Gross: Bush needs to rescue homeowners

[DcifrThs]

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Well, there's two extremes that we would like to avoid. One is the direction you seem to want to go: tighten credit at the exact moment that the economy is perched precariously. That's how we got the Great Depression. The other extreme is the Japanese economy as of late: propping up inefficient businesses leading to a stagnant economy. I would like to think there is a middle ground somewhere.

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Becker and Posner recently analyzed the issue and concluded that there's no evidence to suggest that the subprime troubles pose a danger to the rest of the environment:

http://becker-posner-blog.com/

The wastefulness (giving billions of dollars to the rich people in the financial industry) and the danger (moral hazard for future lenders) of a bailout are obvious, and the benefits are just airy populist rhetoric.

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borodog, if you post a link, i'd highly advise reading it and summarizing it correctly.

here is Becker's concluding thoughts (about 1/2 his total analysis, but worth reading):

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So is laissez faire the right option in this case, and the Fed and other central banks should not offer any special help? I would have absolutely no doubts that this is the right policy if the major risk of the present situation were that some hedge funds and other financial institutions would experience sharp rundowns in their assets and even bankruptcy. However, the Fed's recent intervention was driven by the fear that the weakness in financial markets will spread to the real economy, and will adversely affect employment, investments, and general welfare in the United States. The same justification would apply to Europe and Asia as well. The avowed goal of such interventions would not be to help individual companies or borrowers, but rather to stabilize the complicated and interconnected economic system.
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Such an approach by the Fed and other central banks is not foolish, and may be right, but I believe they should continue to be guided by the criteria that have served them very well during the past couple of decades. That is, their policies should be determined by rules dependent on broad developments in the economy: unemployment, the growth in GDP, and the inflation rate. Central banks should intervene by lowering interest rates only when these broad economic indicators begin to slip badly. Since unemployment continues at low levels, and inflation is still modest, the U.S. GDP growth rate is the only major indicator that has worsened- output in Europe, Japan, and most of the rest of the world has continued to grow at a brisk pace.
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I conclude that central banks should be especially vigilant for signs that the damage is spreading to fundamental economy indicators, but should refrain from any special actions until that time. Otherwise, central bank policy would get confused between rules that depend on broad developments in the economy, and discretion that is affected by development in the housing market, the market for credit, or other specific markets.

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to me, becker says that the economic indicator "has worsened" and that the fed should be on guard for significant deterioration. that deterioration can easily be found with indicators coming up in the next month or so.

to say that becker says

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that there's no evidence to suggest that the subprime troubles pose a danger to the rest of the environment

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i don't think matches what he actually says. in fact, it is an outright misrepresentation.

Posner also didn't deal precisely with the issue you gave him credit for analyzing. he analyzed the moral hazard of a bailout. i didn't see where he stated in that blog post (only read the first two since the 3rd was about airlines) that there are no risks to the economy as a result of subprime borrowing.

Posner states that "the only justification for a bailout...is to avoid a depression (recession)."

Posner concentrates FAR more on the economics of a bailout and i completely agree when he (and really both of them) sstate that you cannot encourage excessive risk taking with moral hazard and expect there not to a result. the NY fed in 1998 presided over/encouraged the bailout of LTCM. this is arguably a mistake (may have been correct since a failure or huge problem at 8 massive prime brokers could put a massive dent in the economy).

but bailing out mortgage lenders now is a bad policy. managing the economy requires waiting until more data come out since unemployment is still low, inflation a touch high (but still low overall), and capacity still very constrained (81.9% at last reading in august). if growth takes a big hit (or indicators suggest it will), then a lowering of the funds rate is warranted. not until then though.

i agree with posner in almost everything he says.

especially his closing thoughts...here is his conclusion:

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Studies in cognitive and social psychology have identified deep causes for the overoptimism, wishful thinking, herd behavior, short memory, complacency, and naive extrapolation that generate speculative bubbles--and that require heavy doses of reality to hold in check. Any efforts to soften the blow will set the stage for future bubbles.


