Involuntary Homeownership
by matt at 10:45 am on July 11th, 2008 in Bush Man Date, Economy, Hank PaulsonUS looks at Fannie, Freddie contingency plans - Reuters (7/10/08):
The Bush administration has had discussions about contingency plans in the event that giant government-backed mortgage-lenders Fannie Mae and Freddie Mae falter, the Wall Street Journal reported on Wednesday.
Shares of the two companies have taken a beating recently on worries about whether they can withstand more losses and support housing as well as concerns that they might need to raise massive amounts of new capital.
The discussions have been going on for months as part of the Treasury Department’s normal planning, but have become more serious of late, the Journal said, citing three people familiar with the matter.
According to the paper, the government doesn’t expect Fannie and Freddie to fail and no bailout is imminent.
Depends on the definition of imminent, I imagine. And with wise and credible financial masters such as Hank Paulson and of course the President himself on the case, I’m sure we’ll all be fine. Especially everyone who doesn’t own a home; a bailout will give them all of the downside of homeownership while they still get to live in crappy studio apartments!
But since our market-worshiping leaders are so intent on nationalizing risk sheltering gamblers, why not take it all the way?
Nevada casinos had a bad month in May, winning $969.9 million from gamblers for a 15.2 percent drop compared with the same month a year earlier, a state report showed Thursday.
So that’s a billion, just in Nevada, in a down month. Throw in Atlantic City, the Gulf Coast, horse and dog tracks, slots, and church raffles, and multiply it over the course of the current housing boom, and we’re talking about some real money.
I eagerly await the socialization of these losses as well.
Nogburt wrote:
Which gamblers are you referring to in this particular example?
Posted 11 Jul 2008 at 1:25 pm ¶
matt wrote:
do you need me to draw you a picture?
Posted 11 Jul 2008 at 6:19 pm ¶
Nogburt wrote:
A drawing might be useful. Obviously everyone made decisions about how they thought the future would pan out. I was wondering if you were referring to humanity in general or a more specific group (investors, homeowners, politicians, home builders, etc…).
Posted 11 Jul 2008 at 8:23 pm ¶
matt wrote:
people who bought houses in the middle of a bubble using loans that would only work if prices continued to rise gambled.
option arm loans were a gamble. neg am loans were a gamble. no money down loans were a gamble. these people lost their gamble, but because homeownership is now somehow necessary, they get a pass.
meanwhile, i could have purchased a home in nearly any other area than the one where i live, but chose not to because clearly prices were not sustainable. bailing people out means that prices will not fall as far as they should. so i’m taxed to pay for the bailout, and must come up with more money than i should have to to buy when i’m ready.
meanwhile no one is jumping up to subsidize the few hundred i lost at the tables in tahoe this snowboarding season.
fuck that.
btw, we’ve been over this before which is why i don’t feel that much of a need to repeat myself.
Posted 11 Jul 2008 at 8:36 pm ¶
effay wrote:
I fully agree matt and would add that it’s sad that politicians have become obsessed with increasing home-ownership rates as if it’s un-American to rent.
Posted 11 Jul 2008 at 8:51 pm ¶
Nogburt wrote:
I’d agree with your more conservative saving-heavy approach is obviously less prone to falling apart due to unexpected future events, I am, however wondering if your paradigm here takes it that there are many actions that men can take that don’t involve some conception of what is likely to be in the future (a.k.a. “speculation”, a.k.a. “gambling”).
Couldn’t your bank with all of your savings (or a bank where you have a CD as in the example you give on another post) grow insolvent? If you have your savings in cash under your mattress, couldn’t your mattress catch on fire? The cash itself might be made worthless by inflation.
All of these decisions seem like “gambles” (in at least some sense of the term).
Posted 11 Jul 2008 at 9:02 pm ¶
matt wrote:
i am aware that the cash i hold could be eaten by inflation. i considered other alternatives - some that would have made me rich, and some that would have broken me - and decided to bet on deflation rather than inflation.
i don’t consider the 4% that CD is earning gambling. it’s not over the FDIC limit. if i wanted to gamble, i’m good enough with cards that i could do that, or i could always entrust one of the masters of the universe on wall street to lose it for me. but 4% guaranteed is ok for that part of my portfolio for now.
houses and mortgages aren’t ensured by the FDIC, so i fail to see how my situation compares.
