Posted on 08/25/2007 12:09:28 AM PDT by 2ndDivisionVet
Edited on 08/25/2007 10:13:31 AM PDT by Admin Moderator. [history]
The last politician who took advice from the bond market was Bill Clinton. When he pushed for a tax hike back in 1993 to cut the budget deficit, it was under the assumption that bond investors would respond by bringing down interest rates. (The theory here is that deficits are inflationary. Inflation is bad for bonds.) Yet long-term interest rates surged from 6.45 percent when Clinton signed his tax-hike bill on Aug. 10, 1993, to 8.16 percent on Nov. 7, 1994, the day before the midterm congressional election where Republicans won back the House and Senate.
Now PIMCO's Bill Gross, perhaps the most well-known bond fund manager in the world, is giving President Bush and the GOP some advice. He wants the government to start cutting checks to struggling homeowners, as both good policy and smart politics. (Bush has already ruled out any direct payments.) As Gross wrote in his recent letter to clients:
"The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions emblematic of the RFC, or perhaps to be more current, the RTC in the early 1990s when the government absorbed the bad debts of the failing savings and loan industry...This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hardworking Americans whose recent hours have become ones of frantic desperation...And if you're a Republican office holder, you'd win a new constituency of voters—"almost homeless homeowners"—for generations to come. Get with it, Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Re-establish not the RFC or the RTC, but create an RMC—Reconstruction Mortgage Corporation...Write some checks, bail 'em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all, "W," you're "the Decider," aren't you?"
My take on this:
1) This would totally alienate conservatives, many of whom were pretty disgusted heading into the 2006 election with what they perceived as the free-spending ways of the White House and the GOP-led Congress. Here are three pretty typical responses to the Gross bailout idea posted on the conservative Free Republic message board: "Using whose money? Mine? In a pig's eye. I work for MY home, not yours." "Why is it that I, who [watch] what I spend, put 20% down on my home, got a conventional 30-year loan and make my payments on time get nothing while some want the government to bail out stupid people?" "I hope every home squatter that signed those mortgages gets put out on the street!"
2) Talk about playing on someone else's home turf. Any Bush bailout idea, if he should propose one, would inevitably start a bidding war with Democrats. Hillary Clinton, for instance, has already proposed a billion-dollar fund to boost state programs that help at-risk borrowers avoid foreclosure. I don't see why the Republicans would get more credit than the Dems.
3) We're not talking about a very big constituency here. Research firm First American CoreLogic projects 1.1 million subprime-related foreclosures, spread out over a total period of six to seven years. And it's blue state California—which Democrat John Kerry won by 11 points in 2004—where most of the trouble is, with a reported 39,013 foreclosure filings in July, the most of any state for the seventh month in a row and up 289 percent from July 2006, according to RealtyTrac.
4) Not that politicians necessarily care, but the economics of a bailout are pretty iffy. As U.S. Appeals Court Judge Richard Posner, a guy who specialized in the effect of economics on law, notes in the blog he shares with Nobel Prize-winning University of Chicago economist Gary Becker:
"The only justification for bailing out risk takers is to avoid a depression (or as it is politely called nowadays, a "recession," but, oddly, the worse the macroeconomic consequences of a speculative boom and bust, the stronger the argument for punishing the risk takers (which include both borrowers and lenders) by not bailing them out. ... If the government relieves risk takers of the consequences of their risks, there is a divergence between social and private risk. An example is subsidized flood insurance, which leads to excessive building in floodplains. ... Moreover, government intervention to help lenders and borrowers invites further government regulation—for example, limits on subprime lending. There is no more reason to discourage risk taking than to bail out the risk takers when the risks they have voluntarily assumed materialize."
B U M P
Not just bad, but terrible...
Why should the federal government bail out people who cannot afford their homes? Who bails them out next year and the next and the...
Look, people who can afford mortgage payments will pay them. Those who can’t won’t be able today, next month, next year or ten years from now.
Face the music. Get on with your life. Don’t be so gullible next time. Chalk it up to life experience.
Bill Gross is self-identified “lib”-ertarian, who wants a bailout not for homeowners but for himself, as he is sitting on largest stockpile of US bonds - if interest rates are lowered by Fed, their value goes up and he stands to make a bundle in a very short period of time.
EXTREMELY bad Idea.
Dang. I don’t think I can highlight just one of those issues.
Nobody seems to be responsible for anything, anymore.
However, I’m responsible for my commas. ;o)
B.S. panic alert from a dubious source; U.S. “liberal”
News and Socialist Report.
Bad timing as the July report shows a 2.8% jump
in new home starts. The sub-prime sector is nominal.
Sorry, Mr. Zuckerman. The pro-Clinton Article is hogwash!
F#$% that.
The people that bought these homes with nothing down have little to lose. That have little invested. On the other hand we have stupid lenders that lent money where they shouldn’t have and created this mess to begin with. They should pay the consequences. After all they did it in the first place to make more money. Their greed got them where they are. Now comes reality. To erase the consequences for their greed only invites more of the same at others expense. A big fat NO!
thank you!
