This page has been archived and commenting is disabled.
Bill Gross Explains Why The Housing Ponzi Must Go On, Or Else Society, Nevermind Pimco, Will Suffer
In his latest letter, Pimco's Bill Gross explains why neither he, nor his fund, are some bloodthirsty vampire squid, monopolizing the bond market: all he wants is the greater social good, which can only be perpetuated by endless government subsidizes of the housing ponzi. What follows is truly entertaining: "Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields – 300–400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy. And why do I and PIMCO support this view? Is it some self-interested, money-making plot to allow us to dominate the bond market? Hardly. Any investor would recognize that it’s better to have a 6 or 7% yield instead of 3–4%, so it would be better for PIMCO to let the Administration flood the private market with non-guaranteed, private mortgage product and let us vultures feast on the pickins. No, the self interest rests on “Que” Street. If the housing market continues to be government dominated, then the points from originations and the fees for private insurance would all of a sudden disappear. The vested interest lies on Wall Street, not Newport Beach or Main Street." Of course, should the government go cold turkey on the housing ponzi, we leave it up to our readers to conclude what would happen to Pimco's over $1 trillion in rate exposure: here's a hint - a 300-400 bps drop in prevailing spreads will mean game over for the magnanimous Mr. Gross overnight. So yes, what's good for everyone (even as nobody really cares about rates with pretty much everyone paying down, not raising debt), just happens to be very, very, very, very good for Pimco. q.e.d.
From PIMCO:
Mr. Gross Goes to Washington
- Americans now know that housing prices don’t always go up, and that they can in fact go down by 30%–50% in a few short years.
- Having grown accustomed to a housing market aided
and abetted by Uncle Sam, the habit cannot be broken by going cold
turkey into the camp of private lending. - Private mortgage lenders will demand
extraordinary down payments, impeccable credit histories and
significantly higher yields than what markets grew used to over the past
several decades.
I’ve
had a lot of high perspiration “Right Guard” moments in my life,
although I futilely try to live by Gillette’s 1984 advertisement of
“never let ‘em see you sweat.” External composure during times when
others around you are losing theirs is a quality that leaders are
presumed to require, so I walk like a man and talk like a man, while all
the while a little boy inside me is screaming, “Run!” The only time I
ever remember totally losing it, though, was when I reached the head of a
reception line for Bill and Melinda Gates, nearly 10 years ago. “Nice
to meet you, Mike,” I said, and my armpits needed a full can and then
some for the rest of the evening. Last week was an equally challenging
situation as I ventured back to the Treasury in Washington D.C. which,
considering how often we’re painted as powerful Washington players, was
my very first official visit of any kind in over 35 years at PIMCO. I
sort of saw myself as a modern-day Jimmy Stewart – a Bill Gross, instead
of a Mr. Smith, going to Washington, but with the same populist spirit;
no filibusters or anything, but an idea or two on how to benefit Main
as opposed to Wall Street, in the ongoing housing crisis. And who could
possibly object to helping the little guy, I thought? Wrong! Just like
Oz isn’t Kansas, Washington D.C. isn’t Newport Beach or Des Moines,
Iowa. There were lots of powerful people there – special interest groups
who said their home was in neighboring Chevy Chase or Arlington, but
that they all worked at a place called “Que” street. Remembering my high
school Spanish, I innocently asked if that began with a “Q,” and one of
the lobbyists gathered around my circle rather dismissively said, “no,
it’s a single letter and it’s between J and L in the Greek alphabet.”
Shortly thereafter they all drifted off, presumably to find a more
informed but less entertaining source of conversation. I guess they must
have taken French in high school or maybe I hadn’t used enough Right
Guard that morning, but at least in my defense, I hadn’t called any of
them “Mike.” My image as a leader presumably was still intact, although
my intelligence was in question, a not too uncommon condition in
Washington, I might add.
Later that morning, in front of cameras from my favorite
television station, C-SPAN, I exercised (exorcised) my leadership role
in proposing a solution for the resolution of Fannie Mae (FNMA) and
Freddie Mac (FHLMC) and the evolution of housing finance in the United
States. I proposed a solution that recognized the necessity, not the desirability,
of using government involvement, which would take the form of rolling
FNMA, FHLMC, and other housing agencies into one giant agency – call it
GNMA or the Government National Mortgage Association for lack of a more
perfect acronym – and guaranteeing a majority of existing and future
originations. Taxpayers would be protected through tight regulation,
adequate down payments, and an insurance fund bolstered by a 50–75 basis
point fee attached to each and every mortgage. Seemed commonsensical to
me. After all, Fannie and Freddie had really blown up because of the
private/public nature of their charter, which incentivized executives
and stockholders to go for broke with the implicit understanding that
Uncle Sam would be there as a backstop should anything go wrong. If you
eliminated the private incentive and provided a tighter regulatory
watchdog, we would have no more “liar loans” or “no docs” and a much
sounder foundation for future homeowners and investors. The
private market, to my mind, had really lost its claim as the most
efficient and judicious arbiter in this particular case. Markets and
private incentives without proper guardrails were as threatening to a
sound economy in the 21st century as too much regulation and government
ownership proved to be in the 1970s.
