Government takes control of Fannie Mae, Freddie Mac

[Mavdog]

Originally Posted by alexamenos

The lead paragraph From today's editorial in the Dallas Morning Pravda....

Why is it every freaking piece on this thin just basically begins by begging the most relevant question?

That is....like hell the treasury department didn't have a choice.

It's no more sensible to say that Fannie Mae would have taken down $5 trillion in debt if it closed it's doors than to say that Ford cars all over the globe would instantaneously stop operating if Ford Motor Company closed down. And the most catastrophic things that would happen would be that a) lot's of people who made risky investments would lose money, which is something that often happens when people make risky investments; and b) interest rates on mortgages would rise which would cause housing prices to fall which would be bad, unless of course you were trying to buy a home for the first time in which case lower prices don't hurt at all...

....and we all know fannie mae is an absolute necessity to make housing affordable for first time buyers...

ba dum bum

the analogy would be that ford wouldn't be there to make any replacement parts for the millions of cars and trucks out there, so people couldn't fix them as they broke and eventually none of them would work.

the "most catastrophic thing" to happen wouldn't be what you mentioned, although "a" above DID happen to those who put their $ into the stock of fannie and freddie thinking it was a safe investment (surprise!), and interest rates are declining a bit.

no, the catastrophe would be a meltdown in the financial market. complete shutdown as the asset base which allows for these institutions to lend money and operate would be gone, flushed away. no more loans for you, for me, for most anyone. not for houses, not for cars, not for businesses either.

that WOULD be a cataclysmic event. our lives would all be negatively affected, our nation's economy would come to a streaking halt. a proverbial sledgehammer to the side of its head.

not something that I'd wish to experience.

[alexamenos]

^^economic analysis from someone who's having trouble distinguishing between borrowing 100k and investing 100k, and who seems to believe the vast majority of folks are sitting around deliberating on how to invest that 200k they have sitting in their bank account...

respectfully mavie, I don't agree with your take on the matter.

cheers

[dude1394]

Originally Posted by alexamenos

I see Dude that you're over your "Who is John Galt?" phase....at least I can't picture any of Ayn Rand's cast of characters applausing government bailouts.

Even I recognize that there is desire, philosophy and reality. Sure you don't like this to be done, but what are the ramifications of it. I think they seem pretty drastic. At least if I want to keep my paycheck coming.

[Arne]

From Bloomberg:

Sept. 9 (Bloomberg) -- Senator Jim Bunning said Treasury Secretary Henry Paulson, by rescuing Fannie Mae and Freddie Mac, is acting like China's finance minister and both Paulson and Federal Reserve Chairman Ben S. Bernanke should step down.
``I sincerely believe that Henry Paulson and Ben Bernanke should resign,'' said Bunning, a Republican from Kentucky on the Senate Banking Committee. ``They have taken the free market out of the free market.''

Paulson and the federal regulator for Fannie and Freddie placed the two largest U.S. mortgage-finance companies in a government-operated conservatorship on Sept. 7, ousting their chief executives and eliminating their dividends. Treasury also may purchase up to $200 billion of stock in the firms to keep them solvent.

``We no longer have a free market in the United States, we have a government controlled free market,'' Bunning said in an interview. Paulson, a former chief executive officer of Goldman Sachs Group Inc., ``is acting like the minister of finance in China.''

Bunning, 76, criticized Paulson's successful effort in July to obtain congressional authority to pump unlimited amounts of money into Fannie and Freddie to keep them afloat.

``When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turned out it was socialism here in the United States,'' he told Paulson at a July 15 Senate Banking Committee hearing.

http://www.lewrockwell.com/blog/lewr...es/022760.html

[Mavdog]

Originally Posted by alexamenos

^^economic analysis from someone who's having trouble distinguishing between borrowing 100k and investing 100k, and who seems to believe the vast majority of folks are sitting around deliberating on how to invest that 200k they have sitting in their bank account...

respectfully mavie, I don't agree with your take on the matter.

cheers

interesting, although I didn't anticipate that you'd have a failure of understanding on the matter. apparently I was in error.

this may surprise you but the average net worth of americans is about $100k. half have more half have less.

the average balance in a 401k is even higher. so apparently even tho you have difficulty grasping these sums, they aren't that big nor uncommon.

here's hoping that you can get to that national average someday. here's hoping that you also understand the magnitude of the fannie and freddie dilemna, and stop limiting your vision by some cantankerous hang up on a utopian world free of the dreaded government boogeyman.

[jefelump]

Regarding the 100k mortgage vs 100k investment discussion..... I'm not going to pretend to be an expert, or even pretend to know more than anyone else, but here's how I see it.

If I have a mortage on my house for 100k at 6% interest, that means in 1 year I will have paid roughly 6k in interest. If I make 80-100k/yr in salary, I'm probably somewhere in the 20-25% tax bracket. (Of course I'm guess here.... don't go looking up tax brackets to prove me wrong). So if I take my 6k deduction and pretend I didn't have it, that means I would pay 20-25% on that 6k that would have otherwise been deductible. That means I would pay an additional $1200-$1500 in taxes. So basically what this "tax deduction" means is that I pay the BANK 6k in a year, so I can save 1200-1500 on my taxes. Those numbers of course change year to year as the principle is paid off, but the point is I will ALWAYS pay the bank more in interest than I would save on my taxes. The tax deduction doesn't mean every penny spent on interest equates to a penny saved in taxes.

