Archive for the ‘federal reserve’ Category

It has been abundantly obvious from day one that Ben Bernanke has no understanding of “liquidity” — whatsoever.

Only 2 months (?) after Bernanke helicoptered $122 billion to AIG, AIG has come cap in hand to Uncle Sam with a down face and a confession: “The money’s all gone.” AIG supposedly wants $200 billion in new money.

AIG in talks with Fed over new bail-out

By Francesco Guerrera in New York

Published: November 8 2008 02:00 | Last updated: November 8 2008 02:00

AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.

AIG’s executives were last night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.

People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday.

AIG’s board is due to meet on Sunday to approve the results and discuss any new government plan, they added.

The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit.

AIG has drawn down more than $81bn of the combined $122.5bn facility. The company’s efforts to begin repaying it before the 2010 deadline have been hampered by its difficulties in selling assets amid the global financial turmoil.

AIG executives have complained to government officials that the interest rate on the initial loan – 8.5 per cent over the London Interbank Borrowing Rate – is crippling the company.

They compared the loan’s terms with the 5 per cent interest rate paid by the banks that recently sold preferred shares to the government.

One of AIG’s proposals to the Fed is to swap the loan, which gave the authorities an 80 per cent stake in the company, for preferred shares or a mixture of debt and equity.

Such a structure would reduce the interest rate to be paid by AIG and possibly the overall amount it has to repay. An extension in the term of the loan from the current two years to five years is also possible, according to people close to the situation.

The renegotiation of the loan could be accompanied by the government’s purchase of billions of dollars in mortgage-backed securities whose steep fall in value has been draining AIG cash reserves.

AIG is also proposing the government buy the bonds underlying its troubled portfolio of credit default swaps in exchange for the roughly $30bn in collateral the company holds against the assets.

Losses on the mortgage-backed assets, which were acquired by AIG with the proceeds of its securities lending programme, and the CDSs caused the company’s collapse.

Since the government rescue, they have continued to haunt AIG, which is required to put up extra capital every time the value of these assets falls. AIG and the Fed declined to comment.

Red staters get a lot of sh*t from their coastal cousins for being stupid. I will say one thing in red staters’ defense, though: it truly takes a blue coast, blue-blood stupidity to concoct such dangerous national policy as Bernanke’s.

It’s the kind of stupidity that only an Ivy League education can buy.

What is Bernanke going to do when he issues $2 trillion in Treasuries next year, and nobody buys?

All the people who thought they got a great deal when Pepsi priced its last bond at 7.5% are going to feel pretty damn stupid 12 months from now. Either that, or AAA corporates will have lower yields than Treasuries.

At the primary dealer desks, there is no net Asian sovereign demand for US sovereigns anymore.

Right now, Uncle Sam is printing the money and planning to float Treasuries “soon.” I am not exaggerating. It is the dirty secret that every FX macro desk at every major institution knows: the Treasury is printing now and issuing later.

In the ivory towers at Treasury and the Fed, “printed” money will be converted to Treasuries soon, because the Fed and Treasury (okay, just the Fed) think that there is an “irrational” “liquidity crisis”, which will abate any day now.

It won’t abate. It will get worse: all bond yields are based on Treasury yields. Treasury yields are definitely going up in the next year. All other yields (corporates … munis … ) will go up too.

That will be the real “credit crisis.” We are just mostly through the second act.

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on today’s seismic Treasury selloff:

“The point is that the world was long Treasury, and we can see how they’ve been suckered.”

In other news, more insanity from the federales, who think they can permanently reduce commodities prices by shoving out leveraged players.

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Thomas Palley, Open Society Institute pontificator emeritus cum DC-cocktail laude, mocks himself best when he’s most honest. As do most political people.

Defending the Bernanke Fed

Filed under: U.S. Policy, Uncategorized — Administrator @ 6:37 am

Federal Reserve Chairman Ben Bernanke has recently been on the receiving end of significant criticism for recent monetary policy. One critique can be labeled the American conservative critique, and is associated with the Wall Street Journal. The other can be termed the European critique, and is associated with prominent European Economist and Financial Times contributor, Willem Buiter.

Brought up on the intellectual ideas of Milton Friedman, American conservatives view inflation as the greatest economic threat and believe control of inflation should be the Fed’s primary job. In their eyes the Bernanke Fed has dangerously ignored emerging inflation dangers, and that policy failure risks a return to the disruptive stagflation of the 1970s.

Both argue the Fed has engaged in excessive monetary easing, cutting interest rates too much and ignoring the perils of inflation. Their criticisms raise core questions about the conduct of policy that warrant a response.

