patrick.net

Banks are now afraid to lend, and are hoarding their cash. They are depositing with the federal reserve bank instead of lending.
And the grim irony is that the Fed then lends this cash out through TAF. Sterilization, and risk free (for the banks, not the Fed)!

They are not doing it correctly, money wasted.

They should have mailed out more rebate check, at least it seems like Obama gets it right, he is going to stimulate us with at least $500B directly.

I like the recent proposal by the different CEOs on cutting tax permanently, giving out more rebate checks and investing in infrastructure as well as alternative energy.

Even if we go into trillions of debt, there may be some payback. If we just pump money through the monetary channel, it is a dead end, Fed and the bank are just doing a dead-end loop, waste of the money that Fed printed. If Fed prints, it should get it out through Treasury to reflate the market. Fiscal stimulus is the correct way to do it.

If the government spends the money on infrastructure we will at least have something to show for it.

Otherwise I think most of the money is just wasted for very little benefit. Just moving money from one pocket to another. No real gain for the economy. The bailout money and stimulus money does not come from nowhere. It comes from all of us in inflation or in taxes. So what the government spends the rest of us can not spend.

Infrastructure projects must be carefully chosen to have good value.

Repairing and strengthening levies in New Orleans or Sacramento River Delta would be good.

Tearing down and re-building bridges at random is not a good idea. Expanding airports given the future prospect of oil prices is not a good idea. Incremental improvements of railroads is a good idea.

It is crucially important that we build the right kind of infrastructure rather than just doing useless busywork, or worse, building entirely the wrong kind of infrastructure.

I pray that congress does not fall into the trap of thinking "the important thing is that we do something, and not so much what we get for the money". Nothing could be further from the truth.

Clearly some projects are more worthy than others.

Government spending is typically full of waste even when the project itself is totally worthwhile.

When the project is not worthwhile then it is just like pouring money into a hole (see my earlier link on the money hole).

Unfortunately congress has fallen into the trap of thinking they must do something even if it is a waste.

Normally in a free market the less efficient producers lose market to the more efficient. The least efficient go out of business.

In government there is no such effect.

With government intervention we can keep the inefficient in business.

Monopolies do not need to be efficient - and generally are not. Governments are monopolies.

yup. The worst kind of monopolies. They monopolize the money supply.

They have so much of a monopoly that they charge us a fee even when we just want to barter with someone else. And another fee for having our bartering turn out profitable.

But at least our fees are going to good use. Namely, blowing up brown people, and putting some helium under those golden parachutes.

Our fees are clearly NOT being used to regulate the very few things that should be regulated.

I would rather at this point pay a "leave me the fuck alone" fee of the same amount. But alas, that won't work. They are going to take my money, then fuck me even more.

Yes they will.

...and even more than you will ever know.

...because it is not just the direct fucking - you will never know what good is precluded by their failed good intentions.

Normally in a free market the less efficient producers lose market to the more efficient. The least efficient go out of business.

Replace 'efficient' with 'fraudulent' and you might be on to something!

One big reason our government is not working is that there is one political party that does NOT WANT it to work. They are known as the "republicans". Republicans are so hell-bent on proving that government does not work that they will do just about anything to prove it. With predictable results.

The Democrats are better. At least they want goevernment it to work, but they also run up against human frailty. Government must be strongly regulated (I know, I borrowed that last sentence from Peter. At least he is right about ONE thing :-)).

Saying that republicans do not want the government to work is just as silly as saying that democrats do not want business to work.

Both points are untrue. Yet we frequently hear that kind of political rhetoric.

Republicans want less government, and democrats want more government - but they both want it to work.

Of course, people have differing ideas on the priorities for what it should work on as well.

With economic policy I think the fundamental difference come to this: Republicans are more focussed on making the economy more efficient and the pie bigger, while democrats are more focussed on making the distribution of the pie more uniform. So republicans are not as concerned about those who get less of the pie, while democrats are not so concerned about incentives to make the pie bigger.

In a perfectly efficient free market world many would be oppressed and discarded by the brutality of the system. In a perfectly equal compassionate world everyone would share equally in the abject poverty. Both extremes suck, and somewhere in the middle is a good but imperfect compromise.