Posted 11 Jul 2008 at 10:03 pm ¶
Nogburt wrote:
The FDIC doesn’t have the money to back what it guarantees. Is this 4% rule a subjective definition that you have set for yourself?
Posted 12 Jul 2008 at 7:05 pm ¶
sarabeth wrote:
You really want to argue that any administration (Bush, Obama or McCain) would ever let the FDIC default on its guarantee obligations?
Posted 12 Jul 2008 at 8:42 pm ¶
matt wrote:
>Is this 4% rule a subjective definition that you have set for yourself?
it feels like you’re either arguing for arguing’s sake or aren’t up to speed on the issues being discussed.
4% has nothing to do with it other than that’s about the highest short term guaranteed rate i could find at the time. i bought the CD because it was FDIC insured. if it wasn’t, i’d have put it in foreign currencies or gold and taken on a different kind of risk.
people who bought homes with exotic loans did so without any guarantee. it says so on every loan agreement.
stop trying to compare my CD to their house.
the comparison is between people who gambled on housing and people who play cards or slots.
and as far as the FDIC is concerned, this is the second time in a week that someone here has doubted their guarantee. the only way the FDIC wouldn’t pay would be if there was no more dollar. not paying would effectively be the end of the american banking system, and for all intents and purposes the end of this country. in which case we’d be foraging for food and fuel, and dressing like mad max.
Posted 12 Jul 2008 at 9:35 pm ¶
Nogburt wrote:
>stop trying to compare my CD to their house.
The difference between your CD and their house is a difference of degree not of class.
>the only way the FDIC wouldn’t pay would be if there was no more dollar. not paying would effectively be the end of the american banking system
The Feds would have to print money to pay those liabilities or not pay them at all. The FDIC “paying” doesn’t mean much when they are only paying in nominal dollars. A crack-up-boom is always a possibility, albeit an unlikely one.
Posted 13 Jul 2008 at 11:25 am ¶
effay wrote:
So matt are you saying that it’s okay if the taxpayers, through the FDIC, bail you out on your CD, but it’s not okay for the taxpayers to bail out homeowners?
Also, the whole strategy of government bailout is just a way that risk-takers found to create a stop-loss that enables them to do really risky stuff that they would never do otherwise. Of course, the argument is that the government will regulate them so the stop-loss won’t be used very often. That seems to be working out pretty well, huh?
Posted 13 Jul 2008 at 12:26 pm ¶
matt wrote:
do you guys really not see the difference between the expectation on insurance one has investing in a government guaranteed bank deposit and buying a house?
come on.
the difference is precisely a difference in class vs one of degree.
my money manager tried to talk me into floaters and a cash plus fund, neither carrying insurance, but both with higher returns. i decided against it because i expect banks to fail. if the FDIC said today “going forward, we can not insure any more deposits” i would have to make a different choice for this portion of my portfolio. but that’s not the rule i was playing by. no one told homeowners “buy whatever house you want and don’t worry about price depreciation because we have your back.”
i took on no risk, they took on total risk.
yet you two idiots can’t see the distinction? make a case then why there isn’t one.
>A crack-up-boom is always a possibility, albeit an unlikely one.
so what? you’re confusing my investment objective (capital preservation) with my views on how the economy will play out.
Posted 13 Jul 2008 at 12:48 pm ¶
Nogburt wrote:
>if the FDIC said today “going forward, we can not insure any more deposits” i would have to make a different choice for this portion of my portfolio.
>i took on no risk, they took on total risk.
The FDIC is essentially a bluff. Yes, you would be correct to say that they can insure a tiny fraction of what they insure, and you would also be correct in pointing out how insurance is all about insuring a tiny fraction of what is insured.
The difference between the FDIC and let’s say State Farm is that State Farm’s insurance is a contingency whereas the FDIC is propping the banks up.
Your faith in (or, to be fair, correct knowledge of the success of) the bluff doesn’t change the fact that the fractional reserve systems is a bluff. Fortunately you correctly chose between the various possible and uncertain future outcomes.
