If I understand this article correctly, the US economy is run on even more Home-Owner-Ist lines than in the UK:
Pimco's Bill Gross says there will be no housing-led recovery (1) in the US without Government support (2).
The veteran bond investor (3) says mortgage yields could rise as much as 4% if housing agencies such as Freddie Mac and Fannie Mae are put into private hands, stalling the recovery.
"Ninety-five percent of existing mortgage creation over the past 12 months were government-guaranteed (4). The private market was nowhere to be found because they charged too much (5)," he says, "Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields - 300-400bp higher than currently offered, crippling any hopes of a housing-led revival to the economy."
Instead, Gross proposes the Government remains involved in mortgage provisions, by combing all housing agencies into one body.
"Taxpayers would be protected through tight regulation (6), adequate down payments, and an insurance fund bolstered by a 50-75bp fee attached to each and every mortgage," he says, "The private market, to my mind, had really lost its claim as the most efficient and judicious arbiter in this particular case."
1) How on earth can price inflation in the perceived value of one particular class of government protected quasi-monopolies lead to a 'recovery'? What about reducing regulations, taxes; improving educational standards etc?
2) Blue Socialism.
3) Fair play. If he has a lot of money invested in long dated bonds, he doesn't want their value to drop (which is what happens when interest rates rise). There again, if he knows what he's doing, he could sell his bonds now and then and wait until prices fall/yields rise. Hmm.
4) Ninety-five per cent? In the land of 'free markets'? Are they mad? See also (2).
5) Or should that be "The private market was nowhere to be found because the state-sponsored banks charged too little"?
6) Yeah, right.
Wednesday, 25 August 2010
"Gross warns mortgage privatisation could 'cripple' US recovery"
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5 comments:
Exhibit 1: "Ninety-five percent of existing mortgage creation over the past 12 months were government-guaranteed"
Exhibit 2: The credit crunch was caused by defaults on US sub-prime mortgages. Those bad debts had been packaged up and sold off around the world, including to British banks, leading to the near-collapse of some of them.
Unless the sub-prime mortgages were the other 5 percent that wasn't government guaranteed, the government guarantee didn't do a lot to protect our banks, did it?
AC, that's one hell of a history rewrite!
1. Most countries had property price/credit bubbles over the last ten years (esp. USA, UK, Spain, Ireland, ANZ).
2. Sure the US sub-prime crap was bigger than ours in absolute terms, but not in relative terms, and their crap was spread all over the world.
3. This last credit crunch was only unusual in that it was considerably larger than all the credit crunches that went before it every twenty years or so. Apart from that it was the same every time.
4. Most of UK banks losses relate to losses on loans that they made themselves to UK borrowers for UK land and buildings. Sure, they bought some US crap but they sold on a load of UK crap as well. Northern Rock was purely UK sub-prime.
5. It is only over the last 12 months that the US government has been responsible for 95% of new lending. The word 'guaranteed' is misleading in this context. Before then, they didn't explicitly guarantee anything.
6. Why should the US govt protect UK banks anyway? Or vice versa?
1. Agreed
2. Agreed (although the last government tried hard to pretend otherwise)
3. Agreed
4. Agreed (although the last government tried hard to pretend otherwise)
5. The 95 percent figure might have been only the last 12 months. But before that I believe the figure was 90 percent. Although Freddie and Fannie didn't have an explicit government guarantee, they did have an implied guarantee
6. Indeed
So almost all agreed. It was just that the facts as presented here rather blow apart the received wisdom that "it all started in the US" and their sub-prime infected the rest of the world. Sorry I didn't express myself very clearly!
What about reducing regulations, taxes; improving educational standards etc?
Forlorn hope.
AC, as to 5, that's the funny thing:
a) there was only a very vague implicit guarantee. But the theory goes that as China held most of F & F debt/bonds, and the USA didn't want to upset China too much, which is why it re-nationalised these two.
b) It's the same as Germany/France making the EU bail out Greece - not out of love for Greece but because German/French banks hold so much Greek government debt.
c) The reason that the US government makes/guarantees the NEW loans is to prop up house prices and banks generally (i.e. it's pure Home-Owner-Ism).
JH, I can hope, can't I? I am prepared to live with eternal disappointment.
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