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The Mess has Moved!

Friday, March 26, 2010

Please update your bookmarks, RSS readers, or any other means that you might have used to read what is written here because The Mess That Greenspan Made has moved to:

It will look and feel pretty much the same, however, the URL is much shorter and it's a lot easier for me to tell people how to find it. The new RSS and Twitter feeds are as follows:

I have no intention of abandoning this blog as it contains five years worth of reference material that, hopefully, will persist for a very long time. Unless something goes haywire at the new blog (and, yes, there is reason for concern after this 2007 debacle), I won't be posting anything new here again, but it will likely generate new comments for years to come (as is the case for the Hummer post back in 2005).

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Five years and a new mess!

It's been exactly five years since publication began at this blog and, if all goes well, this will be the second-to-last post at this location since a new and better self-hosted blog has been taking shape over the last month and, quite frankly, your humble scribe has long since grown tired of double-posting everything.

Rest assured that the name will remain the same, however, the URL is shorter and it is a WordPress blog instead of a Blogger blog. After a few rough patches early on, Blogger has been quite good - very reliable and easy to use - but, after working with WordPress in recent weeks, it has become clear why everyone likes it so much. Anyway, here it is:

The new URL is: and the next (and last) post that you'll see here at this blog will have additional information about RSS, Twitter, and the like, though most of you can probably figure that stuff out on your own.

As for the five year anniversary, the previous item about our old rental house brought back some memories of working a full-time software job, writing the blog, and launching the investment website back in Southern California.

I must say, I'm happy to be out of there, though, I do sometimes miss the weather.

As has become the custom around here on this day, looking back to March 26th, 2005 we find this very first post on a Stephen Roach commentary, one that still rings true today.

An appropriate first post - Stephen Roach hits another home run with his latest missive The Test. The last paragraph serves as an excellent premise for this blog:
"It didn’t have to be this way. The big mistake, in my view, came when the Fed condoned the equity bubble in the late 1990s. It has been playing post-bubble defense ever since, fostering an unusually low real interest rate climate that has led to one bubble after another. And that has given rise to the real monster -- the asset-dependent American consumer and a co-dependent global economy that can’t live without excess US consumption. The real test was always the exit strategy."
Yes, it's easy on the way up. Ever increasing liquidity to meet every emerging problem and everyone gets rich - not rich in the old sense, of course, with higher real income and savings, but through higher asset prices for stocks and homes.
"Asset markets around the world are now quivering at just the hint of an unwinding of this house of cards. And they quiver with the real federal funds rate barely above zero. What happens to these markets and to an asset-dependent US economy should the Fed actually complete its nasty task of taking its policy rate into the restrictive zone? "
All aquiver, that's right. Paul Volker must be so proud of his successor ... about to bring down the whole house of cards with quarter point increases to the Fed Funds rate in the low single digits.
"I still don’t think America’s central bank is up to the task at hand. In the face of disruptive markets or growth disappointments, this Fed has repeatedly opted to err on the side of accommodation. I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. "
This is my central belief on this issue, and the motivation for this blog - that given the choice of some economic pain and a long slow death by inflation, the Fed will opt for the latter. It will never be able to raise interest rates like Paul Volker did, in order to put this fiat currency system back on a track that is sustainable for another generation or two - instead, we will continue to swim out to the deep water and hope for the best.
Recall that, at the time, short-term rates had just begun to rise from 1.0 percent in mid-2004 and the housing bubble was entering new and more dangerous phases about every six months. This five-year old commentary seems all the more strange as many people are already talking about short-term rates beginning to rise once again sometime in the next year.

Dan, feel free to comment...

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Our old SoCal rental house is for sale

In a bit of irony that is quite appropriate for today, the five-year anniversary of this blog (more on that in an hour or so), it looks like the rental home in Southern California - where we spent more than three years during the middle of the last decade as the housing bubble reached its peak and where this blog was first written - is now up for sale.
IMAGE If memory serves, the owners paid $555K for it in late-2003 while it was still under construction and we moved in not long after, following the sale of our house a mile away.

That was back in the days when homebuilders could, basically, do as little as possible and people would still come with their "loan pre-approval" papers to buy real estate.

In this case, there was no landscaping provided, no window coverings, and not much of anything else, so the owners must have put about $50K into it at the start, bringing their cost basis up to around the current asking price of $599K which is about what Zillow says its worth.

You probably shouldn't feel sorry for the owners though. Not only are they very nice people but they own a ton of property in Santa Barbara and the only reason they bought this one was to do one of those tax exchange deals to reduce the tax owed on properties they sold up the coast where prices had gone parabolic.

I remember looking up houses in Santa Barbara on back then to see that you could get a 70-year old, 900 square foot two bedroom house - something like this - for about a million dollars. They're about half price now, which still seems way too high.

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Government should just get out of the way

Well, it looks like many more billions of dollars will be spent to aid the nation's housing market in what is, in large part, an ultimately futile attempt to keep home prices above where the market would like to take them.

Freakishly low interest rates and $8,000 or more in tax credits for homebuyers apparently hasn't done the trick, so the White House today is launching a new program to help homeowners who can't afford to stay in their house by lowering payments through government subsidized financing and, in some cases, reducing mortgage balances.

Not long ago, a commenter here noted the following:

I feel that another leg down is inevitable. I also think the government will try to intervene which may keep us in limbo for longer than necessary. The end could come and we could get back to business in a more stable, albeit lower price level, market if the government would just get out of the way. It is much harder to sell or rent in a market that is still trending downward or where there is a lot of lingering doubt. If we could reach a bottom and have prices stabilize on their own for a few months without any government action, it would become obvious to all that the worst truly is behind us and then all the pent up buying could come back. But as long as the market is being propped up superficially, the skeptics will continue to wait on the sidelines making recovery impossible. We need to bottom and start over so we can develop business models that will work. With the government involved and more bad news waiting in the wings, it is impossible to make long-term plans. The economy will just have to wait until the government gets out of the way, IMHO.
Unfortunately, that doesn't appear to be one of the options now being considered...