At least he didn’t call us “liquidationists.” Generous.

Rather than cutting interest rates as steeply as the Fed has, American conservatives maintain the proper way to address the financial crisis triggered by the deflating house price bubble is to re-capitalize the financial system.


This explains the efforts of Treasury Secretary Paulson to reach out to foreign investors in places like Abu Dhabi. The logic is that foreign investors are sitting on mountains of liquidity, and they can therefore re-capitalize the system without recourse to lower interest rates that supposedly risk a return of ‘70’s style inflation.


The European critique of the Fed is slightly different, and is that the Fed has gone about responding to the financial crisis in the wrong way. The European view is that the crisis constitutes a massive liquidity crisis, and as such the Fed should have responded by making liquidity available without lowering rates. That is the course European Central Bank has taken, holding the line on its policy interest rate but making massive quantities of liquidity available to Euro zone banks.

In other words, the Buiter critique advocates one set of interest rates for banks, and a very different one for individuals, without regard to respective credit risk. Presumably, there would be no arbitrage between these two bifurcated markets. Presumably, liquidity provisions to other banks–“inflation by other means”–would both 1) save the banks, and 2) not institutionalize higher prices on the tabs of the people who didn’t take the stupid risks.

Never made much sense to me either. [I used to like Buiter because he was the only person who trashed Bernanke way back in the day. Unfortunately his “lender of last resort” bailout loophole was an unforgivable leap of illogic, and while formally very different from the Bank of Japan’s disastrous early-1990’s bailout, was functionally indistinguishable.]

According to the European critique the Fed should have done the same. Thus, the Fed’s new Term Securities Lending Facility that makes liquidity available to investment banks was the right move. However, there was no need for the accompanying sharp interest rate reductions given the inflation outlook. By lowering rates, the European view asserts the Fed has raised the risks of a return of significantly higher persistent inflation. Additionally, lowering rates in the current setting has damaged the Fed’s anti-inflation credibility and aggravated moral hazard in investing practices.

The problem with the American conservative critique is that inflation today is not what it used to be.

It’s different this time.

1970s inflation was rooted in a price – wage spiral in which price increases were matched by nominal wage increases. However, that spiral mechanism no longer exists because workers lack the power to protect themselves. The combination of globalization, the erosion of job security, and the evisceration of unions means that workers are unable to force matching wage increases.

DC establishment liberal: “Inflation is okay now, because workers have to eat all costs themselves.” As if workers will just sit back and take this? As if they can’t read these internet posts, which presume weakness, ignorance and stupidity on the part of American workers?

The problem with the European critique is it over-looks the scale of the demand shock the U.S. economy has received. Moreover, that demand shock is on-going. Falling house prices and the souring of hundreds of billions of dollars of mortgages has caused the financial crisis. However, in addition, falling house prices have wiped out hundreds of billions of household wealth. That in turn is weakening demand as consumer spending slows in response to lower household wealth.

Different. This. Time.

Countering this negative demand shock is the principal rationale for the Fed’s decision to lower interest rates. Whereas Europe has been impacted by the financial crisis, it has not experienced an equivalent demand shock. That explains the difference in policy responses between the Fed and the European Central Bank, and it explains why the European critique is off mark.

The bottom line is that current criticism of the Bernanke Fed is unjustified. Whereas the Fed was slow to respond to the crisis as it began unfolding in the summer of 2007, it has now caught up and the stance of policy seems right. Liquidity has been made available to the financial system. Low interest rates are countering the demand shock. And the Fed has signaled its awareness of inflationary dangers by speaking to the problem of exchange rates and indicating it may hold off from further rate cuts. The only failing is that is that the Fed has not been imaginative or daring enough in its engagement with financial regulatory reform.

Copyright Thomas I. Palley

The bottom line is, DC policy emerati are profoundly ignorant, sycophantic, and irresponsible people.

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“With Bold Steps, Fed Chief Quiets Some Criticism”:


“It has been a really head-spinning range of unprecedented and bold actions,” said Charles W. Calomiris, professor of finance and economics at Columbia Business School, referring to the Fed’s lending activities. “That is exactly as it should be. But I’m not saying that it’s without some cost and without some risk.”

[As yours truly noted back in November, Charles Calomiris wrote a verbose and obtuse article for VoxEU which proclaimed that there was no credit crisis — a restatement of his August claim that there was no credit crisis. I guess that makes him almost as good a forecaster as Bernanke is. ]

Timothy F. Geithner, president of the Federal Reserve Bank of New York, and a close Bernanke ally, defines the Fed chief’s “doctrine” as the overpowering use of monetary policies and lending to avert an economic collapse. “Ben has, in very consequential ways, altered the framework for how central banks operate in crises,” he said. “Some will criticize it and some will praise it, and it will certainly be examined for decades.”