Also, raises a spectre of chain reaction. If one is scraping to make payments and pay the mortgage, and his neighbor is at risk of default and gets a check from the government - what’s one to do, but apply for the same treatment or feel like a fool.
This is just a lame-brain idea, and since Bill Gross is not at all dumb and understands this will not happen, it’s simply designed to raise the noise level and sense of panic to try and make Fed lower the Fed funds rate, so he can make money on his bonds.
Yes...some of us peons are watching. ;o)
Thank you!
Good grief! Is this assclown Gross serious?
He wants the GOP to be more socialist than the rats and pander to society's losers in order to buy their votes??
(rubbing eyes) This HAS to be a joke.
Fred Thomspon v Obama or Hilary puts California in play, but trying to buy it is as useless as trying to ‘reach out to the Latino vote’ through amnesty.
Meanwhile, wages and the cost of goods and services go up. This means that homeowners are now paying their mortgages with much cheaper dollars, which ain't so bad. Those sitting on money today are forced to invest in order to (hopefully) compensate for the ravages of inflation.
If I'm Bill Gates I don't care for it a bit. If I'm on a fixed income I feel vulnerable to the government's largess. If I'm Joe Sixpack I hate it - but only because I haven't thought it all the way through and hate watching prices go up. If I'm a business owner I just raise my prices (the very definition of inflation) - besides, it's great having all these rich investors looking good business opportunities.
Whether one should be concerned is simply a function of their circumstances.
???
Did you read the article?
Notice the ruse and the bait :
After all, "W," you're "the Decider," aren't you?"
Can skip the rest, anybody who does something like that doesn't have your best interests in mind.
Seriously is this being illustrated as Bush winning/bailing out all the young voters involved in construction/mortgage/speculation business?
More so this is an argument on what level of risk the Government (ie/you and me) will back/buy.
Mae and Mac were well done. They are not the argument to add Curly in this market.
My advice to Bush: Jawbone the Fed to lower rates to give the economy a period to adjust - give it a soft landing - there are a lot of "innocents" that would be hurt as well in a crash.
Nite. ;-)
I’m sorry however I voted for W twice
He (GW) needs to distance himself from the GOP and try to let us rebuild what he destroyed.
REAL bad idea.
Precisely.
So the GOP can "save itself" by "one upping" a great lot of rotten socialists? That's going to endure the GOP to it's conservative base, the same base that didn't even bother to show up at the last election because the GOP was acting too much like corrupted socialists?
Great thinking there...
Now I know why I constantly run across articles like these regarding Bill Gross:
June 13, 2007 Pimco's Bill Gross has been grossly off
Quote : "Why am I so entertained by Gross's predictions? Because if you look at Bill Gross's track record as a market prognosticator, the reaction to the PIMCO don's latest call should be hoots of laughter, not a panic to sell. In fact, for the past few years, you could have made plenty of dough betting on the opposite of whatever Big Bill said was about to happen."
LOL!
The strong will survive, new companies without intractable bureaucracy will get a chance to rise up, capital will be allocated to those who can make better use of it!
For me the fact President Bush hasn't done anything really ups him in my book... and makes me happy to have voted for him twice. And his choice for the federal reserve Bernake seems to have a level head about him, and carefully thinking through his actions. Versus the ECB which seems to have panicked nearly.
Not only that, but I can do a sub-prime loan today, right now. It will be a little harder to qualify for than August of 2006, but it can be done. There will always be a market for borrowers with a score of 619 and below.
Ownership of a home is, in terms of eternity, a deception. It is really borrowed money for 30 years, and then the owner is in his 50’s or 60’s when it is paid off.
The real truth is that it is borrowed time. You don’t get it and neither does anyone else.
For everyone gets to die and after that there’s a judgment.
And you can’t take it with you.
Vanity & deception. Better for a “homeowner” with a bad loan and a low income to rent. We’re all just renting anyway.
I hope that happens. Bad behavior only stops when people are truly held responsible for their actions. As I tell my adult children, “Your financial problems are not my financial problems.” Basically your debt is your debt. That was advise I got from my dad decades ago. It set me on the right path.
I agree with this. However, in this mortgage mess, the bad behavior was on both sides - the borrowers were borrowing more than they could afford to borrow based on their incomes, and the lenders were allowing these borrowers to qualify for 1-year or 3-year ARM loans knowing that they would very quickly jack those rates up as soon as they had the opportunity. The lenders bear some responsibility for it as well.
Suppose a lender gave a borrower $250,000 for a home that was probably only really worth $175,000 in a "normal" housing market. In addition, that lender allowed the borrower to just squeak by on their debt to income ratios to qualify for the $250,000 loan by offering the borrower a 3.5% rate on an ARM loan, while financing 100% of the home's "value". Now the borrower is struggling to make the payments, which have gone from around $1100 a month (plus PMI) to over $1500 a month or more.
Now, many of you say "screw the borrower", but the reality is that the lender is screwed too, because the home has now returned to a pre-runup value of closer to the $175,000 figure that it should have been worth in the first place. So, the lender can foreclose on the house, but then the lender is left with a home that will not cover the money the lender handed out to the borrower.