On the other hand, if I buy that 200k house outright, I'm then free to invest money month to month. Doing it that way, I have no risk in the form of a mortgage.

[DelNegro]

Originally Posted by jefelump

Regarding the 100k mortgage vs 100k investment discussion..... I'm not going to pretend to be an expert, or even pretend to know more than anyone else, but here's how I see it.

If I have a mortage on my house for 100k at 6% interest, that means in 1 year I will have paid roughly 6k in interest. If I make 80-100k/yr in salary, I'm probably somewhere in the 20-25% tax bracket. (Of course I'm guess here.... don't go looking up tax brackets to prove me wrong). So if I take my 6k deduction and pretend I didn't have it, that means I would pay 20-25% on that 6k that would have otherwise been deductible. That means I would pay an additional $1200-$1500 in taxes. So basically what this "tax deduction" means is that I pay the BANK 6k in a year, so I can save 1200-1500 on my taxes. Those numbers of course change year to year as the principle is paid off, but the point is I will ALWAYS pay the bank more in interest than I would save on my taxes. The tax deduction doesn't mean every penny spent on interest equates to a penny saved in taxes.

On the other hand, if I buy that 200k house outright, I'm then free to invest money month to month. Doing it that way, I have no risk in the form of a mortgage.

I'm coming out of lurker mode just to weigh in here because I faced this exact scenario just last year when debating whether or not to cash out my non-retirement investment portfolio in order to get a smaller mortgage on a new home my wife and I bought. You're right that it doesn't make much sense to pay $1.00 in interest to your bank just so that you can save 28 cents (or whatever your tax rate is) on your taxes.

But, that is only looking at one side of the equation as you have to consider what kind of investment return you can get on that money you invested as opposed to using for a downpayment. If you can earn a big enough return, it's possible that you still come out ahead, even considering the bank interest on your mortage would be roughly 3 times your tax savings.

I had a whole spreadsheet tailored to my specific situation and basically what I concluded was that I would need to have a rate of return over twice what my mortgage interest rate was in order to break even 30 years down the road. This considered borrowing more to leave my investments intact versus borrowing less and investing the difference between the two mortgage scenarios on a monthly basis. I didn't think that kind of return was likely so I cashed out and got a smaller mortgage. Considering how the market is down 20% in the last year there's zero doubt in my mind that I did the right thing.

I'll also give the disclaimer that I'm not a professional in this field.

[alexamenos]

jefe -- there's nothing wrong with your analysis, my point was more generally that the market for mortgage backed securities...

....mortgage backed securities -- a company like Fannie Mae purchases mortgages from any number of banks and then "securitizes" the mortgages, or let's say "bundles" several mortgages together, and then sells the securitized mortgages to investors...

but I digress....

the point I was making is that the *people* who invest in mortgage backed securities are very rarely mom and pops -- generally mom and pops and mainstreets are straight stocks and corporate bonds and cash. The people who invest in mortgage backed securities investment banks and their clients, not some Dean Witter stock broker.

I can think of one person, my 93 year old grandmother, who actually has money invested in something very similar to a mortgage backed security, and this is only because my dad is a real estate nut who thinks everybody ought to put all of their money in real estate -- he's far and away the exception, not the rule.

(and what would happen to Granny if Fannie Mae cratered, I wonder??? The market value of her fund would plummet, but the dividend payment would remain the same, and the reason she invested in this was far the cash dividend payments - hence if the drop in market price doesn't scare her to death, she'll be fine)

Anyhoo....the larger issue here, imo, is the issue of Moral Hazard.

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions.

I think it is very fair to say that the purpose, mission, charter of Fannie Mae is to create a Moral Hazard vis a vis subsidizing and bearing the ill costs of the expansion of credit beyond credit worthiness.

Or in plainer english, Fannie Mae et al tell bankers to make bad loans because institutional investors are going to buy the loans, and the federal government reassures the institutional investors that they should buy the bundles of bad loans because the subjects of the Fed Gov will bail them out if/when things inevitably go south.

So, when editorials such as I cited earlier say:

Fannie Mae and Freddie Mac are textbook cases of "too big to fail."

I think what they are effectively saying is that we've created Moral Hazard so big that we must further insulate the offending parties from bearing the full costs of their actions....

This is questionable thinking, imho.

[Mavdog]

Originally Posted by alexamenos

jefe -- there's nothing wrong with your analysis, my point was more generally that the market for mortgage backed securities...

....mortgage backed securities -- a company like Fannie Mae purchases mortgages from any number of banks and then "securitizes" the mortgages, or let's say "bundles" several mortgages together, and then sells the securitized mortgages to investors...

but I digress....

the point I was making is that the *people* who invest in mortgage backed securities are very rarely mom and pops -- generally mom and pops and mainstreets are straight stocks and corporate bonds and cash. The people who invest in mortgage backed securities investment banks and their clients, not some Dean Witter stock broker.

I can think of one person, my 93 year old grandmother, who actually has money invested in something very similar to a mortgage backed security, and this is only because my dad is a real estate nut who thinks everybody ought to put all of their money in real estate -- he's far and away the exception, not the rule.

uh, that dean witter stockbroker was out selling the cmbs to their clients. and paine webber, and lehman, and merrill...the list goes on. that could be in the form of actual cmbs securities or bonds of fannie and freddie, which are valued based on their loan portfolio.

and freddie and fannie held about half of the mortgages they underwrote, they don't "bundle" all of their loans to sell. they also have the role of guranteeing loans (the "qualifying loan" you may have encountered) that other lenders funded.

