Saturday, November 22, 2008

A Huge Case of I Told You So

In 2003, John R. Talbott wrote the following in his book The Coming Crash in The Housing Market:

Not everyone is alarmed by the increasing trend in personal bankruptcies and mortgage foreclosrues. Freedie Mac is the second largest purchaser and packager of mortgages and pass-through securities after Fannie Mae. Their chief economist, Frank Nothaft, says that he doesn't see the connection between the increase in personal bankruptcies and increased levels of mortgage borrowings. He blames increasing cultural acceptance of bankruptcy for the problem and thinks that refinancings that pledge people's homes as collateral to repay other debt is the right step for families to take to get out from under burdensome debt.

We will see that part of the problem here, as elsewhere, is that those institutions closest to this issue have the potential to let their narrow self-interest outweight the public interest. Realtors, mortgage brokers, appraisers, commercial bankers, mortgage insurers, Fannie Mae and Freddie Mac, and even Alan Greenspan all have an interest in preserving confidence in mortgage system, even if it is broke and in desperate need of fixing. Even Alan Greenspan? Yes, even Alan Greenspan. The reason is that he works for the Federal Reserve Board, which is owned and controlled by the country's commercial banks, which in trun hold plenty of home mortgage assests on their books. In addition, he has his hands full right now with a weak economy and a collapsing stock market. The last thing he needs right now is to have a housing crash. Remember, homeowners' spending of money that they have taken out of their homes through refinancings is one of the few bright spots of the current economy.

Needless to say, the crash has come and havoc has been wrought all across this great nation. The effects of this crash have been felt around the world and the global economy has weakened significantly. Today, shares of FRE are going for $0.41. In 2003, shares of FRE were selling for around 60 bucks. The logic of Mr. Nothaft and Mr. Greenspan was clearly flawed. It's unfortunate that more people didn't pay attention to Mr. Talbott's warnings.

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