A bailout of the borrowers is not the answer, nor is a bailout of the lenders. I'm not sure where the answer lies, but it probably has something to do with "encouraging" lenders who have a certain percentage of these loans to readjust the loan amounts and interest rates to more favorable terms that can work for both parties. How you do that, I don't know, but there's got to be a better way than just having a million foreclosures on properties that are worth less than the lender has at stake anyway.
Does that make any sense? Any other suggestions, other than the standard "Screw 'em - throw them out on the street" response so popular around here?
I remember you just mentioned this recently. Maybe a better assumption is that tax hikes are inflationary.
Because many people wouldn't be in trouble if the Federal Reserve hadn't kept interest rates too high.
The article is contradictory. Did Bubba make a bad assumption or did he take bad acvice? Otherwise, I think using the bond market as an indicator is a pretty good idea. And apparently so does the author, who cites the jump in rates after the tax increase.
Just because we haven’t had a mortgage in years, why should we be paying for other people’s mortgages?
What do I get for being able to afford my home/pay my mortgage?
Who would take advice from a guy who is the head of a corporation called PIMPCO?
Oops! It’s PIMCO. My bad!!!
I love the idea that deficits are bad, because they raise interest rates, because they reduce the amount of money available for borrowing. It's better to just take the money, permanently, because that doesn't reduce the money out there. LOL!
Maybe a better assumption is that tax hikes are inflationary.
Well, if the hikes reduce economic activity, but the money supply remains the same, that would be inflationary.
In many parts of the country where median housing prices got up to 8-10 times median income, housing deflation is not only not "destructive", it's positively necessary.
I cannot understand why so many think it's terrible that Americans are paying more for gas than their parents did, but wonderful that they are paying far more for housing.
W’s already said “NO”.
In other words, life sucks and then you die.
bttt
You have no promise of tomorrow.
Even without religion that’s simply a fact.
Good point. WELCOME ABOARD!
But it is accurate to say the problems now are much more than just the subprime market. They may have started there - the schematic might look like: subprime, Alt-a, (bear stearns takes haircut) prime mortgage industry locks up, stock market turns on a dime, then commercial paper freezes up.
And this isn’t acknowledging the subprime exposure overseas which is considerable.
a lot of people are saying “screw the lender” actually, from anecdotal observation anyway. Loaning more than say 80 per cent of market value doesn’t make any sense. That way if the borrower defaults the lender doesn’t take a loss, or much anyway. And there are accounting devices and tax issues that come into play.
well - housing appreciation has been part of the attraction of homeownership in the US for many years. Truth is most people don’t want a lot of money or at least arent willing to work for it, they are deathly afraid of the stock market because they don’t understand it. You might say they are stupid, and some undoubtedly are, but a house means a place to live and in the past a dependable source of income or equity. It takes guts and hard work to be successful in real estate but undoubtedly there is at least one guy out there livin large at a fully paid house that is the net proceeds of a dozen 0 percent down credit cards and a few savvy flips at the height of the bubble. But even staid Americans have traditionally used the gently rising housing market as a sensible way of making money.
Agreed. It’s very difficult to learn from one’s mistake if you don’t pay a price.
So after taxes rise so that the Federal Government can afford to bail out people whose wages rise insufficiently to pay terrible mortgages, who bails out citizens who cannot afford their taxes, food, and housing expenses simultaneously even if their incomes rise? This sounds like a way to get aboard an endless cycle, and only the banks win.
START
Some people get unreasonable mortgages from banks.
Banks threaten to foreclose on people who cannot pay mortgages.
Federal government pays some people to pay banks for mortgages.
Federal government raises taxes on ALL citizens.
Citizens cannot afford to pay taxes, food, and previously “affordable” mortgages; many employers cannot pay both taxes and wages to citizens, who consequently lose their jobs, making their mortgages unaffordable.
RETURN to START and REPEAT.
Then we have the ancillary effect of people purposely getting unaffordable mortgages because they know that the Federal government will give them money to pay that mortgage. If this phenomenon happens with sufficient frequency, then we effectively untie the nominal price of housing from the costs of obtaining it to many/most citizens. This dichotomy currently afflicts the medical industry, where people get health care, but employers and government agencies (mostly) pay for it. This disconnect worst afflicts those somehow ineligible or unable to pass their cost burden to a third party.
We do NOT want to go down this road, folks; followed to its logical conclusion, it leads to “socialized housing,” wherein everyone resides in the “projects,” howsoever the government tells them to live.
Well, I guess as a form of very-low-return forced savings housing is an "investment".
But that bears no comparison to the insane housing bubble of 2001-05.
When the value of Krugerrands, Beanie Babies, or tulips goes stratospheric, the average prudent J6P's life is not seriously affected.
But when 1500 square foot houses in middle class neighborhoods start getting bid up to the point where it takes an 90th percentile income to afford one (without a toxic mortgage), we are talking serious damage to our way of life.
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