(and what would happen to Granny if Fannie Mae cratered, I wonder??? The market value of her fund would plummet, but the dividend payment would remain the same, and the reason she invested in this was far the cash dividend payments - hence if the drop in market price doesn't scare her to death, she'll be fine)

what? if fannie "cratered... the dividend payment would remain the same"????

yikes, you really do not understand this do you?

I think it is very fair to say that the purpose, mission, charter of Fannie Mae is to create a Moral Hazard vis a vis subsidizing and bearing the ill costs of the expansion of credit beyond credit worthiness.

Or in plainer english, Fannie Mae et al tell bankers to make bad loans because institutional investors are going to buy the loans, and the federal government reassures the institutional investors that they should buy the bundles of bad loans because the subjects of the Fed Gov will bail them out if/when things inevitably go south.

I think what they are effectively saying is that we've created Moral Hazard so big that we must further insulate the offending parties from bearing the full costs of their actions....

This is questionable thinking, imho.

the breakdown was not in the format of fannie and freddie, and yes "moral hazard" is important. fannie and fredie don't make zero equity loans, they do not have the creative loan structures that got way out of hand.

the breakdown was that the rating agencies did not do their due diligence on the cmbs, and the corresponding value they assigned (value is a function of risk, the higher risk the higher discount = lower price) was too high.

did lenders get way to exuberant in their lending? absolutely. it was the job of the rating agencies (s&p, fitch et al) to analyse that, put a figure on it, and have that refelected so the values of the securities were appropriate and credible.

if the ratings were correct (high risk) the lenders couldn't do the type of loans that they did, the loans wouldn't pencil at the front end as they couldn't recoup enough when they moved them thru cmbs.

again, this situation that we find ourselves in is traced back to the shift from lending by the local bank who held and serviced the loan to wall street allowing securitization of these loans, and wall street (and the rating agencies that are supposed to be independent of them) screwed the pooch.

[alexamenos]

what? if fannie "cratered... the dividend payment would remain the same"????

yikes, you really do not understand this do you?

The dividend payments depend upon the terms of the underlying assets -- the original mortgages, which are payable by the debtor to the creditor, whomever the creditor may be. The demise of Fannie Mae or any other situated party would lead to a liquidization of the securities, which would lower the market value of the securities, but not alter the terms of the underlying assets, hence...

the market value of her fund would plummet, but the terms of the underlying assets (and hence, dividend payment) would remain the same.

Clearly one of us doesn't understand this, and thanks again for your comments.

[Mavdog]

Originally Posted by alexamenos

The dividend payments depend upon the terms of the underlying assets -- the original mortgages, which are payable by the debtor to the creditor, whomever the creditor may be. The demise of Fannie Mae or any other situated party would lead to a liquidization of the securities, which would lower the market value of the securities, but not alter the terms of the underlying assets, hence...

the market value of her fund would plummet, but the terms of the underlying assets (and hence, dividend payment) would remain the same.

Clearly one of us doesn't understand this, and thanks again for your comments.

uh, first, bonds don't pay a "dividend"....they pay interest, or the coupon. stocks pay a dividend, and freddie and fannie won't be paying any to their stockholders that i can see.

second, bondholder are typically secured creditors, so in the case of a "demise" of the debtor they are in a line with other secured creditors based on who subordiantes their debt to whom.

last, if these institutions fail, the economic atmosphere would be very, very difficult, businesses would be hurt, employees would suffer, unemployment would surely increase, and the level of defaults on the underlying assets would increase dramatically, leading to the bonds being worth pennies on the dollar.

and the coupons would not be paid, and grandma wouldn't see any money coming her way.

you are welcome for me giving you this lesson in finance.

[Arne]

Why Smiling Keynesians Are Despicable Creeps

Posted by Karen DeCoster at September 10, 2008 09:20 AM

As an addendum to this post, we have this follow-up.

The Bill Gross-managed Pimco Total Return fund reaped a $1.7bn payday following the US government takeover of home loan giants Fannie Mae and Freddie Mac.

While shareholders in Fannie and Freddie suffered deep losses, the world’s biggest bond fund saw its highest ever one-day rise against its benchmark index on Monday, benefiting from the bet made by Mr Gross on mortgage bonds issued by the agencies.

Gross had made a big shift out of US Treasuries and corporate bonds over the past year and into agency bonds, betting that the government would support Fannie and Freddie Mac. By May this year, more than 60 per cent of his $132bn fund was in mortgage debt.

Gross, while he had been shifting out of corporate bonds and Treasuries, was publicly clamoring for a government bailout - but only because that was necessary to avoid a financial tsunami, and, of course, it was good for the middle class and Main Street. All the while he was betting on a government bailout - a pretty easy and low-risk bet - that would make him vastly richer, and a winner. Gross is a high-profile and powerful guy who carries lots of influence in the markets, and he used his position, power, and influence to sway New Deal-style policy in favor of his pocketbook and his clients. I once read an interview with Gross where he stated that he "had more money than he knew what to do with," and thus it's not about the money - he only "wants to win."

http://www.lewrockwell.com/blog/lewr...es/022772.html

[alexamenos]

Originally Posted by Mavdog

uh, first, bonds don't pay a "dividend"....they pay interest, or the coupon. stocks pay a dividend....

mav....I understand the difference between a bond, which technically pays a coupon (interest) and a security, which technically pays dividends, etc. , etc....it is really annoying to me to be continually (mis-) corrected by someone who is plainly two or three steps behind me. The fact that you routinely waste my time with this sort of smug and wholly unjustifiable condescension is why I'd rather argue basketball with the average Houston Rockets fan.

