Fireside Finance

A periodic blog dedicated to providing commentary and encouraging debate on topics in Economics and Finance.

About Me

Age: 26 Occupation: Private Equity

Thursday, June 12, 2008

From Yahoo Finance: Couldn't have said it better myself

Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Has the American Dream Become a Fairy Tale?

by Laura Rowley

Excellent (113 Ratings)
Posted on Wednesday, June 11, 2008, 12:00AM

Once upon a time there was a greedy young man with shiny wingtips and important degrees. His father, an advisor to the king, had paid the young man's way through an Ivy League college and got him a job managing the village's pension investments.

The greedy young man went to his magic mirror and said, "Mirror, mirror, I'm at the top of my field, I'm entitled to a higher yield. I'd like to earn that yield today, so I get a bonus with my pay. Tell me now, because here's the thing -- I'm really entitled to earn more than the king."

The mirror replied, "Call Wall Street please, and invest in mortgage-backed securities. Don't worry whether the yield will last, this way you'll get your bonus fast."

And the greedy young man went on television, where the media declared him a genius.

The Investment Banker

Once upon a time there was a greedy investment banker with shiny high heels and important Ivy League degrees. She went to her magic mirror and said, "Mirror, mirror on the wall, I'm clearly entitled to a windfall. I'm putting upon you the onus -- what's the best way to boost my bonus?"

The mirror replied, "Here you'll find the recipe -- sell this hot security: Bundle good and bad mortgages together, slice and dice them and sell them as treasure. Don't worry about what's really inside -- anything foul the rating agencies can hide. If you follow my advice today, surely you'll increase your rate of pay."

And the greedy investment banker went on television, where the media declared her a genius.

The Bank President

Once upon a time there was a greedy bank president with a fancy gold watch and important degrees. He went to his magic mirror and said, "I find myself on the executive floor -- I'm really entitled to be earning more. If the stock went up I'd have no cares, since I own about a million shares. Ten other banks have opened on my block -- tell me how to boost my stock."

The mirror replied, "Hand out mortgages across the land, and sell them to Wall Street as fast as you can. Heed my word in this endeavor, and your stock will go up and up forever."

And the greedy bank president went on television, where the media declared that his bank's stock would likely go up forever.

The Mortgage Broker

Once upon a time there was a greedy young man with a not-so-fancy degree and a leased Porsche. He went to his magic mirror and said, "Mirror, mirror, I want to be rich, tell me where I can find my niche. I've read 'The Secret' and I'm ready for action, I'm familiar with the laws of attraction. My ambition is so thoroughly unbridled, I think you'll agree that I'm entitled."

The mirror replied, "Now my friend don't fret or frown, but make some loans with no money down. Become a mortgage broker and get on the phone; get some expertise in the 'liar loan.' Find suckers with no income to sign on the line, tell them when the rate adjusts things will be fine. Or sign yourself, who needs permission? Just make sure the loan has the biggest commission. Since you're lending the bank's money there's no hitch, just close those loans and you'll be rich."

And the mortgage broker went on television, where he starred in a commercial as Crazy Morty the Mortgage Broker, urging would-be homeowners to call him at 1-800-555-4567.

The Greedy Townsperson

Once upon a time there was a greedy townsperson who lived in his parents' basement and spent most of his time watching television. He saw the mortgage broker's commercial, went to his magic mirror, and said, "I don't have a job or a fancy degree, but I'm smarter than those geniuses on TV and I'm entitled to a home for free. Should I call the number that I see?" And the mirror replied, "Yes, and then cash out your equity."

He bought a McMansion and, six months later, cashed out the equity and bought a Lexus.

The Hard-Working Townsperson

Once upon a time there was a hardworking townsperson, the neighbor of the man who bought the McMansion. The hardworking man toiled in IT for the bank, where he received raises of 4 percent a year. Unfortunately, his expenses -- food, gas, utilities, taxes, health insurance, college tuition, even the cleats for his kids' soccer shoes -- were rising much faster. He drove an 8-year-old minivan, and had scrimped and saved to buy a house he could afford -- even putting 20 percent down.

He went to his magic mirror and said, "Mirror, mirror, I'm exhausted. Today at work I almost lost it. I come home from my toil and fall into bed. What can I do to get ahead?" And the mirror replied, "I have no schemes for such an honest dude -- I sincerely hope you don't get screwed."

The Moral

And as it turned out, the mortgage-backed securities were not treasure, and the pension fund went broke. The king made up for the loss by doubling taxes. The greedy young man and the greedy investment banker both got lucrative new jobs at a hedge fund run by an Ivy League pal.

The bank stock didn't go up forever -- it crashed to $5 a share -- but the bank president received a bailout worth $160 million and retired to the Caribbean. The mortgage broker moved to the Caribbean as well, where he was recognized by the banker who had enjoyed his Crazy Morty TV commercials. The banker got him a job running the country club's caddy shack.