In addition, my argument had a practical/market-based logic to
it. Ninety-five percent of existing mortgage creation over the past 12
months were government guaranteed. The private market was nowhere to be
found because they charged too much. It was the cost of private
origination and securitization, perhaps more than any other factor, that
justified government involvement. Prime, but non-conforming,
mortgages (jumbos, insufficient down payments) were being purchased by
PIMCO in the hundreds of millions of dollars every week, but at yields
of 6, 7, and 8%. If that was the risk/reward tradeoff, compared to FNMA
and FHLMC yields at 3.5–4%, how could policymakers pretend that the
housing baton could be quickly and cost-effectively passed back to the
private market? Few, if any, could afford a new home at those interest
rates. If you were a believer in the dominance and superiority of
private markets, how could you deny the signal that markets were sending
– that the risk was too high given the substantial losses of recent
years?
My argument for the necessity of government backing was
substantially based on this commonsensical, psychological, indeed
sociological observation that the great housing debacle of 2007–2010+
would have a profound influence on homebuyers and mortgage lenders for
decades to come. What did we learn from the Great Depression, for
instance: Americans, for at least a generation or more, became savers –
dominated by the insecurity of 20%+ unemployment rates and importance of
a return of their money as opposed to a return on their money. It
should be no different this time, even though the Great R. is a tempered
version of the Great D. Americans now know that housing prices don’t
always go up, and that they can in fact go down by 30–50% in a few
short years. Because of this experience, private mortgage lenders will
demand extraordinary down payments, impeccable credit histories, and
significantly higher yields than what markets grew used to over the past
several decades. Could an unbiased observer truly believe that
housing starts of two million or even one million per year could be
generated under the wing of the private market? In front of Treasury
Secretary Geithner and the assembled audience, I said that was
impractical. Let me amend that to “ludicrous.”
Policymakers not only have to consider the future “flows” of
new mortgage originations, but the existing “stock” of mortgages already
created. FNMA and FHLMC either own or have guaranteed $4.5 trillion of
the $11 trillion mortgage market now on the books. As the Treasury
contemplates the “transition” from Agency conservatorship to either
public or private hands, how could private market advocates reasonably
assume that pension, insurance, bank, and PIMCO-type monies would
willingly add nearly $5 trillion of non-guaranteed, in many cases
junk-rated mortgages to their portfolio? They would not. We are in a
bind, folks. Having grown accustomed to a housing market aided and
abetted by Uncle Sam, the habit cannot be broken by going cold turkey
into the camp of private lending. The cost would be enormous in terms of
yields – 300–400 basis points higher than currently offered, crippling
any hopes of a housing-led revival to the economy.
And why do I and PIMCO support this view? Is it some
self-interested, money-making plot to allow us to dominate the bond
market? Hardly. Any investor would recognize that it’s better to have a 6
or 7% yield instead of 3–4%, so it would be better for PIMCO to let the
Administration flood the private market with non-guaranteed, private
mortgage product and let us vultures feast on the pickins. No, the self
interest rests on “Que” Street. If the housing market continues to be
government dominated, then the points from originations and the fees for
private insurance would all of a sudden disappear. The vested interest
lies on Wall Street, not Newport Beach or Main Street. Try explaining that
to commentators intent on returning to a free market ideology that
continues to serve monied interests in the high style to which they are
accustomed, but denies a commonsensical, more tightly regulated
government alternative for millions of current and future American
homeowners. Jimmy Stewart I’m not, and I won’t be going back to
Washington anytime soon. If I did, though, I’d want to visit those guys
on “Que” Street. “K pasa?” I’d say, and then I’d ask if they slept well
at night.
William H. Gross
Managing Director
[someone forgot to add Supreme Protector of the People and Viceroy of Newport Beach]
»
- 10952 reads
- Printer-friendly version
- Send to friend
- advertisements -
Nationalize PIMCO.
Too Big To Tell Us What To Do.
Nationalize PIMCO.
Hasn't the Fed already been turned into "Bad Bank" by buying up MBS?
Here is the single best "deconstruction" of the housing market I may have ever read. Its by David Stockman, Reagan's Dir OMB now a Priv Equity fund mgr:
http://tinyurl.com/38a3r9a
Needless to say Stockman is not a fan of the current "house of games"!
Nah, just pull the feds out of the mortgage sector and let this fucker take his lumps.
I didn't fall for that BS tax credit. I am not falling for these asking prices. In most markets, housing must fall 25% additionally before anyone can even contemplate buying. The banks for obvious reasons, (booking losses, no incentive to sell, tactical defaults) are aiding this misconceived notion that the housing market is healthy.
Joe Homeowner got some sodomy. Not it's time for the banks to step up and get a share. I am sick of government intervention into a free market.
So I am just sitting chilly, renting. Hoping to get in 25% cheaper at a stone cold 4% just before my worthless dollars collapse and become unusable.
Even with an $8,000 'credit' the prices are still FAR up in bubble land! Hey man dont worry about paying 25% less, real soon you can just move into any house you feel like for FREE!
The idiots who fell for the tax credit have probably lost more money due to the lower interest rates than $8,000. I've heard some of them whining about wanting to refinance already. Only they can't, because loan officers want to see a "seasoned" loan history of at least six months.
I feel somewhat sorry for them. But I've grown less sympathetic with these speculators, as that's what they are.
