Capitalism 2.0

Whatever happened to Pollyanna?

Where is she?  For the past four-five years I and many others of similar mind have been called every name in the book for daring to express the view that there just maybe, perhaps, might be some kind of "housing bubble".  If I had a buck for every used house salesperson who assured me that "this is the bottom", well...

The real reason I started this thread is because of accountability.  Yes, accountability.  For the first time in history we've experienced an episode that has been well documented in a democratic, not-easily-corruptible manner.  Because of blogs like this and thousands others, there can be no claim that "no one predicted all this".  Not that any of us had the entire picture -- we did not.  But in aggregate, a small group of internet "bloggers" seem to have predicted the current state of affairs with striking accuracy.

And what of all the blurry eyed optimists?  Well, not only do we have their comments of record in blogs and other extracts, preserved in the web's wayback machine for eternity.  But we also have thousands of hours of video documentary in the form of youtube and metacafe and others.  Here we can see what all these pundits, shills and outright con artists have said over the years.  We can watch the "economists" from the NAR lying quarter after quarter after quarter in the face of overwhelming evidence contrary to their rosy view of a "spring rush in 2007!"

Not that I'm going to hold my breath, but I'd love to hear from some of those who attacked me and others on this blog so viciously over the years.  Your comments are now on the record.  But where are you now?  I'm still here, as are many of my readers and commenters.  But you, the Pollyannas, where have you gone?

Mortgage Cram-Downs a *Terrible* Idea

I had hoped to pen a considerable article about the Obama administration's currently (rumored) mortgage "cram-down" plan.  But I won't have time until after Wednesday of this week (at which point I'll revise this article and spell out the arguments) [Note, I've decided to just contribute my thoughts in the form of comments below.  I may write a more formal essay later, but for now I'm just going to argue in real-time].

But in case anyone wishes to discuss in the interim, have at it.

In short, I think mortgage cram-downs are a terrible terrible terrible idea.  I agree that something needs to be done regarding the flood of foreclosures.  But I'm more for an "orderly devaluation", if you will.  I'd slow down the process, and put more effort into being thorough.  I'd go after those who committed mortgage fraud aggressively, lenders & borrowers.  I'd also go after lenders, borrowers and home builders who exploited or outright avoided taxes.

But I would not punish responsible homeowners who've been paying their mortgages, along with responsible savers who waited to buy, along with the struggling people who are working 2-3 jobs just to barely make the mortgage they can't really afford by _rewarding_ the worst of the worst.

Yes, this plan punishes someone who's working 3 jobs to just make payments, and rewards his lazy neighbor who'd rather sit around and whine for a bailout.  And don't get me started on the banks/lenders.  Yet another bailout for them?  The government will "match" their loan workouts? 

This is getting ridiculous.

--- More on why my plan to allow foreclosures to take place in an orderly fashion *helps*, later.  First I must make a living...

Sticky Bay Area Housing Prices, Redux

A thoughtful question from reader "sun_kan" asked:

randy, i have read your price stickiness argument (in patrick.net) in detail & i have seen it play out precisely as you expected it to be, in the bay area, till the recent credit crisis. now i see a slightly different behavior from sellers, with a lot of them accepting the reality & cutting prices in bigger chunks. it is still expensive but i do see cuts in the range of 50K-100K, even in nicer areas (hills, school district etc). in not-so desirable areas where there is a lot of foreclosures/short sales, i am seeing sellers trying to price very competitively with (or sometimes lower than) the reo prices. is there a tipping point in the sellers psychology, just like the one in stock market? and if so, how would that affect the price stickiness?

Vacation

As you've all noticed, I haven't been contributing much to the blog lately.  I'm going on vacation next week, and have been busy getting everything done before the holidays basically shuts everything down.

I have a ton of ideas for new articles on old subjects and some new topics.  If any of you want to pen an article in my absence, send me an email before Saturday (you can find my email on the blog).

The Great In/De-flation Debate

Presently there is an increasingly raucous debate brewing between those who believe there will be long-run inflation, and those who see an extended period of deflation.  I have elaborated my position here and elsewhere, which is basically that we're currently at the head-end of a deflationary period which risks collapsing into a broader deflation cycle.  The actions of the Federal Reserve in concert with other world central banks strongly suggests that monetary policy leaders also fear deflationary forces.

This subject is particularly interesting being that it has generated the most email I've received on any topic since I wrote about the Second Life virtual world economy.  Following are a few examples...

How about a $600 trillion headache?

Coming Soon:  The $600 Trillion Derivatives Emergency Meeting (link).  The Prudent Investor posted the linked article on SeekingAlpha over the weekend.  It's a must-read.

Realizing that by no means is the entire derivatives market at risk, and that a good deal of the notional values of these derivatives net out (theoretically) should give some comfort.  But only some.  This is still a big problem.  Well beyond the ability of any government to "bail-out".  Not even all governments acting in unison could hope to bail-out the derivatives-related fallout should systemic failure spread.

Will it spread?  I wish I could say no.  But, right now, everything is on the table.

One interesting notion I'm hearing discussed more and more, including in the comments on that article, has to do with a purely legal solution to the looming derivatives defaults and unwinding problem.  It goes roughly like this:

Default swaps (and related instruments) were unregulated.  Those instruments were basically a form of trade-able insurance positions; sometimes used to insure, sometimes to hedge, often to simply speculate -- ie., to bet.  Not regulated by financial authorities.  Not regulated by insurance authorities.  Not regulated by gaming regulators.  Therefore, these things constitute a form of illegal gambling.  As such, they violate public policy, are not protected by any international treaties or trade agreements, and are subject to nullification by a court.  So, just nullify them all.  All; every single one.  Tell all the parties, "Tough, you should have known better.  Be happy we're not going to prosecute you for illegal gambling". 

Then, effectively, every party has what they have today, and we move foreward tomorrow.  Lot's of upset folks.  Lot's of rhetoric about the end of capitalism, the end of markets, the end of credibility.  But it will pass quickly.  Only a select, elite few ever played in this market to begin with, and they were just running giant bets against one another.  So, knock out the hundred trillion or so of default swaps and dependent derivatives and move on to the next crisis -- which is consumer credit defaults.

Thoughts?