Mr. Bernanke’s actions have transformed his image as a self-effacing former economics professor.

“I am tempted to think of him as somewhat Buddha-like,” said Richard W. Fisher, president of the Dallas Federal Reserve Bank. “He’s developed a serenity based on a growing understanding of the hardball ways the system actually works. You can see that it’s no longer an academic or theoretical exercise for him.”

Did he just say “Buddha-like”?

Within the Bush administration, Mr. Bernanke’s willingness to work with Democrats in Congress on measures to prevent mortgage foreclosures has stirred unease. “The fact that he, an appointee of George Bush, has come very close to advocating — though he hasn’t quite advocated it — a piece of legislation that George Bush threatened to veto is an illustration of his willingness to put his head on the chopping block,” said Alan S. Blinder, a professor of economics at Princeton and friend of the Fed chief.

One reason Mr. Bernanke is sticking his neck out is that he believes the broader economy’s recovery depends on the housing sector, which remains in a serious slump. Plenty of new evidence surfaced on Tuesday that this year’s spring home-buying season will be dismal, with one report showing that prices fell 14.1 percent in March from a year earlier and another that new-home sales are down 42 percent over the last year.

Among Democrats, Mr. Bernanke, a Republican, had previously been criticized by such party luminaries as the two former Clinton administration Treasury secretaries, Robert E. Rubin and Lawrence E. Summers, who worried that he was downplaying the dangers of a recession. But that view has changed.

“I think in the last few months they’ve handled themselves very sure-footedly,” Mr. Rubin said of the Fed. Many Democrats in Congress agree.

“They say that crisis makes the man,” said Senator Charles E. Schumer, Democrat of New York and the chairman of the Joint Economic Committee. “He’s made believers out of people who were just not sure about him before.”

To lessen the chances of a financial collapse, Mr. Bernanke engineered the takeover of one investment bank, Bear Stearns, and tossed credit lifelines to others with exotic new lending facilities — the Fed now has seven such lending windows, some of them for investment banks as well as commercial banks.

He also allowed the Fed to accept assets of debatable value — mortgage-backed securities, car loans and credit card debt — as collateral for some Fed loans. For the first time ever, he installed Fed regulators inside investment banks to inspect their books.

Much to the dismay of conservative economists, Mr. Bernanke has also presided over an extraordinarily aggressive series of interest rate cuts, lowering the fed funds rate seven times, to 2 percent from 5.75 percent, since last September, though it has signaled a pause in further rate-cutting barring a further crisis. …

Bernanke and Paulson are the worst thing that’s happened to capitalism since Arthur Burns and Richard Nixon. Carter would have been awful, but conditions were so bad by 1979 that he had to authorize significant deregulation and capital gains tax cuts (from 35% to 28%, from memory) kicking and screaming.

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MZM (NSA) v USD value v commercial lending

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… underwritten by PIMCO’s Bill Gross.

Just in time for the huge TIPS burp a couple of nights ago, when massive buying pushed the 5-year TIPS yield down to -.77.

I’ve been a huge fan of the SS hypothesis for a long time, so it’s good to see the world’s biggest fixed income guru practically copy-paste from the Shadow Stats website for his latest letter.

Without further ado:

What this country needs is either a good 5¢ cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” – “what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value. After 12 months of an endless primary campaign barrage, for instance, most of us believe that a candidate’s preacher – Democrat or Republican – should be a significant factor in how we vote. We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon. We care as much as we always have – we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.

It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome – better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense of self importance on a geopolitical scale, that our allies are dropping like flies. “Yes we can?” Well, if so, then the “we” is the critical element, not the leader that will be chosen in November. Let’s get off the couch and shape up – physically, intellectually, and institutionally – and begin to make some informed choices about our future. Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.

I’ll tell you another area where we’ve been foolin’ ourselves and that’s the belief that inflation is under control. I laid out the case three years ago in an Investment Outlook titled, “Haute Con Job.” I wasn’t an inflationary Paul Revere or anything, but I joined others in arguing that our CPI numbers were not reflecting reality at the checkout counter. In the ensuing four years, the debate has been joined by the press and astute authors such as Kevin Phillips whose recent Bad Money is as good a summer read detailing the state of the economy and how we got here as an “informed” American could make.

Let me reacquaint you with the debate about the authenticity of U.S. inflation calculations by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S. An observer’s immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S.