Whining already...not enough free money and/or handouts/bailouts.
Of course, with $8k back and a 3.5% FHA down, most of them probably got into their house with no/little money down.
Wash, rinse, repeat.
Eternal,
These people are not speculators. They are in fact far from it. They the purest definition of the American middle class. Are they ill informed and naive? Yes. That's why the government was able to hook them into buying a home. Speculators? No, definitely not.
Sorry, I have to respectfully disagree. I've debated too much with them to be convinced otherwise. The mad dash for the cash last October and April (when the tax credits expired) just cinches the argument, IMO.
Naive? Yes. Middle-class? Certainly. But that doesn't make most of them any less of a speculator.
If they were putting 20+% down, then I'd be more agreeable on this. But leverage to the max is simply speculation, no matter whether it's a sophisticated investor or a naive one.
The more prices fall, the more people are underwater, the longer it will take for them to ever be able to sell the house they are in to buy another one.
The whole damn real estate market is about to lock up or already has. People can't sell at these levels (or don't want to), and you'd be crazy to buy right now. No one has the money to buy up all the foreclosures (try to finance one.)
Stalemate.
Right. This is a natural step in the progression of a crash. Sellers want last years prices and buyers want a bargin. The forces are on the buyers side, and eventually the sellers will be forced to give in. Mish had a pretty insightful summary of the standard steps in a housing market crash, and we're pretty much at the beginning.
All bets are off though if the Fed decides to blow another bubble, like they tried last year. They just might put off the implosion for another 6 months. My guess though is that the Fed will have a smaller effect now, since Corporate and State Bonds need the money as much as Housing does. We shall see; the fat lady hasn't sung yet, but she's waiting in the wings.
The fat lady has gorged on bon bons and that rush of air is not her voice.
bring on the fat woman. I love big women.
..aah... maybe I'll deliver on those promises of love another day.
Agreed.
For those that hope for the housing market to fall another 25% to buy in, be careful for what you wish for.
When it does, people like me will be that much further underwater, and will strategically default.
The time will come when everyone strategically defaults.
Even the governments.
It's only a matter of time.
First ones to quit win the most.
sad but true
We're not hoping for you to suffer, but just see the housing market as oversupplied and overpriced.
It's not personal, it's just a consequence of the bubble. The Gubbmint's intervention is actually making things worse, as it's only putting off the time of recovery.
Excellent! Though my real name is "Joe", there's no "Homeowner" attached to it. Like you, I'm enjoying the life of a renter, without all the underwater/bankruptcy/repossession worries of a bunch of dem homeunners.
Rent, bitchez!
PS: I was talking to a girl online, trying to romance her a bit, and she practiced the 20 questions on me. One of 'em was "Do you own a home?" "Alright, another gold-digger", I thought! But I answered her just for the humor, telling her "No". She immediately wound down the conversation, saying she didn't want to go out with an "irresponsible" guy who didn't own a house. Read a newspaper lately, honey? :)
There are no homeowners...
..stop paying the liability of ever-higher taxation rates on that land/structure and see who really owns it.
The people are waking up to this fact, and thus, makes no sense to own with all the liabilities of taxation, insurance, constant upkeep, etc. at this point in time.
In most jurisdictions landlords pay a higher real estate tax than homeowners. This tax is ultimately borne by renters. So, assuming that one needs somewhere to rest at night the tax preference would be to own rather than rent.
It has always been ironic to me that the liberals trying to stick it to the evil landlords are just hurting the less fortunate renters.
...only two questions are required 1) do you cash-flow... 2) do you put the seat down...
Ahem. The second question only gets asked if the answer to the first one isn't completely satisfactory.
And of course, did she own a home?
Homeownership will go down as one more fad perpetrated on the American people by the realtors, banks, homebuilders, and local politicians (real estate taxes). And of course, the corporations want debt-slaves who can't say no to working on a Saturday for some useless project.
@ Something Wicked:
The area I live in was "bubbled up" far less than average. (rural) Prices are back to around where they were when I built in 1999. You know, back when you had to have a real down payment, income, and decent credit???
The biggest problem is that supply is inflated so badly, that realistic value has a long way to go down before it becomes reasonable.
If they wanted to put stimulus dollars to work effectively in an effort to mend the housing market, they should have bulldozed a few million single family units. Prices would be back to a reasonable level and the surplus would be gone. /sarcasm.
Rosenberg on Lost Money midday saying US in a depression on bubblevision no less...
Doug Kass still buying more BAC on today's
capitulation because yesterday's capitulation
wasn't really capitulation. Oh, and he says
Rosie's wrong.
He destroys his credibility in such an open fashion. I used to respect him... now I don't know what kind of crack he's smoking.
Fuck Pimco, I want to go out and purchase some income producing property on the cheap. Give me some numbers that work in Newport Beach.
Bill Gross is one of the most pathetic bond managers ever. Most insiders beg for government welfare behind close doors. Gross does it out in the open.
LOL Gross does it out in the open LOL +1
+1
He's big, so he's throwing his weight around for advantage (to get free taxpayer money), since that's always worked in the past.
The funniest thing is that it's so obvious he's being dishonest -- he can't deleverage from his zero-percent-return treasuries and toxic mortgage crap, and a spike in mortgage rates will decimate his holdings -- vaporized -- with no value and no ability to get out of those positions.