But I digress....

Mortgage Backed Securities are securities, hence the name Mortgage Backed Securities rather than, say, Mortgage Backed Bonds.

So, now a quick quiz for mavdog:

Are Mortgage Backed Securities, securities, or bonds?

Hint: Look very closely at the name of Mortgage Backed Securities, especially the third word.

[mary]

Forgive me for poking my head in, I just have a quickie.

Isn't a bond a type of security?

A stock is another type of security?

I thought the term "security" encompassed both debt and equity.

I took a finance class in college, but I was probably high that semester.

[Usually Lurkin]

Originally Posted by mary

I took a finance class in college, but I was probably high that semester.

I think in finance, they say, "I was probably invested that semester."

[Mavdog]

Originally Posted by alexamenos

mav....I understand the difference between a bond, which technically pays a coupon (interest) and a security, which technically pays dividends, etc. , etc....it is really annoying to me to be continually (mis-) corrected by someone who is plainly two or three steps behind me. The fact that you routinely waste my time with this sort of smug and wholly unjustifiable condescension is why I'd rather argue basketball with the average Houston Rockets fan.

is that shorthand for "oh, I made a mistake, and now I need to make myself look better by saying trite comments about the person who caught my mistake"?

But I digress....

Mortgage Backed Securities are securities, hence the name Mortgage Backed Securities rather than, say, Mortgage Backed Bonds.

So, now a quick quiz for mavdog:

Are Mortgage Backed Securities, securities, or bonds?

Hint: Look very closely at the name of Mortgage Backed Securities, especially the third word.

well, as there are varied types of "mbs", so there are multiple answers to your question.

cmbs are bonds. these aren't residential but commercial mortgages in nature.

mbs are seen as securities who receive principle and interest from the loans, still not a "dividend" (oh wait I'm being "smug" and "condescending" again..)

and then there are mrb, which are mortgage revenue bonds, ie securitized mortgages, and yes these are bonds.

any other questions that I can answer for you?

[Mavdog]

Originally Posted by mary

Forgive me for poking my head in, I just have a quickie.

Isn't a bond a type of security?

A stock is another type of security?

I thought the term "security" encompassed both debt and equity.

I took a finance class in college, but I was probably high that semester.

din ding ding! we have a winner!

An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity.

The official definition, from the Securities Exchange Act of 1934, is: "Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."

whew! now that's what I call "lawyering it up"!

[alexamenos]

Originally Posted by mary

Forgive me for poking my head in, I just have a quickie.

Isn't a bond a type of security?

A stock is another type of security?

I thought the term "security" encompassed both debt and equity.

I took a finance class in college, but I was probably high that semester.

you're right, Mary....a bond is a type of security....and as such it is possible for a security to pay interest rather than dividends. I was skipping a step and should try thinking before venting from time to time.

In the case of Granny's investment in mortgage backed securities, as a point of fact she does receive dividends and not interest, and this is because she technically invests in a mutual fund (that is sold in shares) that owns mortgage backed securities.

My larger point all along was of course that the payments of dividends to Granny is ultimately contingent upon whether the fund specific home-buyers continue to make their mortgage payments....

....that is to say there is an agreement between a borrow and a lender which exists irregardless of the status of fannie mae, between some specific home buyer X and some banking institution Y. Even if Fannie Mae goes belly up, some banking institution is going wind up owning the loan. This banking institution is going to expect the home buyer to make his mortgage payments and that banking institution is then going to pass these payments on to the owners of the mutual fund.

My bigger point is that Granny should bear the risk of her investment -- not taxpayers who aren't invested in her mutual fund, who don't share the upside of the fund and who never agreed to accept the risk of the funds investments.

So....the demise of fannie mae doesn't mean that gillions of mortgages spread across the country evaporate into thin air -- not at all, much as a shutdown of Ford Motor Co. would not cause Ford vehicles to instantaneously and simultaneously stop operating all around the world.

What such a shut down would do is a cause a further plunge in housing prices and a rise in interest rates. Is that bad? Yeah, but the question is not whether these things are bad but whether they are worse than continuing to support the Moral Hazard that is Fannie Mae.

[Arne]

How to Avoid Another Depression

Daily Article by Mark Thornton | Posted on 9/10/2008

"Great Depression" is a strong term, but what exactly does it mean? Depressions are a normal part of a business cycle that are now often called recessions, downturns, or corrections. They occur in any economy where the financial markets are based on fractional-reserve banking.

Depressions only become "great" when normal to severe depressions are used as excuses for massive increases in government intervention. Murray Rothbard's America's Great Depression clearly demonstrates this phenomenon. The three great depressions in the history of the United States are the Progressive Era (1907–1922), the Great Depression (1929–1945), and the Great Stagflation (1970–1982).

