Decius wrote:

The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fueled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, conforming mortgage-backed securities.

But in 2003, political, regulatory and economic factors – including accounting irregularities that led to their senior officers’ resignations and the capping of their retained loan portfolios – forced the two entities to significantly slow their lending volume. Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital.

The new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products. Such products included adjustable-rate mortgages with low initial “teaser” rates, Alt-A loans that did not require income verification and nonowner-occupied investor products. This borrowing climate provided previously marginal borrowers with additional access to credit.

Curious what your take is on this:

Ben Bernanke's Hush Money

Hijexx wrote:

Curious what your take is on this:

Ben Bernanke's Hush Money

A hell of a lot of meandering without getting to the point. Seems to be opposed to the FDIC. Seems to touch the edge of an uninformed rant about immigrants but pulls back after making at least one stupid assertion. I basically stopped reading after "Foreigners do not... buy American goods." If you could explain what the point is I can tell you what I think. Yes, banks are based on the assumption that everyone won't simultaneously withdraw their money. That only happens when there is a panic. The FDIC provides a reason not to panic, thus usually preventing bank failures. Thats perfectly logical. Its not a moral hazard, unless you are opposed to banking, which takes us over the cliff of a wide array of radical notions that are of no practical use right now.

Based on what we know about Indymac one of the problems that we have is a lot of people are depositing large sums of cash in bank accounts. In some cases more than the FDIC insures. Thats stupid, and it reopens the risk of bank runs. The right answer to it is probably stock market annuities with set upper and lower bounds for return...

Decius wrote:

Hijexx wrote:

Curious what your take is on this:

Ben Bernanke's Hush Money

A hell of a lot of meandering without getting to the point. Seems to be opposed to the FDIC. Seems to touch the edge of an uninformed rant about immigrants but pulls back after making at least one stupid assertion. I basically stopped reading after "Foreigners do not... buy American goods." If you could explain what the point is I can tell you what I think. Yes, banks are based on the assumption that everyone won't simultaneously withdraw their money. That only happens when there is a panic. The FDIC provides a reason not to panic, thus usually preventing bank failures. Thats perfectly logical. Its not a moral hazard, unless you are opposed to banking, which takes us over the cliff of a wide array of radical notions that are of no practical use right now.

Based on what we know about Indymac one of the problems that we have is a lot of people are depositing large sums of cash in bank accounts. In some cases more than the FDIC insures. Thats stupid, and it reopens the risk of bank runs. The right answer to it is probably stock market annuities with set upper and lower bounds for return...

That point about sending the dollars out of the country is the point I was having trouble understanding. From the article:

The only contraction that is permanent is the contraction of currency withdrawn from a local bank and then sent to relatives outside the United States. When this is done, there is a permanent contraction of digital money in the banking system. But this rate of withdrawal is fairly constant, and so the banking system does not contract unexpectedly. This process actually reduces the rate of monetary inflation and the rate of price inflation in the United States. Immigrants send money to their relatives, and American consumers find that imported goods are paid for in effect by pieces of paper with Presidents’ pictures on them. Foreigners do not use the money to buy American goods, leaving prices lower in the United States than they otherwise would have been.

I *think* he meant:

* If I withdraw money from an ATM, I have just contracted the fractional reserve system while I have cash in hand.
* Once I spend my money and a store deposits it, that money is back in the fractional reserve system.
* No net contraction as long as the money stays in circulation
* Contraction is permanent if money is withdrawn from the system and sent out of country.
* He postulates that rate of contraction is fairly constant and actually has a net effect of reducing monetary inflation.
* I assume his premise is there are less US dollars chasing the same amount of domestic goods, so monetary and price inflations stay in check.
* He uses the word "foreigners" to mean people living in other countries receiving the money from the US but spending it in their own country. That money does not recirculate in our economy. Not sure if this was meant to be derogative but I didn't pick up that implication.
* WRT "imported goods are paid for in effect" that doesn't really make sense to me, other than meaning the money is then circulated in another country's economy to produce goods that we then import? Little hazy on that point.

All of that was a sidebar to explain money expansion and contraction in terms of cash circulation.

The health of an economy is related to the speed at which money moves through it. Everyone does fractional reserve banking because it makes better use of money, causing more activity, which creates wealth. A catastrophy could cause the whole system to collapse, but as he writes, if that happens there is no escape. The fed's job is to prevent that from happening.

The great depression was the result of concentration of wealth. Money stopped moving through the system and became concentrated in gold held by a small number of rich people who weren't spending it. The problem was solved first by taking the money from them by force, and then by decoupling the value of money from the value of gold. It won't happen again. A collapse could happen, but not that way.

Hijexx wrote:
* Contraction is permanent if money is withdrawn from the system and sent out of country.

That would only be true if no one outside of the country ever bought American goods or services.