This, dear reader, looks a mite suspicious. Sure, inflation was legitimately much higher in selected hot spots such as Brazil and Vietnam in the late 90s and the U.S. productivity “miracle” may have helped reduce ours a touch compared to some of the rest, but the U.S. dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal. I ask you: does it make sense that we have a 3% – 4% lower rate of inflation than the rest of the world? Can economists really explain this with their contorted Phillips curve, output gap, multifactor productivity theorizing in an increasingly globalized “one price fits all” commodity driven global economy? I suspect not. Somebody’s been foolin’, perhaps foolin’ themselves – I don’t know. This isn’t a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics (BLS) and Treasury with rapid turnover to even think of it. I’m just concerned that some of the people are being fooled all of the time and that as an investor, an accurate measure of inflation makes a huge difference.

The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners’ equivalent rent, and 3) geometric weighting/product substitution. The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing. It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners’ equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.

In the 1990s the U.S. CPI was subjected to three additional changes that have not been adopted to the same degree (or at all) by other countries, each of which resulted in downward adjustments to our annual inflation rate. Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburger/less filet mignon when beef prices were rising, for example. In turn, hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durables. As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Hmmmmm? Bet your wallet didn’t really feel as good as the BLS did.

In 2004, I claimed that these revised methodologies were understating CPI by perhaps 1% annually and therefore overstating real GDP growth by close to the same amount. Others have actually tracked the CPI that “would have been” based on the good old fashioned way of calculation. The results are not pretty, but are undisclosed here because I cannot verify them. Still, the differences in my 10-year history of global CPI charts are startling, aren’t they? This in spite of a decade of financed-based, securitized, reflationary policies in the U.S. led by the public and private sector and a declining dollar. Hmmmmm?

In addition, Fed policy has for years focused on “core” as opposed to “headline” inflation, a concept actually initiated during the Nixon Administration to offset the sudden impact of OPEC and $12 a barrel oil prices! For a few decades the logic of inflation’s mean reversion drew a fairly tight fit between the two measures, but now in a chart shared frequently with PIMCO’s Investment Committee by Mohamed El-Erian, the divergence is beginning to raise questions as to whether “headline” will ever drop below “core” for a sufficiently long period of time to rebalance the two. Global commodity depletion and a tightening of excess labor as argued in El-Erian’s recent Secular Outlook summary suggest otherwise.

The correct measure of inflation matters in a number of areas, not the least of which are social security payments and wage bargaining adjustments. There is no doubt that an artificially low number favors government and corporations as opposed to ordinary citizens. But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation. And although the Gordon model for the valuation of stocks and real estate would stress “real” as opposed to nominal inflation additive yields, today’s acceptance of an artificially low CPI in the calculation of nominal bond yields in effect means that real yields – including TIPS – are 1% lower than believed. If real yields move higher to compensate, with a constant equity risk premium, then U.S. P/E ratios would move lower. A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.

A skeptic would wonder whether the U.S. asset-based economy can afford an appropriate repricing or the BLS was ever willing to entertain serious argument on the validity of CPI changes that differed from the rest of the world during the heyday of market-based capitalism beginning in the early 1980s. It perhaps was better to be “entertained” with the notion of artificially low inflation than to be seriously “informed.” But just as many in the global economy are refusing to mimic the American-style fixation with superficialities in favor of hard work and legitimate disclosure, investors might suddenly awake to the notion that U.S. inflation should be and in fact is closer to worldwide levels than previously thought. Foreign holders of trillions of dollars of U.S. assets are increasingly becoming price makers not price takers and in this case the price may not be right. Hmmmmm?

What are the investment ramifications? With global headline inflation now at 7% there is a need for new global investment solutions, a role that PIMCO is more than willing (and able) to provide. In this role we would suggest: 1) Treasury bonds are obviously not to be favored because of their negative (unreal) real yields. 2) U.S. TIPS, while affording headline CPI protection, risk the delusion of an artificially low inflation number as well. 3) On the other hand, commodity-based assets as well as foreign equities whose P/Es are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. 5) Developing, BRIC-like economies are obvious choices for investment dollars.

Investment success depends on an ability to anticipate the herd, ride with it for a substantial period of time, and then begin to reorient portfolios for a changing world. Today’s world, including its inflation rate, is changing. Being fooled some of the time is no sin, but being fooled all of the time is intolerable. Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.

