Posted on 08/09/2007 6:33:05 AM PDT by Hydroshock
Regarding the S&L Crisis. It wasn’t Neil’s fault.
Blame Congress
http://www.econlib.org/Library/Enc/SavingsandLoanCrisis.html
The S&L Crisis /bankruptcy of FSLIC did not occur overnight; the FSLIC was a disaster waiting to happen for many years. Numerous public policies, some dating back to the thirties, created the disaster. Much of it caused by congressional action. The laws pertaining to the creation and implementation of the S&L’s were quite strict about the line of business they were in: mortages. Flip-flops on real estate taxation laws first stimulated an overbuilding of commercial real estate in the early eighties and then accentuated the real estate bust when depreciation and “passive loss” rules were tightened in 1986. The biggest deal with the S&L crisis was that the old tax law had some fairly high tax loopholes that made it worth it to own money-losing property for the tax benefits.
The flip-flop had a double-whammy effect: the 1981 tax law caused too much real estate to be built and the 1986 tax reform bill TEFRA made some changes that got rid of many tax loopholes and hurt the value of much of what had been built. You had a lot of S&Ls, real estate guys like Donald Trump, and all sorts of other people who had made plenty of investments counting on the old tax code to make them worth it. Change the tax code and suddenly these people were stuck with a lot of money-losing real estate investments that didn’t have the tax benefits that were why they had bought them in the first place. So values on these properties that lost their loopholes plummeted. Result— lots of real estate loans went bad because conditions changed. The S&Ls loaned on the basis of the properties being worth more thanks to their loophole status. Thus, way more bankruptcies and bad loans than expected, and the S&Ls lost a lot of money, money that they hadn’t expected to lose.
The S&L’s had to price their collateral to market, and not to the end of the collateral life. So, a 30 year mortage on a house which was always paid on time was valued at the current market price and instantly was considered a non-performing loan instead of a performing loan, even though there was no hint that the mortgage payments wouldn’t continue to be made. So even for good loans, the collateral value went down and the under-collaterization of the mortages did the S&L’s in.
FIRREA made it even worse, a perfect example of Congress throwing gasoline on a fire to put it out. It had nothing to do with “riskier” investments—the riskier investments were the equivalent of the S&L’s trying to find a life raft after TEFRA ‘86 sank their boat. Another example of the Law of Unintended Consequences. The end result was the crisis. The overall benefits to the economy of the tax reform could be enough to outweigh the bailout, though.
Just throwing these possibilities out there:
Liquidity at the top end of the financial markets will dry up. Mortgage backed securities will go down in value. This will hurt share prices of any companies investing in them or earnings of companies originating/selling them. Redemptions from funds that hold them will suck up liquidity. Holds on redemptions will follow, which locks up liquidity of investors.
Liquidity at the bottom end will dry up. More diligent underwriting and tighter lending standards will remove even more buyers from the market, further depressing home prices and hurting builders, Realtors, title companies, insurance companies.
As the velocity of money slows, the efficiency of the markets deteriorate. Falling asset prices result. This makes people feel poorer and more conservative about spending, thus, the retail sector will suffer.
The Fed cuts rates and prints money, but that pushes the dollar to a tipping point, and China, Japan, and others dump out of the dollar, causing it's collapse.
Hillary raises income taxes, capital gains, and death taxes, and institutes a new personal property tax on the wealthy (anyone with a job) to pay for national sickness care, and surrenders in Iraq and Afganistan.
-OR-
Just a bump in the road to Dow 20,000 by 2010.
I'd like to say LOL to that but I don't want to get complacent ...
All of the things you say are possible and even likely - my point was simply that the article made none of them.
I do think liquidity is too good and some tightening needs to occur. The M & A activity was getting excessive, IMO. On the one hand the retail sector may hurt a bit because people can't use their houses as an ATM and spend money on stuff, but on the other falling house prices mean more people will be paying reasonable prices for houses without needing 100%LTV or interest-only mortgages to qualify.
None of this, however, stops the precipitous increase in health or grocery or tuition costs. For that we need Congress to lower taxes and get out of trying to run the energy, education and health care companies and organizations.
Madam Shrillary will only make it all worse.
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