Realism is Medicine
One way to characterize 2008’s sequence of economic and operational convulsions is shock.
Now, news can continue to be bad, and the series of negative headlines can continue, but, collectively, we’ve begun to shield ourselves from shock taking over.
Nobel Prize winning Princeton economist and New York Times business columnist Paul Krugman ties the dynamic disequilibrium of the moment to the econo-scape of our parents, grandparents, and great-grandparents to draw helpful analogy.
To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.
What, then, will actually end the slump?
Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate. The slump that followed Japan’s “bubble economy” also eventually ended, but only after a lost decade. And when Japan finally did start to experience some solid growth, it was thanks to an export boom, which was in turn made possible by vigorous growth in the rest of the world — not an experience anyone can repeat when the whole world is in a slump.
So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.
Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.
Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.
The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.
The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.
You can see, then, why some Fed officials are so pessimistic.
Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?
Krugman and the greatest economic minds of the present day are calling for nationalization of the banking system, at least for a brief, pre-privatizing moment. The Big Picture’s Barry Ritholtz observes yet another eloquent call for a bank take-over, despite banks themselves and the Obama Administration’s current insistance this is not the way to go.
The list of pros vs. cons on bank nationalization make the kicker refrain — you like it when your Nobel laureate economists can quote from Credence Clearwater Rivival — doubly poignant.
Here’s The Big Picture’s tally to date of those in favor, and those against.
Aside from myself [Barry Ritholtz], here are the folks who are in favor of temporarily Nationalizing the banks, and then spinning them back out:
Alan Greenspan
Gordon Brown, UK PM
Senate Banking Committee Chairman Christopher Dodd
Senator Chuck Schumer
Sen. Lindsey Graham
House Speaker Nancy Pelosi
Republicans (some)
Joseph Stiglitz
Paul Krugman
Alan S. Blinder, Princeton
Nassim Taleb
Nouriel Roubini
Greg Mankiw
J. Bradford DeLong
Elizabeth Warren, TARP Oversight Panel
Dennis Gartman
Chris Whalen
Josh Rosner
Jeff Matthews
John Mauldin
Jack McHugh
Bill King
Matthew Richardson
Dylan Ratigan (CNBC, Daily Beast)
Jesse Eisinger, Conde Nast Portfolio
Martin Wolf, FT
Aaron Task (Yahoo Tech Ticker)
Paul Kedrosky (Infectious Greed, CNBC)
Nicholas Kristof (New York Times)
Mark Gongloff (WSJ)
Richard Parker (Newsweek)
Michael Hirsh (Newsweek)
David Reilly (Bloomberg)
Paul Vigna (Dow Jones)
Henry Blodget (Silicon Alley)
Willem Buiter (FT)
Adam Posen (Peterson Institute for International Economics)
Jeff Macke
Todd Harrison
Calculated Risk (Preprivatize the Banks)Mark Thoma (Economistsview)
Karl Denninger
naked capitalism
Eddy Elfenbein (Crossing Wall Street)
Bronte Capital
Aaron Krowne Mortgage Lender Implode-O-Meter
Prieur du Plessis (investmentpostcards)
Roger Ehrenberg, Information Arbitrage
Felix Salmon
Interfluidity (Nationalize Like Real Capitalists)
Urban DigsAnd those opposed:
Ben Bernanke
President Obama
Tim Geithner
Lawrence H. Summers
Financial Services Committee Chairman Barney Frank
Republican Senator Jon Kyl
George Soros
Meredith Whitney, Oppenheimer
Deroy Murdock (NRO)
Larry Kudlow
James Cramer
Hale Stewart
Tyler CowenIf the administration ever gets to the point where its housing initiatives — i.e. foreclosure mitigation can actually target principal reduction, nationalization would be a way to go.
Second Day Leads: A Post-up on Obama’s Housing Plan
The equity analysts expected more. That may be the story of the first 30 days of the new administration. Validation of the strategies for fixing the financial system, for jumpstarting spending with a stimulus program, and halting the erosion of household wealth as a result of skyrocketing foreclosure trends will come or not come as the months grind along.
