Since we have been discussing human foibles lately, why not go to Jeremy Grantham’s monthly piece, titled Pavlovs Bulls.
I particularly like this:
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New Home Sales totaled 329k, 29k higher than expected and up from a revised 280k in Nov (revised lower by 10k). It’s the best sales rate since Apr but not far from the low of 274k in Aug. The avg 30 yr mortgage rate was 4.93% in Dec, up from 4.44% in Nov so there may have been a rush to sign the contract and lock in rates on the fear they would move even higher. With the total # of new homes for sale falling to the lowest since ’68 combined with the uptick in sales, months supply fell to 6.9 from 8.4, the lowest since Apr ’10 and is getting close to the 10 yr average of 6.1 encouragingly as with still too many existing homes, we don’t need many new ones. Regionally, almost all of the sales took place in the West, strangely where most of the excess existing home inventory is. The median price rose 8.5% y/o/y. Net-net, housing continues to bounce along the bottom as we’re well aware that a bubble of the extent we had takes many yrs to work thru.
One of the stranger aspects of human nature — or is it just people with intense affiliations with ideologies? — is the tendency to see the entire world through a distorted lens.
The origins of the financial crisis are no different. It seems that all too many people are willing to use any event to pursue their own agendas, regardless of evidence or proof.
Hence, we have a steady parade of people who seek to blame or exonerate the precise wrong factors which nonetheless fit their preconceived notions.
Examples?
• Mish blames the crisis on 3 factors. While we agree about Ultra Low rates, his other two elements are simply incorrect. “Fractional lending” is his #2 cause. Never mind that this form of credit creation has been around for centuries, he is a vociferous critic of it. Naturally, it was the cause of the crisis. (See: Financial Crisis Brewing Already) Deficits are his #3 cause, which quite bluntly, is beyond my comprehension as a cause of the credit crisis.
• Edward Pinto, under the theory of keep throwing shit against the wall until something sticks, has a series of peeves he blames the crisis on (all acronyms) including ACORN, HUD, CRA, and GSEs. (See, Acorn and the Housing Bubble, Yes, the CRA Is Toxic, The Future of Housing Finance, etc.)
• Peter Wallison was co-director of AEI’s Financial Deregulation Project (since renamed). What are the odds he is going to find that deregulation had anything to do with it? Instead, his pet peeves about the GSEs are his pre-clusion. (See Why is AEI Scrubbing Wallison’s Name From AEI’s Financial Deregulation Project?)
• The usually astute Gretchen Morgenson of the NYT got the GSE factor wrong, as she began one Sunday column with the sentence: :”DECIDING what to do with Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants that helped set the financial crisis in motion, will be a huge job for Congress next year. ” Hey Josh, stop ruining our best reporters! (See The Nerve to Say No)
• James Pethokoukis blames the Mortgage Interest Deduction (Reuters)
• The Atlantic’s Megan McCardle occasionally flails about in her defenses of corporate America. For example, in a critique of Matt Taibbi, she bizarrely wrote that “financial meltdowns don’t offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system.” Ahem . . . The FCIC begs to differ. (See: Matt Taibbi Gets His Sarah Palin On; Contra: No Financial Villains . . . ?)• Michelle Malkin claims Illegal immigration caused the mortgage mess.
• Michelle Malkin blames the crisis on illegal immigration.
• 3 of the 4 GOP appointees of the FCIC dissented, writing: “Our views have been shaped, in part, by our knowledge of economics and financial markets generally.” And that’s the problem — your views of Efficient markets, rational actors, and self-regulation have been proven to be nonsense, bad theories that you slavish stick with for matters unbeknownst to thinking people. (See 10 Questions for GOP Members of Financial Crisis Inquiry)
Of course, any group that sought to ban the phrases “phrases “Wall Street,” “shadow banking,” “interconnection,” and “deregulation” from the final report is not to be trusted in the first place.
The bottom line for most of these folks is that their own intense emotional attachments to their pet peeves, theories and ideologies prevent them from seeing reality as it is. (As investors, we know what that does to your returns).
In terms of getting to a place where you understand the actual, empirically demonstrable, provable causes?
Fail.
Assuming little surprise in today’s FOMC statement with respect to their comments on a continued recovery in growth with caveats and their belief that there is little inflation (the only central bankers in the world to believe so), the most interesting aspect to look for is if there will be any dissents on current Fed policy of zero rates and QE2 from particularly the new voting members Fisher and Plosser. In speeches, they have both implied that they are not fully on board with the path the Fed chose with QEDOS. The lone disagreement with Fed policy over the past year, Hoenig, is no longer a voting member. On the inflation front, German Import Prices in Dec rose 12% y/o/y, the fastest pace since 1981 and above expectations of 10.8%. German 10 yr yield is rising to the highest since Apr and the 2 yr yield is at a one yr high in response. Also, the minutes from the last BoE meeting revealed that a 2nd member wanted to raise interest rates because of inflation pressures.