The year 2008 marks the beginning of the next recession, correction, or depression. All the statistical indicators are pointing in that direction. All market indicators point in that direction as well. Ask any noneconomist and you will get that same answer. We only have to wait for the folks at the National Bureau of Economic Research to officially confirm what we already know.

The reason for the depression is the bust in the housing market — we all know that too. Austrians reported on the housing bubble throughout the boom. Beginning in early 2003, Frank Shostak, Christopher Meyer, Lew Rockwell, Robert Blumen, Jeff Scot, and others, including this author, were writing and lecturing about the housing bubble. We identified the cause of the bubble as the Federal Reserve and its inevitable consequences of a bust in the housing market and the overall economy.

Homebuilder stocks peaked in mid-2005 and it's been like watching a train wreck in slow motion ever since. When the overall stock market peaked one year ago we could finally celebrate the beginning of the correction phase of the business cycle even though most of us suspected it would be a severe one. Several mortgage dealers went bankrupt in 2007 and the increased number of foreclosures signaled that the correction was finally under way.

By late 2007 there were definite signs of major corrective forces acting in financial markets. However, whenever such corrections seemed to be ready to take place they were circumvented by government intervention. On December 12, 2007, the Fed announced the Term Auction Facility which would auction reserves at the Discount Window for a "broader range of counterparties" and against a "broader range of collateral" than open-market operations and without identifying the borrowers. This was the first extraordinary intervention.

Then in March, Paulson and Bernanke orchestrated the weekend purchase of Bear Sterns by J.P. Morgan, providing Morgan with a $30 billion, ten-year loan. This certainly was an extraordinary intervention. It also helped set a pattern of intervention that sends exactly the wrong signals to the market. Government officials at the Fed, Treasury, and elsewhere have been telling us that everything is fine in the economy and then, when bad economic news is announced, they claim that "it's not as bad as we anticipated." Then, when markets react to this misinformation, government comes in with some massive bailout in the form of a brand new, extraordinary intervention.
In July, Secretary Paulson told Congress that he saw no need for additional legislation to address problems at Fannie and Freddie and then, less than one week later, he announced that the Treasury would "backstop" the two megamortgage lenders. This essentially reversed what Treasury secretaries have been saying for decades, that they do not stand behind or guarantee the securities and debts and obligations of these government-sponsored entities.

Now an even more radical step by the Treasury has essentially nationalized Fannie and Freddie. Of course this does not help troubled homeowners or prospective buyers. It does not help homebuilders. Essentially, it hurts all those people because it puts them as taxpayers at risk for several trillion dollars in potential losses.
Most commentators think this takeover of Fannie and Freddie was the right thing to do: unfortunate, but necessary to prevent a financial crisis. This is all wrongheaded. It might delay a financial crisis, but it only makes the overall economic crisis even worse. History has well demonstrated that government intervention only lengthens the economic crisis and increases its overall cost. Just ask the Japanese about their experience.


"History has well demonstrated that government intervention only lengthens the economic crisis and increases its overall cost."
Given the extraordinary nature of interventions that have been taken so far and the precedents that have been set, we have all the makings of the next great depression.

In the absence of all these government interventions, it is likely that the corrective phase of the business cycle would already be over and we would be in recovery mode. To be sure, housing would remain in a slump for some time to come, but restorative market forces would already be at work creating the next generation of companies and jobs.

If we want to avoid the next great depression, all such government interventions should cease. The Treasury Department should revise their recent action and turn their proposed conservatorship of Fannie and Freddie into a bankruptcy receivership that would ultimately liquidate the corporation and their liabilities. Meanwhile the Fed should announce its intent to stop Term Auction Facilities and close the discount window to all but its traditional customers. To reduce the negative impact of the recession, government should cease foreign hostilities, reduce military spending, balance the budget, and cut taxes and regulations.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War and editor of The Quotable Mises and The Bastiat Collection. Send him mail. Comment on the blog.

http://mises.org/story/3103#

[jefelump]

Originally Posted by DelNegro

I'm coming out of lurker mode just to weigh in here because I faced this exact scenario just last year when debating whether or not to cash out my non-retirement investment portfolio in order to get a smaller mortgage on a new home my wife and I bought. You're right that it doesn't make much sense to pay $1.00 in interest to your bank just so that you can save 28 cents (or whatever your tax rate is) on your taxes.

But, that is only looking at one side of the equation as you have to consider what kind of investment return you can get on that money you invested as opposed to using for a downpayment. If you can earn a big enough return, it's possible that you still come out ahead, even considering the bank interest on your mortage would be roughly 3 times your tax savings.

I had a whole spreadsheet tailored to my specific situation and basically what I concluded was that I would need to have a rate of return over twice what my mortgage interest rate was in order to break even 30 years down the road. This considered borrowing more to leave my investments intact versus borrowing less and investing the difference between the two mortgage scenarios on a monthly basis. I didn't think that kind of return was likely so I cashed out and got a smaller mortgage. Considering how the market is down 20% in the last year there's zero doubt in my mind that I did the right thing.

I'll also give the disclaimer that I'm not a professional in this field.

I too would say you made the right decision. It comes down to the level of risk you're willing to take. If you have to have a rate of return more than 2x the mortgage interest rate, then your break even point is set too high. There's no fudge room to account for risk. Chances are very good your return would be less, which means you lose money.