He's so screwed. Of course, his investors were screwed the moment they gave him their money.
Gross can do his begging out in the open because he/PIMCO are a virtually monopoly that shares the same fate w/ Fed, Treasury, TPTB. In this sense, Gross is no different than Geithner, Bernanke, Summers, et al. Gross is part of the same propaganda operation... these guys take their orders from the exact same people.
In a very real sense, PIMCO is the Fannie & Freddie of bonds... 100% private profit, 100% public risk.
well said, but as things go to hell, more high placed folks private and public will be doing it out in the open
The man is positively an idiot. Who would give him $20 to manage. He's so unfamiliar with Washington that he doesn't know that a series of streets are named after letters in the alphabet?
Quoting Gross: "The private market was nowhere to be found because they charged too much." Too much? Compared to what? Presumably the correct price is one subsidized by taxpayers.
Wow...
.
Oh, he knows the streets in Washington. This was a lame copy of Buffett's "ah-shuck's, I'm on your side" schtick.
Hasn't been officially to Washington in 35 years? He's on the side of Main Street?
Oh, doesn't his fund charge a front-end load - for a bond fund?
The man is positively an idiot.
Not hardly - it takes some pretty good smarts to be able to extort the amount of money from Uncle Sugar this criminal has been able to extort. Legally. And in the open.
Yeah, you and traderjoe are right, it takes a cunning and creative mind to play the "aw shucks" bit for the Main St. rubes, and go to DC to lobby regulators and politicians to keep the extend and pretend merry-go round running--all with "geez, it's just common sense" retort.
The whole "Que" St. story was gag inducing though...
That'll fix things. I'd like it if Barak were investing my money.
Cut to white house budgeting scene: "Hmmm. Andy Stern says he needs a new Rolls--couple million there. And we haven't funded much global warming research today. That's a good investment . . . . Did these people really just give us this money? That's great."
The bubbles must continue to be blown faster and higher, or else the crooks might get upside down! Cant have THAT! So govt reverse Robin Hood steal from the poor to give to the ultra-rich must continue forever!
What the hell? Reduce banking and investing to normal careers with modest returns? No more rock star lifestyles? We just can't let that happen. It would be anarchy I tell you.
Without the mortgage tools like option arms and alt a creativity this market has no where to go but down. The incomes in America don't support the prices so sales will continue to plummet and prices will drop accordingly. Not rocket science, just reality. With so many people losing their credit ratings the problem will only escalate. All the sales over the past year were one and dones, people buying foreclosures and no move up sales generated. The market is completely saturated and if you add in the shadow inventory we are pretty much done for a long time. So hoping real estate will bring us out of the abyss is like the oxymoronic thought of a jobless recovery.
This tool is officially pissing me off. Time for him to be a greeter at Walmart or something productive.
So sick of Gross' pathetic priapetic purile pusillanimous pandering .
We need a better class of robber baron; JPMorgan gave out dimes on the street to urchins. Gross just writes long-winded self-deception.
Here come the wolves trying to put on sheepskin.
"Im a victim, Im a victim, spare a quarter point? Look, I'm a consumer too."
I'm sure this is common knowledge, but...
fannie and freddie require a borrower to have FOUR active tradelines (credit card, auto loan, etc.) in order to qualify for a loan. What a bunch of horseshit - "Sorry, but you need to be in debt to get a loan."
Yes, I recognize that active credit demonstrates future ability to pay. there are other ways of establishing credit risk for a stupid fucking home loan, btw.
Didn't know that. Backdoor stimulus at it's finest.
Fannie: You want this home loan? Go open a Nordstrom credit card, take out a line of credit at the Hard Rock and buy a GM, then we'll talk.
"Fannie: You want this home loan? Go open a Nordstrom credit card, take out a line of credit at the Hard Rock and buy a GM, then we'll talk."
Fannie: Sorry, Mr. Dumas, but you will need to go apply for four pieces of credit. Suggestion - credit cards are typically the fastest method and there are a wide array of lenders to choose from - BofA, Citi, Chase, Wells Fargo...um...yes...that's it.
LOL, but it also has to be JUUUUUUSSSSSTTTTT the right amount...
Six months later:
Fannie: "Okay, Mr. Dumas, we see that you now have three revolving credit accounts and one car payment. Unfortunately, we now find that your debt-to-income ratio is a little uncomfortable to us at this time, and we cannot process your loan."
Dammit!!! *cartman voice*
"pieces of credit" Is that like pieces of "flair"? The required minimum is four, but look at Brian over there, he has 37 pieces of credit, and a great smile...you DO want to express yourself, don't you?
:)
Brian financed that great smile through GE capital - from the comfort his dentist office. Brian's girlfriend "flaired" her tits on the card. ;-)
"...load 16 ton and what do you get?"
If you loose your construction/service/finance job, then live on unemployment and EBT until you can't cover the payments anymore. Walk away.
Lather, rinse, repeat.
Not so sure about that VI.
Maybe that's just 1st time buyers.
I'm re-financing and I got the existing mortgage and 1 credit card with zero balance and hasn't been used in 6 months.
Of course, the 830 didn't hurt my chances.
"Not so sure about that VI.