Well shoot, it appears that the guy who got fired and went nuts was actually yet another Casey Serin...

www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/18/BATK146S1Q.DTL

Company officials said Wu had been fired for poor performance but declined to elaborate. He was arrested Saturday.

Republicans want less government, but end up creating more.

Democrats want BETTER government, not bigger, and may just get their way this time.

Money loaned @ 3% when borrowed @ 1% = 300% gross profit. Money loaned @ 12% when borrowed @ 10% = 20% gross profit. Next question.

My math is really bad. 200% -- still 10x more. (1000%) As you can see, it is a better deal for the banks. The banks are in charge -- Paulson is more powerful than Bush.

PS -- since the money is inflated, you now have to borrow $1 million to buy a house, so the banks get the best of both worlds: big margins and the other thing.

Yeah, I suspected there was something up with that gunman, because he bought his residence in 1997 at $470K which should be really easy to pay off given two incomes in the last decade, it should have already been paid off if they were a bit more disciplined.

So he and his wife ended up buying 8 homes and 12 lots? Who did they think they were? Donald Trump?

Back on topic:
Higher interest rates are coming. Not only because the Fed is pursuing an inflationary policy, but because securitzation and mortgage backed securitzation is dead as a mega-sized industry.
So far I have only heard rumors about the govt setting up a mortgage program. Until that firms up, everyone here shold take into consideration rates of over 10% shortly after the economy stabilizes.
Sadly, the govt is STILL:
1. Allowing mortgage interest deduction.
2. Is seriously considering down payment assitance programs.
3. Allows 500K per couple every 2 years write off in capital gains for home sales
4. Allow for non-recourse meaning only the house can be taken in case of default.
5. Allows propery taxes to be deducted federally.

These have the obvious impact of supporting higher prices which I believe is the point of this thread - what solves higher prices?
Loans held to term, interst rates that reflect risk, and less (or no) federal support of home ownership will correct prices to true market value.

What is the "true market value" for housing?

This is hard to guess at since we have had heavy government intervention in the housing markets since WWII. There has not been a true free market for homes for at least 50 years.

The market may have been very close to natural/true free market during the 1950s. But the government housing policies were certainly influencing the market by the 1960s.

The mortgage interest deduction and the rise of the GSEs market share have been the largest factors.

# Zephyr Says:
What is the “true market value” for housing? This is hard to guess

IMO, an estimate based on market rent for the property would be a reasonable way to arrive at TMV. Someone like FAB might even be able to tell you a multiplier (like 10 years rent) to use as an approximation.

The inputs are current rent, current cost of money, expected increase/decrease in rent, and some estimate of long-term inflation, and an estimate of maintenance cost. Using those inputs and solving for NPV should give you a purely financial estimate of what makes sense as a price. Since the inputs all have low-high ranges, you would most likely end up with a fan-chart for the output.

This ignores the "intangible" (imaginary :-)) value associated with the 'pride of home-loanership', the value of painting the walls orange, etc. Depending on the foolishness of a buyer who believes in such things, you could bump up the estimated TMV by an appropriate number to figure out what such a person would be willing to pay.

"Money loaned @ 3% when borrowed @ 1% = 300% gross profit. "

A bank with these numbers would actually be losing money. Borrowing at 1% and lending at 3% provides a 2% gross margin. However, banks generally have overhead/operating expenses of about 2.5%, so in this example the bank would be losing money.

A bank should be able to operate profitably with a margin of about 3%.

This may be a mean thing to say; but isn't their a truism that when the foreigners start to enter an investment cycles its already over-bought and you should get out?

SP, I concur with your logic and analysis for a good method to estimate asset value. But remember that market value is what the market will bear. We can only guess at the values for the various intangible elements. And each person will have differing values for these items as well as differing costs of capital. So there really is no single valid calculation of value, as it will be different for each person.

As a real estate investor I have my own standards and costs for evaluating properties. Nothing has fit my standards since early 2003.

But remember that market value is what the market will bear.

Cannot be more true. That is the definition of market value.

The Democrats are better. At least they want goevernment it to work, but they also run up against human frailty.

Justme, if not because of that human frailty, everybody should be a democrat. ;)

But at least I understand humanity. Going against human nature is an exercise that is doomed to fail.