If I had a house I owned outright, there's no chance in hell I would go out and get a mortgage on it, just so I could take that money and invest it. So there's equally no chance I'm going to hold onto investments and a mortgage, so I can hope to come out ahead with a great return on my investment. It's too risky. If I had a Financial Advisor who told me to take a mortgage so I could invest the money elsewhere, I would find a new Financial Advisor.

[Mavdog]

here's scott burns take:
--------------------------------------
05/03/2005

PAYING OFF MORTGAGE VS. INVESTING, RE-EXAMINED

Two weeks ago a reader, D.J., sent an interesting question. The sale of a recently inherited house would bring enough money to pay off the mortgage on his home.
His question: Should he pay off the mortgage or invest the money?

I gave a pretty abstract answer, warning of the impact of mortgage payments during a down market and suggesting it was more difficult and risky than it looked.

"This isn't a no-brainer. It isn't a slam-dunk, either," I concluded.

Well, it isn't. But you can get a better idea of what this is all about if you see it in real figures rather than abstractions.

D.J., looking backward, was thinking Vanguard Wellington fund would be a good choice.

Given perfect hindsight, it would have been. With $100,000 to invest or pay off his mortgage, he could pay off a $100,000 mortgage and enjoy freedom from mortgage payments and tranquility. At the end of 10 years he would still have no mortgage, and he would still be free of investment worry.

If he had invested in Vanguard Wellington fund and had withdrawn enough money each month to make his mortgage payment, however, he would have ended the period with a lower mortgage balance and an investment account that was larger than his original $100,000 investment.

Ten years ago mortgage interest rates were much higher, with a national average rate of 7.75 percent on a fixed-rate 30-year mortgage. Using Morningstar Principia software, I found that his original investment would have grown to $143,064 if he had made payments of $733.76 a month on a 30-year mortgage at 8 percent. His original investment would have grown to $155,484 if he had made payments of $665.30 a month on a 30-year mortgage at 7 percent.

Either way, he would be way ahead of the game. At the end of the period, his 8 percent mortgage balance would have been whittled down to $87,725. His 7 percent mortgage balance would be a bit less, $85,813.
-----------------------------------------------------------------
so it comes down to your acceptance of or aversion to risk, and if you sleep better knowing you don't have the debt.

[jefelump]

Originally Posted by Mavdog

here's scott burns take:
--------------------------------------
05/03/2005

PAYING OFF MORTGAGE VS. INVESTING, RE-EXAMINED

Two weeks ago a reader, D.J., sent an interesting question. The sale of a recently inherited house would bring enough money to pay off the mortgage on his home.
His question: Should he pay off the mortgage or invest the money?

I gave a pretty abstract answer, warning of the impact of mortgage payments during a down market and suggesting it was more difficult and risky than it looked.

"This isn't a no-brainer. It isn't a slam-dunk, either," I concluded.

Well, it isn't. But you can get a better idea of what this is all about if you see it in real figures rather than abstractions.

D.J., looking backward, was thinking Vanguard Wellington fund would be a good choice.

Given perfect hindsight, it would have been. With $100,000 to invest or pay off his mortgage, he could pay off a $100,000 mortgage and enjoy freedom from mortgage payments and tranquility. At the end of 10 years he would still have no mortgage, and he would still be free of investment worry.

If he had invested in Vanguard Wellington fund and had withdrawn enough money each month to make his mortgage payment, however, he would have ended the period with a lower mortgage balance and an investment account that was larger than his original $100,000 investment.

Ten years ago mortgage interest rates were much higher, with a national average rate of 7.75 percent on a fixed-rate 30-year mortgage. Using Morningstar Principia software, I found that his original investment would have grown to $143,064 if he had made payments of $733.76 a month on a 30-year mortgage at 8 percent. His original investment would have grown to $155,484 if he had made payments of $665.30 a month on a 30-year mortgage at 7 percent.

Either way, he would be way ahead of the game. At the end of the period, his 8 percent mortgage balance would have been whittled down to $87,725. His 7 percent mortgage balance would be a bit less, $85,813.
-----------------------------------------------------------------
so it comes down to your acceptance of or aversion to risk, and if you sleep better knowing you don't have the debt.

The author acknowledges the perfect 20/20 vision of hindsight. However, he disregards (or at least doesn't mention in this article) the risk taken when an investment doesn't perform like the Vanguard Wellington fund.

So let's see how the investment in the same fund would have fared if this person had paid off his mortgage, and then opened an investment account and deposited the equivalent of his old monthly mortgage payment each month. I'm sure it wouldn't grow as fast, due to the comparitively small opening principal balance, but over time as more money is added it would grow and eventually surpass the numbers posted above (because the scenario posted doesn't ever mention adding more funds to the account each month). And he would have no risk of not being able to make his mortgage payment and losing his house.

[Arne]

Washington is the a job saving, job creating innovating force in the American economy it seems:

Congress weighs $25 billion for auto industry

By Richard Simon and Maura Reynolds

Los Angeles Times

September 10, 2008

WASHINGTON


House Democratic leaders are considering a $25 billion rescue package for the auto industry as part of an effort to bolster the sagging U.S. economy. The aid proposal, with its clear political implications for key battleground states, is likely to be put on a legislative fast track, possibly clearing Congress in a matter of weeks.

"This is very, very important. It's an important industry in our country," House Speaker Nancy Pelosi said. "It's about jobs. Jobs, jobs, jobs, jobs."