Maybe that's just 1st time buyers.
I'm re-financing and I got the existing mortgage and 1 credit card with zero balance and hasn't been used in 6 months.
Of course, the 830 didn't hurt my chances."
Rules are meant to be broken, my friend. The leverage for rule breaking in your case is called "compensating factors."
btw - you have two pieces of active credit - the credit card is still considered active (activity in the last 6 mos.) and your existing ortgage, of course. Glad you were able to take advantage of the rates.
My wife bought a condo in brazil. They dont use 30 year mortgages down there. She bought the condo by making a down payment and monthly payments to the builder (not the bank) for 3 years. Since purchase price determines monthly payment amount, which is a function of cash flow, overall purchase price is realatively low compared to the U.S.A. Government programs to subsidize housing inflates overall price. Anyone on this board rather have a 3-5 year payment plan with the builder rather than a 30 year with a bank? If you are still not sure, she was able to get some minor repairs for free since she still had leverage (making payments) on the builder.
Ding ding ding, a 30year mortgage doubles the price of the home. Look at it this way, if you can grow your productivity by 5% a year, then a 30 year may make sense, but what FEW can do that.
Interest therefore is inequity.
Now if the govt were to own the money supply (as they should) and it was not privatized then all of that interest would obviate the need for taxes. But instead we pay something to the money lords (private banks) in interest and something to the public servant class (govt) in taxes.
You are a Greenbacker.
On the road to serfdom you met a fork in the road, and took it.
Nice. But I wish I took out a second in 2006 and bought a place outright in Brazil. That's what the sharpest ones here did. This way they can default, and the collection agencies can't touch them.
I had a client tell me "Village Idiot, you should be accumulating Real Estate in Brazil, that's the smart play." That was 2005. The man should have taken his own advice - he set his sights on Nevada. And I should have loaded up in Brazil.
I must admit his last piece about automatic-flushing toilets (see the PIMCO website) was a bit more enlightening and entertaining.
Housing prices should drop another 25% so people can actually afford to put 20-30% down. I don't buy Gross's line that banks would require pristine credit scores in that scenario as the owner will have substantial equity on a fairly priced asset from the day they sign the closing papers. Of course, this assumes that the borrower has a job that won't be offshored to India next month which might be too much to ask in America 2010.
"And why do I and PIMCO support this view? Is it some self-interested, money-making plot to allow us to dominate the bond market? Hardly"
blow it out your ass bill....you are a vampire squid living off the carcass of america....fuck you and your lies...
Bill Gross doesn't give a shit about anyone but himself which is fine.
The Fed should let prices fall so people can afford them. The government doesn't seem to understand that people can't afford homes thats why sales are falling off a cliff.
Shill Gross is a sack of shit. Nuff said.
It's very kind of Mr. Gross to offer to share a disproportionate share of the losses with taxpayers.
However, my Doctor recommends I cut down eating Shit Sandwiches.
Private mortgage lenders will demand extraordinary down payments, impeccable credit histories and significantly higher yields than what markets grew used to over the past several decades.
Gosh, that's simply awful...you mean like supply actually meeting demand, like in the wild? I'm just not used to that. Isn't that illegal?
It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement.
I think you're looking through the wrong end of the telescope Bill. The GSEs had a lower cost of capital thanks to their "implicit" government guarantee which enabled them to attract the good-credit, low hanging fruit with lower rates. That leaves the riskier borrowers and the non-conforms for the private market which often prices the higher risk ...higher. Countrywide became the king of subprime because the GSEs already monopolized the prime mortgae business.
I love too how he tries to make an apples-to-apples comparison between the 6-7% jumbo and non-conforming loan securities he's buying for his funds with the plain vanilla, prime, 3-4% GSE-backed loans - as if the same type of borrower could have gone with a Fannie loan but ended up getting screwed with a private one instead.
The whole premise here is that when the government gets involved risk just magically melts away and things are just cheaper and easier for everybody. What bullshit.
Does he think we are fools? His argument benefits his EXISTING portfolio of bonds against any upstart buying NEW bonds (post government support) with higher yields. Ad yet he lies about his personal desire for more yield and says it is for the common man that he wants fascism instead of a free market. I have lost all respect for him.
"The worst is over without a doubt."
"American labor may now look to the future with confidence"
"We have hit bottom and are on the upswing"
- James J. Davis Secretary of Labor. (June,Aug,Sept 1930 respectively)
"In other periods of depression, it has always been possible to see some things which were solid and upon which you could base hope, but as I look about, I now see nothing to give ground to hope-nothing of man."
- Former President Calvin Coolidge, (1933)
'He that trusteth in his riches shall fall; but the righteous shall flourish as a branch.'
- Proverbs 11:28
In 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%.
In 2004, the top 0.1% of Americans had a combined pre-tax income of the poorest 120 million people (approximately 40%.)
In 1929 the top 1% of households represented 44.2% of wealth and in 1933 they represented 33.3%. On the second data point hangs the prophetic sword with horsehair splintering over the Oracle at Eccles.
As of 2007, the top 1% of households owned 42.7% of all financial wealth (total net worth minus the value of one's home.) The bottom 80% percent? Just 7%.