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first off, i have to point out here that i've mentioned this before int eh business cycle debate and offered that as the main driver of business cycles (why they'd exist absent management). i think posner would agree with me here about that.

humans in aggregate have short memories and naive extrapolation (these two i've specifically mentioned a ton of times).

so we should let as many companies/people go bankrupt as possible without destroying the overall economy (could be a large # as hedge funds should all be allowed to go bust).

we shouldn't though lower the interest rate beyond what is necesssary. Becker states the problem is that the fed shouldn't be seen as bailing out the poor risk takers, but also shouldn't be seen as letting the economy go to hell...specifically, he says that:

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their policies should be determined by rules dependent on broad developments in the economy: unemployment, the growth in GDP, and the inflation rate. Central banks should intervene by lowering interest rates only when these broad economic indicators begin to slip badly.

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i agree with both of these guys.

the problem i have is that you completely misrepresented their views.

Barron

EDIT: just read bloomberg mkt data reports and durable goods orders came in 490% above forecast and new home sales came in 2.5% above forecast. i can't remember the last time a new home sales figure came in above forecast.

basically, that durable goods # shows how strong factory (equipment) orders were in july.

the real issue for the subprime mortgage flow through to the economy will be consumer sentiment and all the associate indicators. if purchasing falls off significantly, then a lower rate is warranted. but not until then.

i'm STRONGLY for the fed holding steady at 5.25%. anything else would be a mistake imo barring additional economic data. unemployment is low, inflation is contained but near the top end of "comfort level" and capacity utilization is high.

[Copernicus]

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At what point did letting people live with their major life decisions turn into "kicking a million Americans out of their homes?"

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What are the actual number of defaults among borrowers for their primary residences?

[cdutilb]

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surprisingly, not everyone who purchases a house is fluent in the legalese of most Mortgage contracts which run how many hundreds of pages - they depend upon the scruples of their lenders/agents to inform them of what the hundreds of pages mean and that their lenders aren't withholding additional costs/fees and interest information.


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Sigh

I guess if I was taking on a mortgage of 200k or whatever and didn't understand the contract I would get a lawyer or another mortgage broker to help me understand it. That would have to cost like a couple hundred bucks? People are so stupid and no they shouldn't be bailed out. Same goes with the lenders. If all these mortgages default and some of the shady lenders have to go out of business it sounds like the market is correcting the problem.

[bdk3clash]

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borodog, if you post a link, i'd highly advise reading it and summarizing it correctly.

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Borodog didn't write the post you responded to.

[DcifrThs]

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borodog, if you post a link, i'd highly advise reading it and summarizing it correctly.

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Borodog didn't write the post you responded to.

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wow, WTF, i'm like blind. i read the whole thread and came back and must have just read a borodog post and then read that one lol.

borodog i sincerely apologize for implicating you in the response to the bobman guy or whoever that is.

please accept my apology [img]/images/graemlins/blush.gif[/img]

Barron

[bobman0330]

D,

You're right, that was a poorly worded post (note that I also used the word "environment" for "economy.") Better to have said, "At the moment, there is only weak evidence for the proposition that the mortgage slowdown has expanded into a general economic malaise."

[DcifrThs]

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D,

You're right, that was a poorly worded post (note that I also used the word "environment" for "economy.") Better to have said, "At the moment, there is only weak evidence for the proposition that the mortgage slowdown has expanded into a general economic malaise."

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correct, but you have to remember, economic indicators all lag realized economic growth. the fed has the problem of driving by looking at the road through the rear view mirror.

if it expects based on preliminary indicators (jobless claims, durable good orders, consumer sentiment which takes into account possible future consumption) that there is likely to be a significant slowdown, then lowering the fed funds rate makes sense.

i don't think that is prudent right now since we don't want to bail out the poor managers of risk.

Barron