The MBA said refi’s fell 15.3% on the week to a one year low and purchases dropped 8.7% to a 3 month low. ABC confidence fell 1 pt to -44 as the Personal Finance component fell to match its lowest since Aug ’10 but the State of Economy component rose to the best level since Oct ’08. II: Bulls 55.1 v 56 Bears 19.1 v 20.9, bears match the lowest since Apr ’10.
The head of a large private equity firm once told me that he spends Davos in the lobby of his hotel with back-to-back appointments booked throughout his time there. For those who wonder why Davos exists–and why it costs so much–the answer lies in its limitations.
Davos is simply the global power elite’s family reunion. That’s easy to make fun of. The humor, however, is irrelevant to conference. Indeed, the WEF is probably as much a product of the need for a regular jamboree of corporate, state, NGO and media interests as it is the creator of such.
Here’s Henry Blodget’s epiphany upon discovering he was under-dressed even though he was in a mountain resort:
And that’s because Davos is now primarily a huge, high-level business conference, in which senior executives from the world’s largest companies take advantage of their physical proximity to meet in person with partners and clients and would-be clients–meetings that can end up being vastly more valuable than the price of admission.
One executive of a major multi-national told me this morning that he and a colleague will meet with 100 clients in the next three days. Their company sponsors the conference, too, because the branding and association is helpful, but there’s nowhere else in the world that they can cram so many high-level meetings into so little time with such efficient travel.
Source:
THE TRUTH ABOUT DAVOS: Here’s Why People Happily Pay $71,000+ To Come–And Why They’ll Keep Paying More Every Year
by Henry Blodget
Business Insider; January 26, 2011
http://www.businessinsider.com/costs-of-davos-2011-1
Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist who has spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.
~~~
How to Regulate Mortgage Lending, Part 1
By William K. Black
“Regulating” and “deregulating” are terms that often mislead. My next three columns discuss how to regulate two diverse activities that are critical to our economy – residential mortgage lending and starting small businesses. This column explains the most regulatory approaches essential to regulate residential mortgage lending effectively. Next week’s column will discuss why the regulatory approach we have taken and the modifications to that approach contained in Basel III do not provide an inherently sound regulatory structure. The third column will deal with regulatory structures that aid small business formation.
Regulating Residential Mortgage Lending: Introduction
Effective regulation must begin with the rationales for regulating the activity. The failure to take this approach was critical to the crisis we have just experienced. One of the great failures was assuming that if the lender was not federally insured there was no need for federal regulation. That assumption, in turn, was based on assumptions about the type of institution requiring deposit insurance. Both of those assumptions are large topics with voluminous literatures that will be the subject of future columns. For purposes of this column I assume that we have decided that the federal government should regulate residential mortgage lenders. Most of the principles I discuss also apply to commercial real estate (CRE) lending (which includes loans to build more than four residential units), but CRE has some unique characteristics that warrant a separate column.
This column focuses on safety and soundness regulation as opposed to compliance, but I emphasize that effective enforcement of rules to protect borrowers would have prevented trillions in dollars in losses to lenders. Indeed, that example exemplifies my central point – effective regulation is essential and desirable to protect honest lenders. That does not mean that all regulation is desirable or that more regulation is better than less regulation.
Our central function as financial regulators is to reduce criminogenic environments and prevent epidemics of accounting control fraud. Home mortgage lending is an industry that we know how to do well. Historically, credit losses on home loans – from all sources – have been under one percent. That means that residential mortgage lenders have long understood how to limit fraud losses to well under one percent. The good news is that the same rules that dramatically limit losses from imprudent loans are exceptionally effective in preventing fraud.
U.S. home lenders suffer severe losses in three circumstances: due to sharp, sustained increases in interest rates, accounting control fraud, or the collapse of hyper-inflated residential real estate bubbles. Foreign banks can also suffer severe losses due to currency risk. U.S. mortgage loans are made in U.S. dollars and borrowers’ salaries are overwhelmingly paid in dollars, so this column does not address how regulators should respond to currency risk.
Uncompetitive Lenders
Home lenders can also fail due to poor cost controls relative to their competitors, but these failures do not cause serious losses and do not pose systemic risks. These failures also typically require several years to occur and are simple for the regulators to spot through routine reviews of the banks’ “call reports.” We send examiners in to confirm the reasons the lender’s general and administrative expenses make it uncompetitive, but the problem is almost always weak managerial skills. We try to convince the bank to hire new managers or find an acquirer before the failure. Our great advantage as regulators over other entities that are supposed to correct such problems, e.g., the board of directors or the outside auditor, is that we can be truly independent. The board of directors was picked by the CEO and signed off on the business strategy that is leading the bank toward failure. The audit partner fears that he will lose the client if he gives a negative audit opinion. It is not the auditor’s function to serve as a business consultant. Good regulators can help in this sphere, but this is not the sphere in which we must show great courage and it is not the sphere in which we can prevent hundreds of billions of dollars in losses, Great Recessions, and the loss of over 10 million jobs.
