Monday, August 20, 2007

Today's Econ Round-up

Brad DeLong points readers in the direction of a couple of pieces on the role of structured investment vehicles had in the current market shake-up. Kevin Drum takes this paragraph away from the article:

[The] most pernicious problem is that it is becoming clear central banks cannot resolve the biggest problem — a lack of clarity about valuations in structured credit markets and the almost complete loss of confidence that is infecting even the biggest and most diversified of conduit-type programmes.

A Milwaukee blogger gives a solid rundown of the subprime fiasco.

Dean Baker has a solution to subprime loaners who are now facing foreclosure: own to rent.

Here’s how the plan works. Currently, if a homeowner is not able to make their mortgage payments, the holder of the mortgage can go to court to place the house in foreclosure. At that point, if the homeowner is not able to come up with back payments on the mortgage, or work out an acceptable arrangement with the mortgage holder, the bank or financial institution that holds the mortgage retakes ownership of the house and can have the homeowner evicted.

Under this security of housing proposal, the foreclosure process would be changed so that the current homeowner would have the option to remain in their house as a renter paying the fair market rent. If a homeowner chose to go this route, the judge in the foreclosure proceeding would appoint an independent appraiser to determine the fair market rent for the house. This is similar to the process a bank undertakes when it hires an appraiser to determine the value of the house before issuing a mortgage, except the appraiser will be asked to determine the rent rather than the sale price.

The whole thing is a must read.

Much of the reporting on the meltdown of the markets has come from the financial press. The mainstream political press has yet to start asking to the tough questions about money matters, but are starting to criticize each other for not doing so, which is usually the first step to someone actually doing something about it:

But before we get to Iraq, one of the most startling, and perhaps troubling, moments during this debate was the little attention paid to one of the most gripping economic issues erupting on the American landscape — the mortgage lending crisis. Questions about it — even with the expert, Senator Christopher J. Dodd of the Banking Committee, standing right there — seemed an afterthought, tucked in at the end between merit pay for teachers and a query about what epiphanic moment led each of the Democratic candidates to the “broad path’’ that reached the debate stage.

The time allotted to this issue seemed, well, paltry, given the state of small rural farms foreclosed on in the last two decades (a topic that resonates in Iowa), and now the problems facing many homeowners across the country, with the markets roiled by hedge fund investments and lending practices that someone like former Senator John Edwards has railed against (although The Wall Street Journal just chronicled how a big hedge fund in which he invested, Fortress Investments, has a business that foreclosed on homes in the “storm-slammed’’ region of New Orleans). And the answers were, well, almost unprepared, surprisingly, for dealing with the crisis. And it was posed as a “yes-no’’ question?

More on “modern” bank runs from Paul Krugman.

The economic theories of Hyman Minski have taken on a new life under the new circumstances:

Hyman Minsky, who died more than a decade ago, spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval.

More here.

Job growth lags in Wisconsin.

Location, location, location:

Question: What's the best place to set up some retail space?

Answer: Where God himself has instructed you to go.

1 comment:

Douglas McCloud said...

Herein lies the problem: financial institutions lend money, they are not landlords. The process described (your link) isn't new and it does exist in the real estate trade but it typically functions with commercial real estate not residential. Real Estate Investment Trusts (REIT's) are securitized by commerical real estate ventures ranging from shopping malls to industrial properties and large scale apartment complex. These investments skip traditional finanical insitutions and the investment (read: FDIC insured) safeguards they offer. When there is a bursting bubble in a segment of the real estate market, REIT's can be ugly.

Small entrepreneurs do the rent-to-own thing with residential rent-to-own properties locally (and nationally I suspect). However, I really think we want to keep insured financial institutions out of this area. I know many people think there needs to be a government solution to everything. However, working at a public university I realize more often than not, government can screw up a free lunch. If there is money to be made here, business will figure it out without having government actions create an entire new product line for the American banking system.

Yes, in case you are wondering, Adam Smith lives!