While I'm as sympathetic as anyone about a family down on their luck after job losses and a collapsing real estate market, this misplaced notion of the sanctity of homeownership and how people losing their houses to foreclosure is somehow such a terrible tragedy is ultimately doomed to make things much worse than they would otherwise be.

The vital lesson that, apparently, has not yet been learned through previous efforts at bailing out homeowners is that most of these people had no business buying the place in the first place and, while the feeling that "Banks got their bailout so I want mine too" is both understandable and pervasive, it is no reason to make a bad situation even worse.

Caroline Baum has some similar thoughts in today's column at Bloomberg:
Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit.

What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)
I’m all for charity and doing what makes sense. If a lender decides it’s in his self-interest to reduce the loan balance on underwater or delinquent mortgages -- if modification is cheaper than foreclosure -- that’s between management and shareholders.

With government programs, those who lived within their means, who bought a home they could afford, are being asked to pay for the mistakes of others. Bankers and insurance companies weren’t the only ones who were greedy.
Barry Ritholtz also had some thoughts on this, arguing we need more foreclosures, not less:
I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.

It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.
Yes folks, this is how you get a "lost decade", by again and again trying to: a) prop up assets that desperately want to return to levels supported by market fundamentals; b) keep insolvent banks solvent; and c) sustaining the misguided belief that a 70 percent homeownership rate is or ever was a desirable goal.

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More gold for the gold ETF

As compared to activity last year at this time it wasn't much, but recent additions to the gold holdings at the SPDR Gold Shares ETF (NYSE:GLD) are certainly a move in the right direction if ETF demand is to again play any sort of major role in the gold market.
IMAGE The "tonnes in the trust" rose by more than nine tonnes in just the last few days (circled in red) to 1125 tonnes, within striking distance of the all-time high set early last June at 1135 tonnes and then nearly equaled in late-December. The relative lack of ETF demand since the surge in early-2009 has been cause for concern and a new all-time high would certainly go a long way in allaying fears that investors have lost interest in this sector.

Full Disclosure: Long GLD at time of writing

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Friday morning links

EU Steers Greece to IMF, Pledges Loans as Last Resort - Bloomberg
Obama To Order Lenders To Cut mortgage Payments For Unemployed - HuffPo
JPMorgan, Lehman, UBS Named as Conspirators in Muni Bid-Rigging - Bloomberg
Whistleblower Speaks Out On Silver Market Manipulation, Reports to CFTC - Jesse's Cafe
Government Authorities are Looking Out for Themselves, As Should Everyone - Aucontrarian
Lower Home Prices Can Fix What Government Can’t - Baum, Bloomberg
Economics focus: Tricky Dick and the dollar - Economist
The US default-risk meme - Salmon, Reuters

Have these these links delivered to your inbox every weekday.

Oil Rises on Weaker Dollar, Asia Demand - Bloomberg
Gold rises as euro bounces; physicals active - Reuters
Thursday's session amounted to a 'key reversal day' - MarketWatch
Christian: CFTC Position Limits For Metals A ‘Bad Idea' - Hard Assets Investor
The Value of Gold Is as Artificial as Paper Money - Alternet
The history of commodity booms and busts - VoxEU

GDP Up Less Than Thought as Corporate Profits Dip - CNBC
What computer science can teach economics - MIT News
130,000 in Calif. due to lose jobless benefits - O.C. Register
Don’t Be Shocked by Jobs Boom Next Week - WSJ
Not a textbook rebound - EconBrowser

Currency controls and Gresham's law - Economist
Europe agrees IMF-EU rescue for Greece - Telegraph
China CEOs Join Obama in Supporting Yuan Appreciation - Bloomberg
Greece is likely to need far more financial aid than seems to be on offer - Economist
Europe puts the loaded gun on the table but no bailout - Credit Writedowns
Japan consumer-price data show deflation continues - MarketWatch
Chinese Yuan Will Quadruple Over Time: Rogers - CNBC
Crisis, What Crisis? - Economist

More Foreclosures, Please . . . - The Big Picture
Gov. signs new homebuyer tax credit - O.C. Register
Declining Mortgage Performance in Q409 Means More Foreclosures Ahead - Housing Wire
Cash Dwindling For No-Money Down Home Loan Program - WSJ
Half of U.S. Home Loan Modifications Default Again - Bloomberg

Countdown: Fed MBS Purchase Program - Calculated Risk
Bernanke: Fed Likely to Sell Some of Its Mortgages Eventually - WSJ
Alan Greenspan's Financial History for Lobotomy Victims - HuffPo
Fed's balance sheet rises to record in latest week - Reuters

Bank of China executive salaries halved - MarketWatch
Bono And Prince's Financial Woes Revealed - Stop the Presses!
DNA identifies new ancient human dubbed 'X-woman' - BBC
Docs Remove Boy's 11 Extra Toes And Fingers - Sky News


Peter Schiff on Alan Greenspan

Thursday, March 25, 2010

Left sitting in my draft folder for a few days are these thoughts from Peter Schiff about the former Fed chairman following his 48-page defense of monetary policy last week. Now seemed like a good time to hoist it up to the main page.

Peter starts off by noting, "He's not just the worst Fed chairman we've ever had, he's the worst American we've ever had" and then works himself up into a little bit of a lather from there on such subjects as the impact of long-term vs. short-term rates during the housing bubble and other topics.

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