Coming just days after the Treasury stepped in to bolster housing and financial markets with a takeover of mortgage titans Fannie Mae and Freddie Mac, the Democrats' proposal reflects a new readiness in Washington to intervene in economic trouble spots. It also is a sign of the intensifying effort by presidential candidates in both parties to woo voters in the battered but politically pivotal states that are home to the auto industry - especially Michigan and Ohio.

Democratic leaders said they had not yet decided whether to include the aid - which would come in the form of low-cost government loans focused on helping Detroit develop more fuel-efficient vehicles - in an energy bill or in a broad new economic stimulus package.

But the proposal drew immediate fire from some budget hawks. The White House voiced willingness to work with Congress, which adjourns its fall session in three weeks, on aid for Detroit.

Copyright © 2008, The Baltimore Sun

http://www.baltimoresun.com/business...27,print.story

[Mavdog]

Originally Posted by jefelump

The author acknowledges the perfect 20/20 vision of hindsight. However, he disregards (or at least doesn't mention in this article) the risk taken when an investment doesn't perform like the Vanguard Wellington fund.

So let's see how the investment in the same fund would have fared if this person had paid off his mortgage, and then opened an investment account and deposited the equivalent of his old monthly mortgage payment each month. I'm sure it wouldn't grow as fast, due to the comparitively small opening principal balance, but over time as more money is added it would grow and eventually surpass the numbers posted above (because the scenario posted doesn't ever mention adding more funds to the account each month). And he would have no risk of not being able to make his mortgage payment and losing his house.

somehow you fail to grasp a crtical point.

there is no set right or wrong answer, it depends on the individual, and their acceptance/aversion to risk.

don't want risk? don't leverage, remove the debt, but you give up the reward.

me, I have varied income streams, so I paid off my house. I sleep better at night.

but I do so fully understanding that I have forgone the upside the monies tied up in my home would get otherwise, and understanding my home price appreciation will be much less compared to other investments over the long term.

[mcsluggo]

Originally Posted by Mavdog

....

but I do so fully understanding that I have forgone the upside the monies tied up in my home would get otherwise, and understanding my home price appreciation will be much less compared to other investments over the long term.

whaddaya mean? home is where the heart is. MY house has appreciated something on the order of minus $150k over the last 18 months... my 401k is gonna be hard pressed to keep up with THAT torid pace

[mcsluggo]

(I made up that number, btw... for all I know my house has actually appreciated 14cents over that time period... who knows, since nobody can sell anything , and i have plugging py ears and going nanananananananaaaaaa whenever i go past houses for sale in my neighborhood....)

[jefelump]

Originally Posted by Mavdog

somehow you fail to grasp a crtical point.

there is no set right or wrong answer, it depends on the individual, and their acceptance/aversion to risk.

don't want risk? don't leverage, remove the debt, but you give up the reward.

me, I have varied income streams, so I paid off my house. I sleep better at night.

but I do so fully understanding that I have forgone the upside the monies tied up in my home would get otherwise, and understanding my home price appreciation will be much less compared to other investments over the long term.

No, I get that point, and you and I agree on more here than you think. Yes, I am more adverse to risk. I prefer to have my home paid off, just as you do. I'm not there yet, but I'm working on that.

Removing debt is not giving up the reward. To me, being debt free is it's own reward. Someone who is debt free can then stockpile money month to month in whatever investments they want.

from the article you posted

Ten years ago mortgage interest rates were much higher, with a national average rate of 7.75 percent on a fixed-rate 30-year mortgage. Using Morningstar Principia software, I found that his original investment would have grown to $143,064 if he had made payments of $733.76 a month on a 30-year mortgage at 8 percent. His original investment would have grown to $155,484 if he had made payments of $665.30 a month on a 30-year mortgage at 7 percent.

Either way, he would be way ahead of the game. At the end of the period, his 8 percent mortgage balance would have been whittled down to $87,725. His 7 percent mortgage balance would be a bit less, $85,813.

Going off of the $733.76 mortgage amount, if I had paid for my house outright and didn't have that mortgage (the scenario that was discussed earlier, on the 200k house), and if I put $733.76 each month into an investment account, then the principal alone over 10 years (the same time period quoted in the article) would have grown to $88,051.20 (without considering return on investment), and I would have no mortgage. The numbers quoted in the article are $143,064 in investment with a mortgage balance of $87,725. That equates to a net worth of $55,339.

[DelNegro]

Originally Posted by Mavdog

here's scott burns take:
--------------------------------------
05/03/2005

PAYING OFF MORTGAGE VS. INVESTING, RE-EXAMINED

Two weeks ago a reader, D.J., sent an interesting question. The sale of a recently inherited house would bring enough money to pay off the mortgage on his home.
His question: Should he pay off the mortgage or invest the money?

I gave a pretty abstract answer, warning of the impact of mortgage payments during a down market and suggesting it was more difficult and risky than it looked.

"This isn't a no-brainer. It isn't a slam-dunk, either," I concluded.

Well, it isn't. But you can get a better idea of what this is all about if you see it in real figures rather than abstractions.

D.J., looking backward, was thinking Vanguard Wellington fund would be a good choice.

Given perfect hindsight, it would have been. With $100,000 to invest or pay off his mortgage, he could pay off a $100,000 mortgage and enjoy freedom from mortgage payments and tranquility. At the end of 10 years he would still have no mortgage, and he would still be free of investment worry.