As of 2007, income inequality in the United States was at an all-time high for the past 95 years, with the top .01% (yes, that is one-hundredth of one percent) receiving 6% of all U.S. wages.
In 1928, the top 10 percent of earners received 49.29 percent of total income. In 2007, the top 10 percent of earners garnered 49.74 percent.
In 1928, the top 1 percent of earners received 23.94 percent of income. In 2007, the top 1 percent took home 23.5 percent.
And the lessons learned by our blessed leaders concerning this Great Depression? Prices cannot go down and wealth inequality needs to tick up. An assemblage of price-distorting wizards locked arm-in-arm struggling to defeat the creative destruction blizzard. The insouciance of elites and the Antoinette economy. Exhibit thyself to a public that may hiss thee, bemoan the solons. Let them eat debt!
Quis custodiet ipsos custodes? said the Roman poet Juvenal. Who will guard the guards themselves?
Why, pronounce our modern day guards, we will. Trust us but don't task us lest you see trust in us lost to your peril.
'Don't Task Don't Smell', the central plank of the 'I Can't Believe it's Not Capitalism Plan' has given us Sugar Mountain, where stupidity is cupidity.
The cold hard fact of our age is that the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self-interests is colliding head-on with a Mr. Market that is a bit pissed off that we've inflated it out of the business cycle for the last quarter century. (AM Rule #6)
After World War 2, our blessed leaders, impressed by German 'organizational' skills crafted a policy of manufacture of consent.Over time these techniques moved to the economic realm in an attempt to manufacture content.Federales now risk the manufacture of contempt, for it is only a Great Depression if they say it is. (AM Rule #1)
Truly we need a hero or it is generation zero.
Financial Pulchritude, Ringfence the Multitude, Federales with Attitude, Brother can you spare a Rhyme?
Phat, Plummed and Cupid is no way to go through strife son.
Dude, I hope the sun is actually over the yardarm where you are...
Good to see you back in ZH, AM.
Missed you my friend. Thanks for once again darkening our doorstep. It's never the same without you. :>)
HI A M and to your cute little sitting bear at the picnic table. i miss my bear. she may not still be alive, cause she liked apples a lot.
We have major structural problems with housing:
What the fock happened, it shoulda worked...
http://thecivillibertarian.blogspot.com/
Housing market is just a symptom. The problem is that the USA is left without a stable money supply. If new money is no longer being borrowed into existence, the whole machine breaks down. There's nothing "they" can do about it. The money supply will continue to shrink - along with asset prices, incomes, tax revenues, etc. etc.
Financial assets are toast - even USTs. Simply because there's no new money being created to feed all the rents.
This is the fatal FIAT flaw. "Poof" - no more money supply. All you can do now is make sure you're completely out of debt and prepared for a world in which "money" has no meaning. Those capable of income independence will be fine.
Dear Bill,
Take that "Public Hat" you say you donned and shove it.
Respectfully yours,
Main Street
"Because of this experience, private mortgage lenders will demand extraordinary down payments, impeccable credit histories, and significantly higher yields than what markets grew used to over the past several decades."
Bullshit. Not if they want to get rid of their inventories.
+1. The REO manager's bonus is based upon getting those off his desk and a note onto the desk of the risk manager.
Exactly. Banks aren't interested in running a property management business that requires the equivalent of carrying a baseball bat into a trailer park to get the rent checks.
My take on home prices is very simple. For decades, home prices nationwide have averaged 3x household income. At the height of the bubble, they went to 5x. After a bubble bursts, it's reasonable to expect it to overshoot on the downside, to, say 2x, before reverting to the long-term mean.
So I'd wait until nationwide prices roughly 2x household income before I'd even consider buying.
Frankly, without a bubble to sell into, most people are better off renting. Like the old saying goes, 'if it flies, floats, rolls, fscks, needs painting or feeding, lease it.' Property taxes, insurance, maintenance and repairs are roughly 4% annually of the price I paid for the house. Rule of 72, they consume its value in 18 years. My mortgage has been paid since 2002, so there's no mortgage tax credit.
Also, what an absurd methodology for taxation. Suppose I sussed out the best price very early on some good and paid the taxes on it. Say some Greater Fool bought the same good and overpaid, even above full retail for it. Now, the municipality wants to come back and charge me based on the marginal price GF paid for a comparable good? Where else is that theory of taxation applicable?
In a reverse of Truman Capote’s word phrase, Tyler, that was not typing. That was writing!! Nicely done. It’s not only poetic and clever, but it is backed by the logic and the facts of Pimco’s position. Many can be clever, but few can give it the weight that Tyler does.
No wonder the MSM is succumbing! I can’t imagine the extent of the pool of talent that is... Zero Hedge.
Of course he wants house prices up, how else will he flip this http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052970203863204574344950563627732.html he bought last year?
Being "underwater" on a home loan only matters because the rules say they matter. We could change the rules and as long as the loan was being serviced, the lender will eventually be made whole. In fact, allowing someone who is capable of servicing their loan to walk away from it is horribly destructive to the bank's capital and lending ability, not to mention greatly increasing the level of moral hazard.