The townsperson who bought the McMansion couldn't afford his mortgage when the rate reset, so the government bailed him out. The hardworking townsperson was laid off with no severance (that money had been given to the bank president). The hardworking townsperson's home plunged in value and his taxes went up (to bail out his neighbor and the kingdom's pension fund). His IT job was sent overseas, where the bank hired a programmer for $8,000 a year.

And the mirror just sighed at all the trouble. "Another mania, another bubble. The winners get out before it bursts, the man who follows the rules is cursed. With a sense of entitlement and plenty of greed, you can win this game with lightning speed. I've told the tale, and now I'm finished."

And the American Dream was greatly diminished.

Wednesday, April 23, 2008

From Barry Ritholtz at The Big Picture via James Bednar at the New Jersey Real Estate Report via RentingInNJ comes an excellent graphic that basically sums up the credibility of the National Association of Realtors, wholes sole existence is to create home sales (change the direction of the line below) and enrich its members to the detriment of house buyers everywhere.
1. "There's no question there is a strong demand for housing from a growing population." -David Lereah, NAR Chief Economist

2. "For the foreseeable future, the demand for homes will continue to outstrip supply" -Al Mansell, NAR President

3. "We've been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream." -David Lereah, NAR Chief Economist

4. "We are returning to more balanced markets between home buyers and sellers… We feel confident that housing is landing softly as rates continue to rise." -David Lereah, NAR Chief Economist

5. "This is part of the market adjustment we've been discussing, with a soft landing in sight for the housing sector. The level of home sales activity is now at a sustainable level. Overall fundamentals remain solid…" -David Lereah, NAR Chief Economist

6. "Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels." -David Lereah, NAR Chief Economist

"After five years of booming sales, we are now experiencing normal market conditions across most of the country… most owners can expect steadier gains in home values for the foreseeable future." -Thomas M. Stevens, NAR President

7. "Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projection, which tells us the market is stabilizing" -David Lereah, NAR Chief Economist

8. "Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it'll likely take some months for price appreciation to rise." -David Lereah, NAR Chief Economist

9. Existing-home sales stabilized at a sustainable pace in August -NAR

10. "…the worst is behind us as far as a market correction — this is likely the trough for sales. When consumers recognize that home sales are stabilizing, we'll see the buyers who've been on the sidelines get back into the market" -David Lereah, NAR Chief Economist

11. "It looks like we're moving beyond the low for the housing cycle last fall, and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices." -David Lereah, NAR Chief Economist

12. "Fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers," -David Lereah, NAR Chief Economist

13. "We also may be seeing some losses as a result of the subprime fallout. However, this is masking improved fundamentals in the housing market, with lower mortgage interest rates and motivated sellers." -David Lereah, NAR Chief Economist

14. "Buyers who've been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won't be as good as they are now." -Pat V. Combs, NAR President

15. "The rise in sales and prices in the Northeast region on a fairly consistent basis in recent months is promising because this was the first region that underwent sales and price weakness after the boom. Now, it appears that it will be the first region to climb back, indicating that other regions could follow a similar path." -Lawrence Yun, NAR Chief Economist

16. "The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales…Once we get through these disruptions, we'll get a better sense of where the actual market is in late fall as conditions begin to normalize," -Lawrence Yun, NAR Chief Economist

17. "Existing-Home Sales Rise in November, Market Likely Stabilizing" -NAR

18. "Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate," -Lawrence Yun, NAR Chief Economist

19. Existing-Home Sales to Stablize Before Upturn in Second Half of 2008 -NAR

Wednesday, April 16, 2008


Take a moment from your day and oppose the coming housing bailout by clicking here. None of us, especially those paying our mortgages on time or who avoided taking out mortgages we couldn't afford altogether and rented, wants to be rewarded for our good behavior by paying for other people to remain in their mansions.

It's simple... it's just the wrong thing to do, even setting aside the fact that a bailout won't work.


Monday, March 31, 2008

Hillary Says to Copy Japan?

Sometimes, I can't believe what I hear from our politicians. But then, I realize that our politicians know as much about economics as they do about, well, anything else except politics (no, they are not smarter than a 5th grader). So, in essence, they know what is spoon-fed to them by their overworked, underpaid and understaffed staff, which is often incomplete and sometimes dead wrong.

At first, I was delighted to hear 1990s Japan brought into the discussion. That is, until I heard Hillary say that we should be more like Japan. Then I was shocked. Yes! Bring on the agonizing, torturous 15-year funk that was Japan after 1990! What amount of self-loathing would actually lead someone to desire such an outcome? Is she going to try to legislate mandatory self-flagellation for 5 hours per day, and bi-weekly root canals with no anesthetic, as well? Sometimes, we just have to gape in awe at the folly of our fellow (wo)man.