In a perfectly efficient free market world many would be oppressed and discarded by the brutality of the system. In a perfectly equal compassionate world everyone would share equally in the abject poverty.

So under Free Market some will be oppressed but in a "compassionate" world all will be oppressed.

Now we know which side we should err on. :)

TOB, our actions are by definition artificial. ;)

So human nature has nothing to do with Nature. It should be renamed human artifact.

TOB,

Indeed, and we should all be thankful for that.

Duke,

if we raw print, which is something I expect to happen, there won't be the high interest rate problem, the Fed can keep the interest rate artificially low for Treasury forever, although USD is toast.

See, Treasury auctions off Ts, Fed writes a check, there is no limit on how much Fed buys, where is the urgency of seeing a spike in interest rate? We are already doing this in stealth, what do you think Fed's taking on crappy asset and paying full price for them equivalent of? Raw print vs. 1.0. How did the Fed expand its balance sheet from $950B to $2.3T in 3 months? Raw print. It is just that our speed of printing is too slow compared to the rate at which debt is getting destroyed. But I have confidence in the Fed to catch up. Better still, we have Bernanke in his driver seat till 2010, what is the odds of him refraining from raw printing at a high speed from now till then?

As for housing value, the only thing that can really destroy it real bad is not interest rate, but unemployment rate, or the expectation of staying employed. Still too many people are being employed in the Bay Area to support the price. Once the current homeowners get laid off, and there are not enough employed to pay for the wishful price, regardless of what interest rate it is, even if it is 0.2% like the Japanese had for years, nobody is going to buy a house.

Housing value is all about expectation: the expectation of appreciation (now in the toilet), and the expectation to stay employed (still struggling).

This is what Obama said in the recent 60 minutes interview

"Question: Where is all the money going to come from to do all of these things; and is there a point where just going to the Treasury Department and printing more of it ceases to be an option?

Obama: Look. I think what's interesting about the time that we are in right now is that you actually have a consensus among conservative, Republican leaning economists and liberal, left leaning economists. And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to, we're going to have to spend money now to stimulate the economy and that we shouldn't worry about the deficit next year or even the year after. That short-term, the most important thing is that we avoid a deepening recession."

Treasury rates will stay down. With unlimited printing, if China and Japanese sell, our Fed just buy them all.

Raw printing of money will lead to inflation if the pace of printing exceeds the real growth rate of the economy. The peak of the inflation should come about two years after the peak of the printing.

We are seeing very inflationary policies going into place now.

While we are discussing interest rates....

How can a financial institution make any money charging 0% on auto loans for 13 months? The Idahy Credit Union is advertising 0% auto loans for the next 13 months, after which a market rate kicks in. www.idahy.org

It makes sense for the auto manufacturers to advertise cheap loans - they need to move product. But what's the upside for a credit union?

And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to

Too bad Andrew Mellon is not around. :(

To keep interest rates low in such a scenario the Fed will have to continue printing at an ever increasing rate. The rate of inflation will keep rising. At some point this process collapses.

The future direction of policies will dependent on one variable, the powers at the top, what kind of financial situation are they in?

If the TPTB are not extremely leveraged, then deflationary depression is what they will choose to get out of this, because they can hoard more in such a situation.

If the TPTB are very leveraged, they will choose inflationary depression, or even hyperinflation so that they will be made whole. Hyperinflation is generally what everyone will avoid and it is unlikely to happen. However, it seems to me that it is beyond obvious our government wants to reflate and has failed so far, so there is only one option left - blatant raw print. It will be interesting to see how long BB will wait before he gets to that final step that he prescribed in 2002. I think we are about to start doing this when our deficit of $500B or $700B next year can no longer be funded by legitimate buying, and our President says, spend, spend, spend.

I frankly don't care either way, just want to stay on the same side of the TPTB :-)

Dennis,

it is called teaser rate, the bank is banking on the fact that you do NOT pay it off in 13 months, and then they shock and awe you with the "market rate" which will compensate them for the period that they do not charge you anything.

But more importantly, there are bezillion windows open at the Fed where banks can get free dough, who said banks have to make money from retail customers? Their business model is to make money from the taxpayers.