Posted 13 Jul 2008 at 7:22 pm ¶
matt wrote:
you’re not even close to making a case to back up this statement:
“The difference between your CD and their house is a difference of degree not of class.”
you’re also playing a shell game with the point of this post and my arguments in general. it’s annoying.
address what i write, not what you think i mean or what other agendas you may have.
Posted 13 Jul 2008 at 7:28 pm ¶
Nogburt wrote:
Your CD and a home loan are both examples of financial decisions made which involve understandings and expectations of (uncertain) future conditions. How have you shown that these two things are different in class?
Posted 13 Jul 2008 at 7:47 pm ¶
matt wrote:
>Your CD and a home loan are both examples of financial decisions made which involve understandings and expectations of (uncertain) future conditions.
one that explicitly comes with insurance, one that explicitly doesn’t.
>How have you shown that these two things are different in class?
clearly you are having reading comprehension issues.
Posted 13 Jul 2008 at 7:58 pm ¶
Nogburt wrote:
>clearly you are having reading comprehension issues.
I don’t quite understand how an insurance policy that might not pay is certain.
Posted 13 Jul 2008 at 8:23 pm ¶
matt wrote:
>I don’t quite understand how an insurance policy that might not pay is certain.
like i have said, this isn’t even related to my point. it’s not in the ballpark.
an also like i have said, if at some point the FDIC is unable to make depositors whole, we will all have much bigger problems than where our money is. at that point, there wouldn’t be a vault safe enough for gold (which at that point would probably be worthless) and we’d all be scrounging for food and water.
your doomsday scenario just has not one thing to do with what i was talking about. the FDIC doesn’t insure people who buy houses. no one who buys a house has an expectation of price insurance, a point made explicitly in loan documents.
are you so dense you can’t see this?
Posted 13 Jul 2008 at 8:40 pm ¶
Nogburt wrote:
>if at some point the FDIC is unable to make depositors whole, we will all have much bigger problems than where our money is
This is true to a great extent. Of course, there is a difference between the FDIC paying out of some rainy day fund and paying out of a stack of newly printed cash.
>no one who buys a house has an expectation of price insurance, a point made explicitly in loan documents.
>the FDIC doesn’t insure people who buy houses. no one who buys a house has an expectation of price insurance, a point made explicitly in loan documents.
You’re referring to adjustable rate mortgages here right? This would clear up a lot.
I think I’m with you here on seeing shortsightedness in many of those folks who thought that their rates could never go up.
Degree or class, there’s a big difference between your choice to put cash into a CD (even a CD with a bank that failed) and some decision to get a house on an adjustable rate mortgage with a starting rate that the buyer can barely afford in the first place. I’d liken this to shorting a stock at its lowest conceivable price hoping that it will fall further.
It seemed to me earlier as though you were claiming something to the effect of “CDs are categorically certain whereas buying a home is categorically uncertain”. This seemed unreasonable.
But with this clarification of “adjustable rate mortgages”, which wasn’t presented explicitly before now, it would seem as though you have been tacitly saying “a CD is a categorically different sort of risk than an adjustable rate mortgage”. This completely makes sense.
Posted 13 Jul 2008 at 11:13 pm ¶
matt wrote:
>Of course, there is a difference between the FDIC paying out of some rainy day fund and paying out of a stack of newly printed cash.
not for the purposes of anything i’m arguing in this post or any of these comments. at all. period. you injected this into this discussion for no other apparent reason than to cloud the issue.
>You’re referring to adjustable rate mortgages here right?
not only them. lots of other people with normal mortgages want and will get relief just because they are underwater or lost their jobs. the solution is easy: rent.
>I’d liken this to shorting a stock at its lowest conceivable price hoping that it will fall further.
or putting it all on one roll of the wheel. except no one is suggesting bailing out the shorts or people who lost at roulette. and there’s no difference between them and these homeowners.
>But with this clarification of “adjustable rate mortgages”, which wasn’t presented explicitly before now
jesus fuck. it’s not like i wrote this two days ago (in number 4 above):
“option arm loans were a gamble. neg am loans were a gamble. no money down loans were a gamble. these people lost their gamble”
as i said, reading comprehension: u dun haz it.