I got my mortgage years ago at 6 1/4, I'm pretty sure my parents had a higher rate when they bought our family home. Today's yields have nothing to do with the lack of aggregate demand. Buyers who understand know that housing is in a deflationary spiral so now is not the time to buy. Buyers who are blissfully unaware of the macro environment are still fully aware that they've got their pick of the litter when it comes to property and naming their own price. People without jobs arent buying, and people with them are, in many cases, too concerned about their potential job situation to take out a loan. Central planning = fail.
Gross makes some good points. I still expect some new mortgage alternatives besides the big 4 and your local full doc. / 20% equity / 720 score to emerge within the next 12 months.
The potential is there.
Subsidizing the entire mortgage market is insane.
Want to help young families get a home? Fine; give only YOUNG FAMILIES a tax credit, only on their first home purchase and only up to the median housing price; nationwide. That's it, after the first purchase, you're on your own.
The rest of the subsidies, to younger singles (who overconsume single FAMILY houses often to simply shelter income taxes...which I and many other boomers did), to McMansion buyers, to older couples and singles who should be incentivized to consume less housing, they all simply drive the prices for single FAMILY homes up.
FNMAE, Freddie Mac, and all the other "affordable" housing programs should cease making new mortgages and get on a glide path to wind down their portfolios, period. Now's the time to accept the inevitable pain, when the real fundamentals and costs of home ownership are clear, stripped of their "investment" delusions and when prices can clear at the most natural level; a pricing level with no, ongoing, political support.
...you make some sense... with short-refi's and other strategic refi's in the offing... one tradeoff is swap lower rates for tax subsidies (eliminate ability to write-off interest)... and begin to disentangle house purchase from taxes... which is totally unfair, costly and inefficient policy...
IMO, it's immoral to subsidize people just because they breed. It takes great patience and love to raise a kid well. Let's not make a whole new class of 'welfare babies'.
Yes. The dirty, little secrete of the mortgage interest rate deduction is that it's mostly going to the middle class and the rich, those who can actually afford to buy a house. Giving government benefits to the middle class (whether it's tax breaks like this or Social Security/Medicare benefits) is what is really driving this country bankrupt. The middle class doesn't *need* a bunch of help from the government and if we could get rid of that addiction, the entire country would be better off.
I like the idea of limiting the credit to first-time homebuyers. I like the idea of eliminating the credit entirely even better! :)
Perhaps housing prices and rents will have to fall further so that they are more affordable to more people. Kind of like a free market.
Does anyone know which way to free?
+1
Bill Bailout Gross = Crony Capitalist
Imagine a stable housing market without government interference. Now that's an economy worth investment.
I'm thinking that it might be time to re-allocate the 401k out of that Pimco Total Return fund.
Here is the best "deconstruction" of the housing market I may have ever read. Its by David Stockman, Reagan's Dir OMB now a Priv Equity fund mgr:
http://tinyurl.com/38a3r9a
Stockman calls Gross's bluff!
I think Bill is a closet rap fan and hes trying to save his homeboys ...Lol'
When rapper Fat Joe listed his $2 million Florida mansion for sale recently, the 39-year-old denied speculation the sale was spurred by financial woes. Yet he does have money problems, according to public records that reveal a recent $71,611default judgment in a lawsuit filed by his bank and more than $139,000 in delinquent state and federal taxes since 2008.
Chamillionaire On Bank Repossessing His Mansion, "I Still Got All The Cars"
Scott Storch Officially Loses Miami Mansion In Foreclosure
nice H I P b o n e s s MAIL
I bought 20% of a house in November and am having an appraisal for refinancing done tomorrow. I am looking at a 15-year fixed at 3.75 if my est. value has not dropped out the ass. I currently have a 30-year at 4.5. The Fed rates may go lower but I am not sure how much lower for a slob like me; so I'm taking it.
wHOLED a 30 footer off the green right into the cup on 16, with the pin still in, handy. got a hug from B I L L . not Gay GROSS - bill.
I am so tired of the threats of what will happen IF the government does not hold down or subsidize activities.
If you cannot survive without government aid, then you should not be in business.
It's that simple.
According to a study from the State Foreclosure Prevention Working Group (SFPWG), 60% of borrowers with mortgages delinquent by 60 days or more are not being forwarded to the servicer's loss mitigation department. The SFPWG is a consortium of the Attorneys General of 12 states, three state bank regulators and the Conference of State Bank Supervisors. For the past two years, it collected delinquency and loss-mitigation data from the largest servicers of subprime mortgages in the country, totaling 4.6m loans as of March 2010. While some serious delinquent loans remain ignored, foreclosures are outpacing modifications. Since October 2007, the servicers completed 2.3m foreclosures. As HousingWire reported, HAMP cancelations number 616,839. Richard Neiman, superintendent of banks for New York State said such modifications are more likely to fail without principal reduction.
http://www.housingwire.com/2010/08/24/60-of-delinquent-mortgages-not-in-...
there's no "investor best-execution" driving the market anymore... Bill and his kind are stuck in an investment banking paradeim gone berserk... only ones executing "best-ex" are distressed or strategic default borrowers (ummm...which Mod or short-refi is good for me today...) or a few buyers with cash... Bill's ONLY execution is gov't printing-press...
He's right about the public/private charter thing, though. Just sayin'. Stopped clock 'n' all.