* He uses the word "foreigners" to mean people living in other countries receiving the money from the US but spending it in their own country. That money does not recirculate in our economy. Not sure if this was meant to be derogative but I didn't pick up that implication.

It was a rather transparent reference to immigrants sending money to relatives at home I think. There is no difference, in this analysis, between a situation in which someone comes to the US, gets money, and sends it to relatives abroad, and a situation in which an American buys a product made overseas, like everything at Walmart. The money goes to someone outside the country. It comes back when someone in that country spends money on US goods and services. This can be as abstract as a Chinese person buying a Japanese car made by a company that pays a dividend to an American stock holder. Its a global economy. Money flows in both directions.

Decius wrote:

Hijexx wrote:

Curious what your take is on this:

Ben Bernanke's Hush Money

A hell of a lot of meandering without getting to the point. Seems to be opposed to the FDIC. Seems to touch the edge of an uninformed rant about immigrants but pulls back after making at least one stupid assertion. I basically stopped reading after "Foreigners do not... buy American goods." If you could explain what the point is I can tell you what I think. Yes, banks are based on the assumption that everyone won't simultaneously withdraw their money. That only happens when there is a panic. The FDIC provides a reason not to panic, thus usually preventing bank failures. Thats perfectly logical. Its not a moral hazard, unless you are opposed to banking, which takes us over the cliff of a wide array of radical notions that are of no practical use right now.

Based on what we know about Indymac one of the problems that we have is a lot of people are depositing large sums of cash in bank accounts. In some cases more than the FDIC insures. Thats stupid, and it reopens the risk of bank runs. The right answer to it is probably stock market annuities with set upper and lower bounds for return...

Just reread this (I was at work earlier, not a lot of time to sit and think) and I think I missed your point about "If you could explain what the point is..." I thought you were just giving up once you reached the mention of "foreigners" and refusing to read further until that point was addressed.

As far as I can tell, the point of the article is an exploration of what happens as the circuit breakers each get tripped. The FDIC can fail. Indymac bank will probably wipe out 10% of the FDIC's coverage. Indymac was not on the FDIC's watch list either.

So who backs up the FDIC? Is it the Federal Reserve as this article postulates?

"Moral Hazard" is an FDIC defined term, it wasn't used haphazardly in the article to make a character judgement:

http://www.fdic.gov/bank/analytical/quarterly/2007_vol1_2/index.html

In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly ris... [ Read More (0.1k in body) ]

Hijexx wrote:
I also think there is a clear distinction between "banking" and "fractional reserve banking." I don't find it radical to distrust an economy based on fractional reserve banking.

Basically, every bank in the world is a fractional reserve bank with the exception of banks that operate according to Islamic law, so I'd have to disagree with you there.

WRT to "stock market annuities with set upper and lower bounds for return" are you referring to equity-indexed annuities?

Yup.

Decius wrote:

The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fueled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, conforming mortgage-backed securities.

But in 2003, political, regulatory and economic factors – including accounting irregularities that led to their senior officers’ resignations and the capping of their retained loan portfolios – forced the two entities to significantly slow their lending volume. Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital.

The new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products. Such products included adjustable-rate mortgages with low initial “teaser” rates, Alt-A loans that did not require income verification and nonowner-occupied investor products. This borrowing climate provided previously marginal borrowers with additional access to credit.

Well This is sort of right. The sub-prime lending didn't cause it, it may have contributed a bit, but home prices were already on a good upswing before it started. The sub-prime problems ARE the trigger for the popping of the bubble though, so the total relevance of the article is somewhat questionable.

Mike the Usurper wrote:

Decius wrote:

The researchers found that rising home prices up to 2003 could be explained by economic fundamentals, such as low unemployment rates, expanding household incomes and population growth. These factors fueled housing demand and, in turn, increased U.S. home prices. During this time, Fannie Mae and Freddie Mac actively issued and purchased conventional, conforming mortgage-backed securities.

But in 2003, political, regulatory and economic factors – including accounting irregularities that led to their senior officers’ resignations and the capping of their retained loan portfolios – forced the two entities to significantly slow their lending volume. Private funding in the form of asset-backed securities and residential mortgage-backed securities replaced conventional, conforming mortgage-backed securities as the prevalent source of mortgage capital.

The new credit environment allowed looser underwriting standards and increased tolerance for riskier, high-yield loan products. Such products included adjustable-rate mortgages with low initial “teaser” rates, Alt-A loans that did not require income verification and nonowner-occupied investor products. This borrowing climate provided previously marginal borrowers with additional access to credit.

Well This is sort of right. The sub-prime lending didn't cause it, it may have contributed a bit, but home prices were already on a good upswing before it started. The sub-prime problems ARE the trigger for the popping of the bubble though, so the total relevance of the article is somewhat questionable.

Frankly, what I found most interesting is the assertion that home prices were reasonable in 2003. Many of the bears say that the bubble has been going on far longer than that. It provides a helpful gauge for where prices ought to be today.