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Some quick points.. September 30, 2008

Posted by The Armchair Economist in Commentary, Economics, Politics.
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I’ve been studying for my board exams so haven’t been able to post.. but some quick points:

I’m glad to see the bailout fail in the house yesterday.  Unfortunately rather than scratching the current plan, they are merely adding more clauses to it to gain more votes.  While the stock market reaction was expected, I am also disgusted that politicians are using the market losses to justify passing the bailout.  In case people weren’t aware, investing in the stock market means inherent risk.  Using the bailout to prop up stock prices seems a tad short sighted, doesn’t it?  Perhaps our problem has nothing to do with decreasing housing prices.. and the root lies in our systemic aversion to accountability?

An Overlooked Solution: Some lessons from Sweden September 23, 2008

Posted by The Armchair Economist in Business, Commentary, Economics.
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It seems as if Paulson’s plans aren’t getting through Capitol Hill as easily as easily as Paulson and the Bush administration would like it to. Rather than blindly react to a calamity (as they did after 9/11), cooler heads are prevailing. In a way, the quick announcement by the Fed for a ‘Bailout’ last Friday fulfilled its main goal.. of stabilizing a market that was running on fear. While the Senate Banking Committee is busy fleshing out the details of the bailout, I wonder why no one has brought up a strategy that was utilized by the Swedish Government in the 1990s to stabilize their own economy after a similar housing bust. (more…)

Open Letter to Senator Charles Schumer September 20, 2008

Posted by The Armchair Economist in Business, Commentary, Economics, Politics.
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The Honorable Charles Schumer,

I am writing to you, as a constituent and resident of New York State, to share with you my thoughts and concerns regarding the Federal Reserve’s action in response to this week’s financial upheaval on Wall Street.

While I understand the necessity for swift and decisive action in order to stabilize financial markets, the actions outlined by the Federal Reserve do nothing to address the root cause of the sub-prime lending debacle. It is of my opinion that our problems derive from monetary policy driven by our exclusive reliance on continual economic expansion to fund increasingly large government programs (and an unpopular war), a policy that favors growth over stability. (more…)

Fed bailout of Wall Street: Reverse Redistribution of Wealth September 19, 2008

Posted by The Armchair Economist in Business, Commentary, Economics.
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Fiscal conservatives (and the rich) have always cried foul over progressive tax policies and socialist policies(or as they see it, the redistribution of wealth from the rich to the poor). Today, we are witnessing perhaps history’s greatest reverse redistribution of wealth.. from the lowly taxpayer/common man to those who gambled on risky bets (and lost).

While this bailout was necessary to stem the fear running in on the Street and risking catastrophic damage to the US/world economy (think: companies going bankrupt, people losing jobs, less tax revenue, less social services.. depression perhaps), there is no debate that this is basically a free ‘put’ option to gamblers who were caught holding the bag. (more…)

The Fallacy of Carbon Offsets May 18, 2008

Posted by The Armchair Economist in Commentary.
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Have you ever noticed the options to purchase ‘Carbon Offsets’ from travel sites when you buy airline tickets? My first thought when I saw these start popping up several years ago were that these were a scam (how do you know they really plant trees or pass the money to organizations that do.. and what is their ‘commission’?). Eventually, I started hearing about people calculating their carbon footprints and then buying the appropriate carbon offsets so that they are ‘carbon neutral’.

While, I can’t imagine that it is bad to plant more trees and to be more aware of your impact on the environment via your ‘carbon footprint’, the whole idea of ‘carbon offsets’ is at odds with an environmental friendly way of life. When we hear about greenhouse gases and global warming, most of us probably feel alittle bit guilty about our individual contributions.. however the idea of being able to ‘buy’ our way out of our guilt only serves to divert our attention from where it really should lie: Conservation.

When you calculate how much electricity/oil your 4000 sq ft home consumes during the summer/winter, as well as how much gas your V12 SUV consumes, its easy to feel responsible. While buying carbon offsets may help you feel that you did something for the environment, it isn’t the answer. If paying for the appropriate carbon offsets is all you did, you are ultimately consuming the same number of resources (ie: and contributing to the rise of price of natural resources). Similarly, when you purchase carbon credits from airlines to offset the carbon footprint of your trip, you are giving the airline a free pass to keep on using an aging, fuel inefficient fleet. Put your wallet where your mouth is and do alittle research into the airline that flies your route and uses the most efficient aircraft (I wonder if a site exists that does this automatically?)

Besides selling your house or trading in your SUV for a Prius (kudos to you if you are that invested in our environment), there are simple and effective (yet not very obvious) things we can do to reduce our carbon footprint, all of it revolving around conservation and reuse. Figuring out the amount of trash that you throw away is a good gauge of your impact on the environment. Reuse those plastic bags (stop getting them from the grocery stores, do you know how much energy and oil based products it takes to make plastic bags, not to mention their uncanny ability to resist biodegradation). Minimize the amount of water you use (Fix those leaks and turn off those faucets when brushing your teeth). Buy bigger sized products (Speaking directly to those manufacturers that try to hide price increases by decreasing the amount of product while using the same sized container.. I’d rather you just raise the price and give me the same amount of product, since the product:waste ratio only gets worse). Walk/Bike/Skate/Use Public Transportation.. and STOP DRIVING to the next store within the same shopping complex! Refuse to purchase convenience foods (ie: packaged salads, ‘lunch sized’ package of foods).