"The vested interest lies on Wall Street, not Newport Beach or Main Street. Try explaining thatto commentators intent on returning to a free market ideology that continues to serve monied interests in the high style to which they are accustomed, but denies a commonsensical, more tightly regulated government alternative for millions of current and future American homeowners."
I am so sick of the appropriation of the future by any of the monied classes. In Sweden the monied classes are represented by socialists in technique, in manner... in praxis. Now we have seen Soros and Gross hedge their bets on which way future politics will lean rather than doing the right thing.
The small guy gets screwed regardless which ideology wins.
The first rule of politics:
"ALWAYS STATE YOUR SELF INTEREST IN TERMS OF THE PUBLIC GOOD"!
Great job Bill!!!
I think he's "reminding" the government that the long bond rates will rise if they don't guarantee mortgages, which would put even more strains on government's ability to spend. What's really going on here is that he's making them an offer that they can't refuse.
brilliant†
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
cheap site hosting
windows web hosting
windows vps hosting
windows vps
Mises Daily: Wednesday, December 01, 2010 by Doug French
[Introduction to Walk Away: The Rise and Fall of the Home-Ownership Myth]
The idea that "a man's house is his castle" is attributed to American Revolutionary James Otis from 1761, and his idea was that government should never be permitted to breach its walls. It is a good thought, in context, one that sums up a dogged attachment to the right of private property.
In the 20th century, however, government got behind the idea that every citizen should be provided a castle of his or her own. This is the essence of the good life, we were told, the very core of our material aspirations. The home is the most valuable possession we could ever have. It is the best investment, even better than gold. Government would make us all owners, one way or another, even if it meant violating rights to make it happen.
This became an article of faith, a central tenet of the American civic religion, and one that led to additional spin-off doctrines. We should fill our valuable homes with vast amounts of furniture, large pieces especially, things that suggest permanence and roots. If there was any doubt as to where to put our money, an answer was always ready: put it into the mortgage, where it will surely pay the highest return.
The home itself could provide full-time employment for half of the American citizenry, as all women became "homemakers" who devoted themselves to cooking, laundry, and cleaning, while all extra time that the man had was to be devoted to lawn care, household repairs, and landscaping. The home was the very foundation of community, of freedom, of the American dream. It embodied who we are and what we do.
Beginning in 2007 and culminating in 2008, this dream was smashed, as home values all over the country plummeted, wiping out a primary means of savings. Some homes fell by as much as 75–80 percent, instilling shock and awe all across the country. The thing that was never supposed to happen had happened. This meant more than mere asset depreciation. An article of faith had fallen, and there were many spillover effects.
The home was the foundation of our financial strategy, our love of accumulating large things, the core of our strategic outlook for our lives. Once that goes, much more goes besides. The things in the home suddenly become devalued. We look around ourselves in astonishment at how much stuff we have, and we are weighed down by the very prospect of moving. We are longing for a different way, perhaps for the first time in a century.
We are beginning to see the response in the new behavior of some younger people. The New York Times, the Wall Street Journal, and other major media outlets are starting to cover the trend of what we might call the new mobility. Young couples are selling off their possessions: their large furniture, their china and crystal, their enormous bedrooms suites, and even their cars. They are lightening the load, preparing for a life of mobility, even international mobility.
The collapse of the housing market — which has occurred despite every effort by the government to prevent it — coincides with the highest rate of unemployment among young people that we've seen in many generations. Economic opportunity is dwindling, at least in traditional jobs. The advance of digital technology has made it possible to do nontraditional jobs while living anywhere, and perhaps changing one's location every year or two.
Millions have walked away from their mortgages. Those who have swear that they will never again be tricked by the great housing myth that this one asset is guaranteed to go up and up forever. The new source of value is not something attached to the biggest thing we own but rather in the most fundamental unit of all: ourselves, and what we can do. This change represents a dramatic change not just for one generation but for an entire ethos that has defined what it means to be an American for about a century.
To walk away might at first seem like a postmodern activity, one that disconnects us with history and community. We might just as easily see it as a recapturing and redefining of an older tradition that shaped the American ethos from the colonial period through the latter part of the 19th century: the pioneer spirit. Our ancestors moved freely, across great distances, beginning with oceans and then continuing across great masses of land, from New England to the West, all in search of economic opportunity and the fulfillment of a different American dream defined by freedom itself.
This change begins with a single realization: I'm paying more for my house than my house is worth. What, precisely, is the downside of walking away, of going into a "strategic default"? I lose my house. Good. That's better than losing money on my house.
But what are the economic and ethical implications of this? Americans haven't faced this dilemma in at least a century. But now they are, by the millions. They are awakening to the reality that the house is no different from any other physical possession. It has no magical properties and it embodies no high ideals. It is just sticks and bricks.
This book examines the background to the case of strategic default and considers its implications from a variety of different perspectives. The thesis here is that there is nothing ominous or evil about this practice. It is an extension of economic rationality.
But what about the idea that our home is our castle? My thesis is that the essence of freedom is to come to understand that the real castle is to be found within.
Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives.
This article is the introduction to Walk Away: The Rise and Fall of the Home-Ownership Myth.
Comment on the blog.
You can subscribe to future articles by Doug French via this RSS feed.
You can receive the Mises Dailies in your inbox. Go here to subscribe or unsubscribe.ARCHIVED!!!!!!
Heh!