>“a CD is a categorically different sort of risk than an adjustable rate mortgage”
i haven’t been tacitly saying anything. my investment came with a guarantee because that guarantee is what it takes to get people to have faith in the banking system, no matter how they are made whole in the end. buying a house comes with no such guarantee - quite the opposite - and making these people whole is absurd, counterproductive, inefficient, and unfair to both non-homeowners and people who get their gambling fix via other methods.
now if you don’t mind…
Posted 13 Jul 2008 at 11:31 pm ¶
sarabeth wrote:
Unreasonable to you, maybe, but only to you.
FDIC-insured CDs are as close to riskless as makes no difference. Just because you have some bee in your bonnet that FDIC default is not only technically possible but a material risk doesn’t make it true.
Posted 14 Jul 2008 at 5:20 am ¶
effay wrote:
The great thing about this argument is that everyone seems to agree that “gamblers” (risk-takers) should bear the burden of their risk and not be bailed out by the American people. I hope we can be consistent on this across all risk-taking spectrums.
Posted 14 Jul 2008 at 9:43 am ¶
matt wrote:
>I hope we can be consistent on this across all risk-taking spectrums.
for instance?
Posted 14 Jul 2008 at 9:46 am ¶
effay wrote:
No implication intended.
Posted 14 Jul 2008 at 12:33 pm ¶
effay wrote:
Actually, is your position that it’s okay for the government to bail risk-takers out when they agree to and not okay when they haven’t agreed to, or is you position that it’s never okay for the government to bail risk-takers out?
Posted 14 Jul 2008 at 12:59 pm ¶
matt wrote:
it depends on how you define risk, as you were previously seen calling a bank deposit “risk”
but gamblers, investors, extreme sports participants, people who try to play word games with me…no, they shouldn’t ever be bailed out by the government.
this feels like it is veering toward a trap about people without healthcare. please tell me i’m wrong.
Posted 14 Jul 2008 at 1:18 pm ¶
effay wrote:
I wasn’t planning on talking about healthcare; I was going to wait for you to post on that subject before bringing it up.
To your point, I don’t see how the possibility that the bank that issued your CD could fail is not a risk. Isn’t this why the FDIC was created in the first place?
Would I be wrong in assuming that your definition of what actions involve “risk” is all actions riskier than arbitrary level of riskiness?
Posted 14 Jul 2008 at 4:16 pm ¶
matt wrote:
i’m thoroughly finished with this post. i’ve made my case about seven different ways. you have failed to make any attempt at explaining why there’s no distinction between a bank deposit and buying a house.
>Would I be wrong…?
not much risk in assuming that.
Posted 14 Jul 2008 at 4:30 pm ¶
effay wrote:
“you have failed to make any attempt at explaining why there’s no distinction between a bank deposit and buying a house.”
That’s because there are about a million distinctions between a bank deposit and buying a house. They’re both risky propositions though.
“Would I be wrong [in assuming that your definition of what actions involve “risk” is all actions riskier than arbitrary level of riskiness]?
not much risk in assuming that.”
Just trying to give you the benefit of the doubt.
Posted 14 Jul 2008 at 7:58 pm ¶
matt wrote:
>They’re both risky propositions though.
no. when i and everyone else in this country puts less than $100,000 in a bank, we are assuming no risk. there’s no counter argument to this at all.
like i have said before, (why can’t you people fucking read?) if there was no FDIC i would have made other arrangements for that portion of my portfolio. i made my decision based on the rules of the game at the time.
it’s not like i put all my money at the same bank and then whined for a bailout on the money above the insured limit. that is akin to homeowners asking for a bailout because there was no expectation of one.
past that, the FDIC collects premiums from banks to pay for to insure deposits. strictly speaking, this isn’t even a bailout (depending on how bad things get, sure), it’s a payout on an insurance claim by a government agency. and as much as i know that this offends your delicate libertarian principles, that’s life.
as far as you being wrong, my point was basically that you always have been here. not that there is an arbitrary level of risk that is worthy of bailout.