The story of the moment, however, seems to focus on expectations. Or rather management of expectations. Or rather mismanagement of expectations.
The incoming administration allowed expectations to soar. Stoked them, in fact. Set a bar unreasonably high for itself, and now is suffering the consequences of disappointing people who should know better that all of these programs, if they have any merit at all, will take more time to clarify, operationalize, and manage results from.
At face value, the belief system in the proposed Homeowner Affordability & Stability Plan is that a spigot-released $75 billion solution can offset a $300 billion problem.
Clearly, the devil in the details will come down to applying the rules of the program toward the selection of which mortgages to mitigate, the velocity of execution, the success-rate, the transparency, and the ability to stress-test the homeowners’ individual and collective scrupulousness and capacity to avail of the relief, thereby influencing a wider sphere people’s behavior and confidence level.
Just as clearly, the just-announced program falls short of delivering a shock-and-awe “fix” partly because of what it does, and partly because of what it doesn’t do.
Have a look at some top-line observations of a number of the home building equity analysts in their notes to their clients. One red-flag of concern regards the holes in the detail provided in the plan presented yesterday.
James McCanless, senior analyst at FTN Equity Capital Markets Group, believes the two-week lagtime between announcement of the program and rolling out specifics of how it’ll work can create an enormous negative drag right out of the gate.
We believe today’s tepid market reaction to the housing stimulus is due to a lack of detail in the White House and Treasury releases about who does and who does not qualify for the plan. Simple details such as an eligibility cutoff date or maximum household income for eligible participants would have provided some basis for analysis and discussion. Since those details are not scheduled for release until March 4, we think the near-term impact of the bill could be a general hesitation by lenders, buyers, and builders about any and all housing transactions. A similar effect was seen in December 2008 after Secretary Paulson made and retracted a 4.5% mortgage pledge during the month, and we believe the slowdown in December activity may be replicated over the next 2 to 3 weeks.
Further, McCanless seems to believe that a more rifle-shot program, vs. the blanket initiative proposed would have done a better job of nipping the problem in the bud, stemming foreclosures and breaking the free-fall in home prices. Here’s how FTN’s best-case scenario plan would have worked:
Our top 3 ideas/wishes for housing market revitalization are focused on stabilizing home prices through an isolation strategy for troubled mortgages. An isolation strategy would allow workouts and refinancings on a case by case basis and would not negatively affect the net present value of paying mortgages in the same geography. We believe this strategy would make banks more amenable to loan modifications and hasten the goal of home price stability through a faster clearing of problem borrowers and through a relaxed mortgage lending environment. Unlike the Treasury, we are not bold enough to assume our ideas would benefit the average homeowner by $6,000, but we do believe a resumption and restoration of functioning housing markets through proven strategies would have a generally positive effect on housing prices over the next 2 to 3 years.
So, from FTN’s standpoint, more clarity and more specificity as to the beneficiaries would have been the way to go. Josh Levin, home building analyst at Citigroup, is more generous with his assessment of the positives of the plan, with a caveat or two.
It is too soon to know how effective HASP will be at reducing future foreclosures. In the best case, we think HASP could mitigate some future home price declines. However, even in the absences of foreclosures we think home prices need to fall another 10%-15% based on the relationship between home prices and incomes and rents. Moreover, mitigating foreclosures does not change the fact that there are too many homes in the U.S. and it will take some time to absorb the excess inventory.
The team of David Goldberg and Eric Crawford home building analysts at UBS dismisses the ultimate impact of the plan in light of data that more than one out of two homeowners who’ve gotten new terms on their loans re-default within six months of the loan modification. Still, they’re not damning the initiative, only asserting that it will have limited impact in solving the urgent problems.
Although this plan will generate modest benefits, it is unlikely to curb foreclosures significantly, thereby minimizing its impact on home prices. Specifically, we expect “redefaults” among distressed borrowers who seek assistance to remain elevated. Further, although non distressed homeowners with LTVs in the specified range will benefit, we believe foreclosures among this group would have been minimal regardless. Finally, in our view, a trough in housing won’t occur until we see improvement in the broader economy, leading to greater demand.
