Oil and Housing

It's been a busy, busy last few days getting ready to travel to the East Coast, but things are shaping up nicely (we learned today that it's well worth driving an extra half hour to get to a Kinkos rather than use Staples for printing).

A number of you have asked - the oil and gold contest chart will be updated tomorrow.

There were a couple of articles in the free section of today's WSJ that are definitely worth a look. I'm not sure if it's my imagination or not, but it seems that, along with more fluff in the print edition, there are more free articles online since Mr. Murdoch took over.

Anyway, Congress is trying root out the "speculators" that are driving the price of oil to once unimaginable levels. They never tried to root out the housing speculators, did they?

A Senate proposal to combat speculation in energy markets could have damaging unintended effects, a top federal regulator warned Wednesday.

At issue is a Senate proposal to mandate higher cash collateral for energy-futures trading. The proposal is part of a package of measures that Senate Democrats unveiled Wednesday -- and will try to bring to the Senate floor for a vote by Memorial Day -- in an effort to curb speculative trading that some say is contributing to soaring oil prices.

Trading-exchange officials are lobbying against the measure, saying it could cause a migration to foreign exchanges and rob the market of the liquidity that some participants in the market say they need to hedge their risk. Wednesday, the acting chairman of the Commodity Futures Trading Commission also criticized the measure.

"It has the potential to drive participants [traders] into more opaque markets, which is exactly the opposite of what we want to be doing," Walt Lukken, the commission's acting chairman, said in an interview. Mr. Lukken also testified before a Senate panel that his agency hadn't seen evidence indicating that speculators are "a major factor" in driving up the price of oil.

In the same story in the print edition, it was noted that the proposal seeks to increase the cost of oil futures contracts from between 5 and 7 percent of the futures contract value to 25 percent.

Note that this will have no effect on much of the investment money coming into this sector because most index funds only use a portion of investor money to buy futures contracts and invest the rest in treasuries.

For example, if you invest $1,000 in an oil ETF, $70 goes to buy a futures contract for $1,000 worth of oil and the other $930 goes into Treasuries. Raise the margin to 25 percent and $250 goes toward the futures contract and $750 goes to Treasuries - in both cases, the same amount of crude oil futures were purchased.

And David Wessel wrote a good piece about the ongoing debate between Congress and the White House regarding what to do with all the homeowners who are underwater on their mortgages (is upside-down reserved for auto loans?)

These are some pretty staggering stats:

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already owe more than the current value of their homes. They are said to be "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won't, and are at risk of losing their homes.

Lenders, we're told repeatedly, prefer to avoid foreclosure if possible. Better to cut a deal than end up with an empty, decaying house. "If a foreclosure is preventable...the economic case for trying to avoid foreclosure is strong," Mr. Bernanke said this week. And not just for borrower and lender: "Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes and lower municipal tax revenues," he said. And that could depress housing prices, which could hurt the economy and the stability of the financial system, he added. On that much, Mr. Frank and Treasury Secretary Henry Paulson agree.

In ordinary times, a lender shouldn't need prodding from the government to do what's in its self-interest. But these aren't ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many. No one in Washington wants to help the "speculators" who bought homes they don't live in or those who lent to them. And there's broad agreement that those who bought more house than they'll ever be able to afford are going to lose out. The debate revolves around the "preventable foreclosures."

Geez, I don't know.

While it's easy to feel sorry for those people who were really duped into doing something stupid, what kind of a lesson is that teaching them?

Shouldn't someone be learning some kind of a lesson here?