Posted 14 Jul 2008 at 8:23 pm ¶
effay wrote:
They’re both risky propositions though [in the absence of government intervention].
“not that there is an arbitrary level of risk that is worthy of bailout.”
So no risk is worthy of a bailout?
Posted 14 Jul 2008 at 8:40 pm ¶
matt wrote:
go fuck yourself.
Posted 14 Jul 2008 at 8:44 pm ¶
effay wrote:
Actually, I believe that is “what we call asymptotically approaching zero.”
Posted 14 Jul 2008 at 8:52 pm ¶
sarabeth wrote:
Actually, the great and glorious effay whose self-regard knows no bounds (may peace be upon him) crossed over from zero into negative territory long, long ago.
This has been pointless for many iterations. As, for instance, the profound insight that if it wasn’t for FDIC insurance, some bank deposits would carry significant risk.
How the stupid hell does it matter if they would be risky propositions in the absence of government intervention? The government has already intervened ex ante. And there’s a big difference between setting the rules of the game ex ante and changing them ex post.
So hard, isn’t it, to wrap your head around that idea?
You want to blog about (or debate) hypothetical universes, do it on your own blog. And feel free to declare total victory over 1115 as frequently you like.
Posted 15 Jul 2008 at 4:53 am ¶
effay wrote:
“How the stupid hell does it matter if they would be risky propositions in the absence of government intervention? The government has already intervened ex ante. And there’s a big difference between setting the rules of the game ex ante and changing them ex post.”
Well, see, I’m trying to get at the question of what risky propositions should be protected by a government bailout? In fact, it seems like I’ve actually asked that somewhere before…. The answer to this question could help us set better rules for other “games” involving “risky propositions in the absence of government intervention” or change rules ex post in other games.
Posted 15 Jul 2008 at 9:11 am ¶
matt wrote:
and i asked: for instance?
answer the question or go away.
Posted 15 Jul 2008 at 9:16 am ¶
sarabeth wrote:
pointing out that some bank deposits would be risky propositions in a different universe furthers this how?
Posted 15 Jul 2008 at 9:22 am ¶
matt wrote:
clearly he’s looking for an A-HA! moment. some librul program or safety net completely unrelated to finance that drives his fragile libertarian sensibilities over the edge.
rather that list examples, he wants me to say “govt bailout is never ok” and then he’ll pounce.
he’s actually 12 or 13 years old.
Posted 15 Jul 2008 at 9:26 am ¶
effay wrote:
How about unemployment insurance.
Posted 15 Jul 2008 at 9:40 am ¶
effay wrote:
“pointing out that some bank deposits would be risky propositions in a different universe furthers this how?”
If you think that risky bank deposits deserve a bailout but risky mortgages don’t, there must be a reason.
Posted 15 Jul 2008 at 9:42 am ¶
matt wrote:
what color is the sky on your planet?
Posted 15 Jul 2008 at 9:44 am ¶
effay wrote:
Your rubbing up on that axis.
Posted 15 Jul 2008 at 9:52 am ¶
matt wrote:
a) nullus
b) you’re really really bad at logic
Posted 15 Jul 2008 at 9:56 am ¶
effay wrote:
buy [sic] i have taken [logic], and i can tell when something doesn’t make any sense.
Posted 15 Jul 2008 at 10:04 am ¶
effay wrote:
“buy [sic] i have taken [logic], and i can tell when something doesn’t make any sense.”
Posted 15 Jul 2008 at 10:05 am ¶
matt wrote:
wtf is wrong with you?
Posted 15 Jul 2008 at 10:07 am ¶
sarabeth wrote:
Do you understand the difference between ex ante and ex post, and how it applies to the term “bailout”?
Posted 15 Jul 2008 at 10:09 am ¶
matt wrote:
clearly the answer is no.
Posted 15 Jul 2008 at 10:11 am ¶
effay wrote:
“wtf is wrong with you?”
Couldn’t have said it better myself.
“Do you understand the difference between ex ante and ex post, and how it applies to the term “bailout”?”
One you agree to bailout beforehand and the other you don’t. How does this comment on what types of risky propositions deserve a bailout?
Posted 15 Jul 2008 at 11:04 am ¶