Most skeptical of the plan’s design, scope, and likelihood of success or failure among the analysts we’ve heard from is Ivy Zelman, ceo of Zelman & Associates.
We are disappointed that the White House’s plan does not address the heart of the foreclosure problem, which is the negative equity position almost 30% of mortgage holders are currently facing. Absent principal reductions, our mortgage servicer contacts are concerned that re-default rates will remain above 50% as the problem is being delayed rather than solved.
More specifically, Zelman zeroes in on the plan’s failure to focus on geographies where its impact is most needed.
If the center of the economic problem is foreclosures, the epicenter is Arizona, California, Florida and Nevada as these states currently represent 45-50% of incremental foreclosures and underwater mortgage holders. We do not believe this plan will alter the mentality of the at-risk mortgage holder in the most troubled housing markets.
Calling for principal reductions is tantamount to letting the cat out of the bag on repricing assets up and down the financial system. Although the administration and its team seem bent on avoiding taking that course, more and more experts concur that it is inevitable.
Notably New York University economist and principal at RGE Monitor Nouriel Roubini.
More ‘O Moratorium
Here’s Mish on plans among three banks – Citi, JP Morgan, and Morgan Stanley — to halt foreclosures as the government cobbles a huge mortgage relief initiative.
Of course the banks are “chomping on the bit”. Banks are more than happy to halt foreclosures because the plan will allow them to dump $50 billion in troubled loans straight off their balance sheet right on to the balance sheet of taxpayers.
I suspect that $50 billion will soon become $250 billion. This plan is not about foreclosure prevention. It is a fraudulent scheme to dump toxic waste on unsuspecting taxpayer bagholders.
Trusting anyone these days is challenging.
Meanwhile, the Big Picture features a big picture of our banking system’s trillion-dollar troubles via the New York Times and RGE (Noriel Roubini and co.) Monitor.
Click to access original New York Times analysis.
Barry Ritholtz, who normally speaks volumes, simply allows the picture to tell the story on this one.
Stimulus Envy — Matchups We’d Like to See
Folks, on the eve of Super Bowl XLIII in Tampa this Sunday, don’t miss a marquee night of titanic import and raw fury, a clash for the ages.
The Main Event: My Stimulus v. Your Stimulus
Billy Mays, A Pitch in Time, Photo by ACJetter
Light Heavyweight: Billy Mays v. Nouriel Roubini
Middleweight: Liquidity Trap v. A Banana
Lightweight: John Thain v Joe the Plumber
Featherweight: Jerry Howard, NAHB v Doug Bibby, NMHC
Bantamweight: Calculated Risk v The Big Picture
At Housingcrisis.com, we live by a few commandments, one of which came to one of our staffers as she was stuck on a tarmac for several hours, listening to the pilot tell passengers repeatedly every 20 minutes: “We’re next for take-off.” The commandment in one word: “Don’t trust.”
Liquidity trap, nothing. It’s all about putting “risk” on the balance sheet–household, corporate, or government–right there where it belongs instead of in some hidden accounting tactic. “Don’t trust.” Who are you going to outrun, the bear or your buddy?
On Not Being Nouriel Roubini
Some days, there’s just not that much to be thankful for. So we have to find a way to be thankful for less. For instance, the milk with these Cheerios is tasting wonderfully fresh this morning. See? If you practice, it’s not that hard. Try again. Hmmm. Well, I woke up today to discover I’m not Nouriel Roubini. There you go.
Here’s Dr. Doom spreading his cheer among the smart and the powerful in the mountains of Davos. Click on the photo to view. Keep Kleenex at the ready, for you may weep.
Nouriel Roubini, aka Dr. Doom, click and be sobered.
“Certainly starting a war with China on the issue of the currency is very, very dangerous,” he said. “The US is relying on the kindness of strangers — Russia, China, the Gulf States … to finance a huge, and growing, twin current account and fiscal deficit,” Roubini said.“If China were to pull the plug on financing the US dollar, then we’d have a freefall of the dollar,” he added.
Count your blessings
Credit: CNBC Coverage of the World Economic Forum, Davos, Switzerland.