Back in 2009, I published a list of causal factors of the financial crisis: Who is to Blame, 1-25. It was culled from Chapter 19 of Bailout Nation.
For this morning’s exercise lets see where the FCIC and BN differ in emphasis and causal factor.
1. Federal Reserve Chairman Alan Greenspan: We each agree that Greenspan was the single biggest factor in allowing the crisis to develop. Nonfeasance is what I called his refusal to perform his duties as a bank regulator. The FCIC reached the same conclusion.
2. The Federal Reserve (in its role of setting monetary policy) Our biggest disagreement. As discussed repeatedly in Bailout Nation as well as in these pages, Ultra-Low Rates are what jump started the housing appreciation cycle, sent bond managers into the arms of RMBS underwriters, and had other pernicious effects on risk management.
There is simply too much data proving that these interest rates were the push that got the ball rolling. The FCIC said they “created increased risks.” What they may be saying is that despite low rates, had these other factors not occurred, the crisis would not have happened (we wont know until the report is out).
3. Senator Phil Gramm: It does not appear that the Commission named anyone in Congress as a causation. They do seem to have named several of Gramm’s pet deregulatory projects — namely, the Commodities Futures Modernization Act (CFMA). (I’ve heard rumors of Glass Steagall repeal getting some ink as well). I do not think you can separate the legislation from its proponents — especially with someone like Grammm, with his long history of magical beliefs in the markets.
4-6. Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings (rating agencies): They called them “cogs in the wheel of financial destruction;” I prefer the Stiglitz quote I used: “They were the prime enables of the credit crisis.”
7. The Securities and Exchange Commission (SEC) The infamous 204 change in leverage rules –the “Bear Stearns exemption:” — gets the appropriate blame.
8-9. Mortgage originators and lending banks: Specific errors in risk management and underwriting got blamed, but we shall have to wait until the full release to see if the Lend-to-Sell-to-Securitizers model comes in for criticism.
10. Congress: We obviously disagree here, but its not surprising that Congress and its members seem to be given a pass by the committee filled with congress people.
11. The Federal Reserve again (in its role as bank regulator) Lets assume they extend the blame of Breenspan and Bernanke to the full FOMC. here.
12. Borrowers and home buyers: The borrowers played a major role here, and I have yet to see any criticism of the reckless of the American in their free money grab from the FCIC.
13-17. The five biggest Wall Street firms (Bear Stearns, Lehman Brothers, Merrill Lynch,Morgan Stanley, and Goldman Sachs) and their CEOs: They seem to catch flak for their recklessness and irresponsibility. Exactly how much will be revealed in the full report.
18. President George W. Bush: Lots of blame for W’s administration, primarily for rescuing Bear but not Lehman.
19. President Bill Clinton: For the Commodities Futures Modernization Act, but unknown about Glass Steagall repeal.
20. President Ronald Reagan: Nothing said whatsoever about the man who started the entire deregulatory movement. I suspect that Reagan would not have recognized how a legitimate attempt to reduce red tape and help small business became a Frankenstein creature
21-22. Treasury Secretary Henry Paulson: Guilty.
23-24. Treasury Secretaries Robert Rubin and Lawrence Summers: No mention of Rubin, but his protege Summers comes in for a tongue lashing.
25. FOMC Chief Ben Bernanke: Guilty
26. Mortgage brokers: No mention Guilty!
27. Appraisers (the dishonest ones): No mention
28. Collateralized debt obligation (CDO) managers (who produced the junk): No mention
29. Institutional investors (pensions, insurance firms, banks, etc.) for buying the junk: No mention
30-31. Office of the Comptroller of the Currency (OCC); Office of Thrift Supervision (OTS): Both found guilty of pre-empting state regulators from preventing abusive lending.
32. State regulatory agencies: see above
33. Structured investment vehicles (SIVs)/hedge funds for buying the junk: No mention
~~~
So all told, the commission seemed to focus more on the head line players — Fed chiefs, SEC, OCC, OTS regulators, governmental bodies, and the big wall street banks and rating agencies.
The devil is in the details, and we shall have to wait until tomorrow to see what lies within the covers of the full FCIC report.
This video, created by Eloqua and JESS3, looks at the future of revenue: Revenue Performance Management, or RPM. The “School House Rock”-inspired animation puts RPM in context of some of the most significant milestones in the history of business (scientific management, total quality management and supply chain management) and explores how early adopters of RPM can become the Fords, Toyotas and Wal-Marts of tomorrow — that is, fast movers who turned change into competitive advantage.
"Markets can remain irrational longer than you can remain solvent." —John Maynard Keynes
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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