If he had invested in Vanguard Wellington fund and had withdrawn enough money each month to make his mortgage payment, however, he would have ended the period with a lower mortgage balance and an investment account that was larger than his original $100,000 investment.

Ten years ago mortgage interest rates were much higher, with a national average rate of 7.75 percent on a fixed-rate 30-year mortgage. Using Morningstar Principia software, I found that his original investment would have grown to $143,064 if he had made payments of $733.76 a month on a 30-year mortgage at 8 percent. His original investment would have grown to $155,484 if he had made payments of $665.30 a month on a 30-year mortgage at 7 percent.

Either way, he would be way ahead of the game. At the end of the period, his 8 percent mortgage balance would have been whittled down to $87,725. His 7 percent mortgage balance would be a bit less, $85,813.
-----------------------------------------------------------------
so it comes down to your acceptance of or aversion to risk, and if you sleep better knowing you don't have the debt.

The issue I have with this analysis is that it doesn't take into account what the guy would have done with the money he was using on his mortgage payment after using the $100k to pay off the house. What if he takes the money he was using on the mortgage payment and invests that same amount on a monthly basis? What if instead of starting off with $100k of Wellington fund and withdrawing $733.76 a month to pay on the mortgage the guy started with $0 in the fund but he started depositing $733.76 a month into it?

No arguement that if your options are having the investments and paying the mortgage or having no investments, no mortgage and just spending the money on something else, you're better off with the investments and the mortgage. But as best I can figure if you commit to investing what you would have paid in mortgage you'd need a pretty remarkable long term rate of return on that investment to not come out ahead by avoiding interest payments on a mortgage.

For example: If I run a scenario where you start with $0, pay in $733.76/mo with a 12% investment rate of return 30 years down the road I get a balance of over $2.5 mil. If I start with $100k, apply the same 12% ROR, but I take out $733.76 each month I end up with about $1 mil 30 years later. If I adjust the ROR to try and find the break even point 30 years later, I get an ROR somewhere in the neighborhood of 17.5%.

By no means am I an expert at this, so if there are some holes that can be shot in my thinking I'd welcome the response.

[mcsluggo]

well, of course now you are going THE OTHER direction. If you are committed to paying that $735 that you would be paying in mortgage payments to your investment fund going forward... why would you take that money OUT of your investmetn fund monthly in the alternate scenario?

in both cases you have $100k today and 735/month going forward to invest


in case one you: invest $100k up front in investment fund, and then 735/month in property

in case two you: invest $100k up frount in property, and invest 735/month in investment fund

(you invest the same amount in either case)


then it boils down to do you earn more than 735*12 on your investment fund? (in the first year, but the same numbers will apply every year after that, on average)

if you do... then you make more money from case 1. if you don't, then you make more money from case 2

in your 12% return case, you make 12k on your 100k initial investment... and this ensures that your 100k will grow faster than the less than 10k that the other portfolio will grow. Both will earn more each year (by the wonders of compounding).... but the second portfiolio growth rate will never be able to catch up over time.


(this, of course, assumes constant growth rates.... wild swings makes it much more ugly! if you lose 50% your first year, it sucks to have just invested 100k in the market.)

[jefelump]

Originally Posted by mcsluggo

(this, of course, assumes constant growth rates.... wild swings makes it much more ugly! if you lose 50% your first year, it sucks to have just invested 100k in the market.)

That is exactly why I prefer to pay off the mortgage and then start investing. If the market loses 50%, you still have a paid off house. You didn't lose 50k in your investment, and then still have a 100k mortgage.

[DelNegro]

Originally Posted by mcsluggo

well, of course now you are going THE OTHER direction. If you are committed to paying that $735 that you would be paying in mortgage payments to your investment fund going forward... why would you take that money OUT of your investmetn fund monthly in the alternate scenario?

in both cases you have $100k today and 735/month going forward to invest


in case one you: invest $100k up front in investment fund, and then 735/month in property

in case two you: invest $100k up frount in property, and invest 735/month in investment fund

(you invest the same amount in either case)

No doubt you are investing the same amount in either case. But in one case the property ends up costing you $100k and in the other it ends up costing you $264k. The question is whether or not being able to put the larger sum of money into the investment from day 1 is going to give you a big enough investment return to offset the extra money you'll end up spending to acquire the property.

[Arne]

Bailout? What Bailout?

Posted by Bill Anderson at September 15, 2008 02:38 PM

So much for the Fed not trying to "bail out" the mess on Wall Street.

NEW YORK (Reuters) - Global markets plummeted on Monday after investment bank Lehman Brothers filed for bankruptcy protection, rival Merrill Lynch agreed to be taken over and the Federal Reserve threw a life line to the battered financial industry.
As a deepening crisis took new, bigger victims, the U.S. Federal Reserve said for the first time it would accept stocks in exchange for cash loans and 10 of the world's top banks agreed to establish a $70 billion emergency fund, with any one of them able to tap up to a third of that.

Once again, we see the government (and make no mistake about it, the Fed is part of the government) willing to accept worthless paper and make loans from it. Hey, Ben and Alan, the problem ain't liquidity; it is the problem of massive malinvestments that MUST be liquidated. We cannot have a recovery until that happens.

http://www.lewrockwell.com/blog/lewr...es/022873.html