Renters are horrible people, un-American and un-Godly. They are low achievers who watch TV in their underwear and scratch at themselves incessantly. They eat tuna out of the can, then wear the cans on their heads like tiny hats.
I think that the liquidity crunch in housing is just the beginning of a sea change in the housing market. One of Minsky’s ideas was that financial innovations increase booms but also work in reverse to increase busts. This can bee seen in the housing market in that MBSs or CDOs (whatever you wish to call them) allowed banks to lend to much riskier borrowers. This obviously was a factor increasing the strength of the housing boom. How will it work in reverse? Quite simply, the act of selling mortgages into the market for CDOs means that banks and mortgage brokers lose the discretion they previously had over lending. In the good old days a bank could decide what interest rate to charge a borrower etc. Now the market is going to dictate to banks what interest rates they are going to change borrowers. This interest rate will be determined by the rate at which the market clears CDOs. The riskier buyers of CDOs view the mortgage market the higher rates on CDOs will be. In turn banks will not be able to make mortgage loans for rates less than the market rate on CDOs for obvious reasons (what bank would make loans at 6% only to sell them off at CDOs with rates of 7%0. Right now the market is focusing on the mortgage default rate as the factor that is undermining CDO prices. However there are other factors that may soon enter the picture. For example, falling house prices will lead to higher CDO rates as the security for 100% 95% or even 90% mortgages is undermined. One can see the implications of this for the ability of the Fed to stabilise the housing market through cuts in the discount rate. Basically, while the Fed may cut its rate, mortgage lending rates are likely to increase because of increased risk, this being dictated to banks by market rates on CDO. So the spread between the Fed Funds rate and mortgage lending rates is likely to increase. If this happens it would be a complete validation of Minsky’s theory about financial innovation.
Written by Alex Grey on 2007-08-24 16:14:44
http://www.rgemonitor.com/blog/roubini/211982/