Saying we should try to emulate Japan is no different, IMHO, than holding up the Pittsburgh Pirates as the blueprint for baseball success (I still love you, Buccos, but your 15-year funk puts you in the same category as Japan's economy as far as futility is concerned, though on a slightly different scale).

At least someone is paying attention.


This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:

See a sample reprint in PDF format.
Order a reprint of this article now.

Hillary's Bad History
March 31, 2008; Page A18

No, not sniper fire in Bosnia. We're referring to Hillary Clinton's lament last week that the U.S. is flirting with a 1990s Japan-style deflation. Perhaps it's a good time to remind everyone what really happened in Japan, so Mrs. Clinton and the rest of Washington don't make the same mistakes.

"I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone," Mrs. Clinton said in the interview with Journal reporters. "I think the Japanese tried that and tried and tried that." She added Japan should have relied more on fiscal stimulus spending and aid to banks and homeowners, which is what she wants Washington to try now.

The Senator needs a refresher in Japanese economic history. Far from easing monetary policy, the Bank of Japan kept money too tight for too long in the early 1990s. Japan's stock market slide began in early 1990, but its central bank raised interest rates through most of that year and didn't cut them until July 1991. While the Bank of Japan eventually chased interest rates down to zero, it was always too late to break the deflationary spiral.

There's little sign the U.S. is facing a similar danger today, given that the Federal Reserve has been dropping rates quickly as the economy has slowed. If anything, the problem is the opposite, with the Fed risking future inflation by putting rates into negative real territory and devaluing the dollar. (See Ronald McKinnon nearby.)

Japan also made the mistake of refusing to make banks pay for the mistakes they made during their global lending spree in the late 1980s. As the world economy fell into recession in 1990, so did Japan. But rather than letting banks take their losses, the Liberal Democratic Party kept bailing them out. This merely delayed the day of reckoning, as insolvent banks were allowed to exist as "zombies," alive in name but unable to lend.

[Hillary's Bad History]1

The government also raised consumption taxes, burdening consumers at exactly the wrong time. Meanwhile, with encouragement from the Clinton Treasury, Tokyo launched a vast Keynesian spending program. Roads, bridges, trains -- you name it, Japan built it. The nearby chart shows the impact this spending had on overall Japanese government debt, which exploded over the decade. The nearly annual spending programs led to several false recoveries with growth blips, but they never changed incentives enough to revive domestic risk-taking.

Yet this is exactly the policy that Mrs. Clinton now wants the U.S. to emulate. Rather than let housing speculators and lenders take the hit for mispricing credit and allow the market to clear, she wants a 90-day freeze on foreclosures and a five-year freeze on mortgage resets. She also wants the feds to buy up mortgage-backed securities and guarantee troubled mortgages. Rather than let housing markets find a bottom where they can begin a recovery, she and her allies in both parties would prolong the agony. While some homeowners and banks would be saved from foreclosure or greater losses, the cost would be to lengthen the housing recession.

A better model is the one the late Al Casey put into practice during the savings and loan crisis in the early 1990s. As president of the Resolution Trust Corp., Mr. Casey sold almost $400 billion of bankrupt assets as rapidly as he could. Declaring that his purpose was to "put the RTC out of business," Mr. Casey let investors buy those assets even at "vulture" prices. The real estate market was able to find a bottom, and the recovery came so fast that Bill Clinton inherited an economy that grew by 3.3% in 1992.

The Beltway class also now wants to indulge in the same Keynesian "stimulus" that failed in Japan. Mrs. Clinton's "Rebuild America Plan" would invest $10 billion over 10 years in an "Emergency Repair Fund" -- a plan she claims would create 48,000 jobs for every billion dollars spent, or close to half a million jobs. She would build ports, railroads, airports, public transit, tunnels and roads. Senate Democrats are proposing more than $35 billion in new spending -- on top of their $168 billion in tax rebates. These may also lead to false recoveries, but they won't ignite a new round of risk-taking and investment.

Japan finally emerged from its funk earlier this decade after it realized its bank losses and caught the updraft from global monetary reflation. Still, its economic growth remains mediocre -- a level that wouldn't be tolerated in the U.S. and may not be enough even in Japan. Sluggish growth has already sunk one Prime Minister and could prove fatal to the current leader, Yasuo Fukuda, whose approval ratings are dropping fast.

The way to revive U.S. growth is by learning from Japan's mistakes, and doing the opposite. The U.S. needs monetary policy that maintains a stable price level, bank supervision that recognizes mortgage losses and lets markets clear, and marginal rate tax cuts that boost incentives to work and invest. In short, the American policies of the 1980s, not those of Japan's lost decade.