William H. Gross
Managing Director

The SS hypothesis extends to unemployment statistics, as well. In most European economies, anyone unemployed between 19 and 55 years of age is apparently counted as unemployed. The massive graduate education and “nonprofit” apparatus in the United States (Peace Corps, Teach for America, etc) means that many Americans who are effectively unemployed — and who often use such institutions to say that they “have something to do” — are not counted as such.

When you add up all the American distortions, the US economy expressed in European metrics comes to approximately 7 percent inflation, 8 percent unemployment, and very low growth.

Which begs the question of what European governments do to cook their own books, which is something I can’t know. Gold-buggery seems to be an overwhelmingly American phenomenon, and virtually all research into effective gold price support has come from Americans, which means that the CPI-skeptic worldview is very familiar with the nuances of American book-cooking, but not at all familiar with European equivalents.

However, European bonds are not nearly the economic anchor that American fixed income and equities prices are.

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The credit crisis has separated true libertarians from phony libertarians, and separated true liberals from phony liberals.

The phony liberals have inadvertently mocked themselves throughout the entire credit crisis, manning the barricades to defend the greatest act of socialism for the rich in US history. Ditto for supposed “libertarians,” eg Robert Rubin, Bruce Kovner, and the vast majority of institutional Wall Street which found itself drowning in its own quagmire, and changed their tune faster than you can say “WTF.”

Anyway, here’s the link.

The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, “The Scars of Losing a Home,” speaks not of lofty academic economic concepts but of human sympathy, of things that are “really important.” With references from famous academic psychologists. I haven’t taken this kind of a tiger by the tail since I went after Austan Goolsbee last year.

Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

I actually think Goolsbee’s piece was the high-water-mark of the “subprime helps the poor” talking point. You certainly don’t hear much about that these days. Less than two months after Dr. Goolsbee’s earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line (“‘I am passionate about the normal person owning a home,’ said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. ‘I think owning a home solves all their problems.'”) Plus by now we’ve got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn’t going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody’s (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, “just” another 7%. By now, those delinquent borrowers in Goolsbee’s 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were “successful homeowners” last year, or else they’re those lucky duckies who bought homes after the publication date of Goolsbee’s plea that we not tighten standards too much.

Of course Shiller wasn’t exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:

Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it’ll go up. It’s the easiest way to get rich.

At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the “Ownership Society” and Bill Dallas solving everyone’s problems by letting them put Roots in a Community (for only five points in YSP).

So I hope I can be just a tad startled by the New Shiller:

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

So it’s no longer irrational exuberance or plain old speculating; it’s now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous–these people without selves can’t be up to anything good–but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?

If you just scanned the first few paragraphs of Shiller’s op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone’s experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.

But you keep reading and you find Shiller trying to explain the “trauma” of foreclosure. And that’s where this really gets weird:

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

We need to modify mortgage contracts to keep homeowners from becoming cynical? That’s somehow more respectable an idea than the one saying we should throw them out on the street to “teach them a lesson”? If Shiller is serious that all those other parties are “to blame,” then why isn’t the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are “really” to blame, so we’re left managing the psyches of those who can be punished. And that’s not cynical?

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the “fundamental” psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Now, that’s breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the “Self” (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn’t find some psychological insight about the emotional relationship of people to their homes that doesn’t speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

(James on the psychological effect of losing one’s property: ” . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.”)

I’m actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.

It is undeniably true, I assert, that not everyone was a speculatin’ spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class “homeowner.” But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.

It’s worse than odd–it’s downright reactionary–to then go on to that evocation of homeownership as good citizenship and good citizenship as “feel[ing] at one with [the] country.” This puts a rather sinister light on Shiller’s earlier insistence that we need to make sure people don’t get too “cynical.”

I see that Yves at naked capitalism was just as disgusted by Shiller as I am:

Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.

Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we’ll pursue efficiency that first cost blue collar jobs, and now that we’ve gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).

But efficiency arguments don’t apply to housing since we are sentimental about it. And it’s that sentimentality that bears examination, since it engendered policies that helped produce this mess.

I would only add that we are about five years too far into a war that has not made a majority of us “feel at one with that country.” I think of another really important policy change we could be pursuing right now to shore up everyone’s psychological estrangement from their patriotic self-satisfaction. But “efficiency arguments” don’t apply to wars, either.

My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we’re treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the “Ownership Society.” Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.

Shiller’s unwitting self-parody embodies the principle at the heart of the TAF and every other tentacle of the Wall Street bailout. Far more than “economist statistics which can cause us to lose sight of what’s really important,” what’s REALLY important is protection of those Selves which include “lands and horses, and yacht and bank account.”

You can *not* make this stuff up.

Pardon my French, but our economy is being run by f*cking idiots.

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