The ways you can minimize your carbon footprint are endless.. and none of these require you to spend an extra cent! digg story

Accountability and the Mortgage bailout May 17, 2008

Posted by The Armchair Economist in Commentary, Economics, Politics.
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Five years ago, I was three years out of college and had just written the check for the final payment of my college loans (hurray). My thrifty ways had led to a slowly growing pile of cash in my money market account. I considered purchasing a home since I was gainfully employed, had little expenses and had enough cash for a nice down payment. A little more research into the housing market showed that many of the newest mortgage loans were Adjustable Rate Mortgages, mortgages that had low teaser rates that were to reset in a few years (usually 3-5 years) at the prevailing interest rates. The historically low interest rates, coupled with the stratospheric (not yet ionospheric, as I was soon to see) housing market, and number of ARM mortgages was enough to put a slight pause into my own dreams of owning a home. I reckoned that by the time the interest rates rose in the next few years,  many people who bought in hoping for a quick buck will head towards the exit – all expecting to  cash out before their loans reset, leading a possible downturn in the housing market possibly creating some buying opportunities. By the way, this was before mortgage lenders found a way to mediate the perfect storm of less knowledgeable (subprime) borrowers , increasingly greedy banks willing to accept an amazing new form of seemingly low risk, high return mortgage products , and an increasing number mortgage brokers with surprisingly absent scruples that finally caused the housing market to crash and burn.

Last week, the House has passed a $300 billion in federal insurance to refinance troubled mortgages. While I feel some sympathy for some families that will lose their homes, I question the wisdom of not letting the market work out the kinks of the housing bubble. In the true American (read litigous) fashion, we’ll likely be arguing about who lied to who, who knew what when, and who is truly a victim for the next decade, the truth is that everyone involved in the entire chain of events is partially responsible and should be held financially and criminally (if warranted) liable. Why should bystanders and taxpayers be held financially responsible for other peoples actions? 

Subprime borrowers were giddy at the prospect of finally owning a home, but did they ever wonder WHY even though they didn’t have enough credit to buy a used car, people were now giving them hundreds of thousands of dollars without even checking their income (or even requiring a down payment!)? Did borrowers using ARM mortgages ever consider what would happen if the interest rates ever increased from historic lows (did they really think rates would stay there, or even go lower?!?). While I can see the excitement of owning your own home, as well as the prospect of watching it go up in value 100% every 3 years, did these borrowers ever consider that housing prices might not continue appreciating exponentially in perpetuity? Sure, I understand that that some of these folks might claim that mortgage brokers lied to them or misrepresented some aspects of the loans, but didn’t these borrowers have a duty to try to figure out ‘whats missing’ in this picture rather than blindly sign on the dotted line and hope that they wouldn’t need to consider the ‘what ifs’ should things go sour? In the end, sure, it sucks to lose your home, but should you have been able to purchase this home in the first place (ie: did you really lose it if it was never meant to be yours?). I won’t even get into borrowers who can afford to pay their loans but decided to walk away because their loans are now upside down (ie: they owe more on the house than the house is worth).

Mortgage brokers represent another one of the responsible parties. Enticed by hefty commissions on subprime mortgages, brokers did everything and anything to write loans to innappropriate borrowers.  Mortgage brokers first lowered the credit standard of the borrowers (ie; subprime borrowers, who never should have been able to borrow in the first place),  they lent money without even proof of the borrowers income via ‘Stated Income’ loans, they lent money with ‘No Money Down’ removing the borrowers stake in the gamble, and they underwrote loans for amounts greater than the collateral was worth (ie: money for your house AND renovations).  All of these tactics served to increase the pool of borrowers and ensure that the hefty commissions kept on rolling in.  Brokers may argue that their managers told them to lend money via these standards, while managers may argue that the brokers acted on their own but one cannot deny that as professionals, both parties should have enough understanding that basic mortgage underwriting principles were being violated. 

What enabled the mortgage companies to underwrite such risky loans?  Weren’t they concerned about the fact that they wouldn’t be able to collect on their mortgage payments when the borrowers hit upon hard times?  The beauty of this scam lies in their ability to sell these mortgages to other investors, thus absolving them of the riskiness of these loans and yet keep the fees and commissions from writing these mortgages. 

Banks and Investors, in blind pursuit of ever increasing returns,  was the likely party that enabled the house of cards framework of the mortgage crises.  Companies such as Fannie Mae existed that bought mortgages from the primary mortgage market and bundled these mortgages together to sell as a portfolio product that promised high returns with limited risk (with favorable ratings by credit rating agencies).   The basic rule of finance and investment is high returns come with high risk, and there are VERY little opportunity to get high returns with low risk (free market economics states that there are no free lunches).  Securitidized mortgage products (a portfolio of thousands of mortgages bundled together reduces the risk of individual defaults much like the protection you receive when you buy a mutual fund and one of these companies goes bankrupt) have always held a dear place in investors hearts due to their predictable (and relatively safe) income stream.  With the increasing number of subprime loans, loans offered to risky borrowers and thus had higher interest rates, the rate of return of these packaged mortgage products rose accordingly.  For some reason that I don’t understand, credit rating agencies failed to see the risk inherent in these loans and gave them credit worthy scores.  These credit ratings encouraged investment banks to blindly invest in these products creating a cycle of more demand for risky mortgages.  At some point, why didn’t someone at the investment banks question WHAT had fundamentally changed to enable the once modest mortgage market to offer such an increased rate of return in exchange for minimal change in risk? 

One can argue how borrowers were coerced to borrow money by mortgage brokers; Mortgage brokers are just writing the loans that ‘help people own homes’ and to fulfill the demand of the securitidized mortgage products, and Investors were misled about the riskiness of the mortgage products. However each party likes to play victim, each should be responsible for their actions and the resulting consequences without burdening the rest of the population. 

Disclosure: I still don’t own a home.. maybe in a few years. digg story