Cornell law professor Robert Hockett has proposed a way out of the “mortgage debt impasse” that he thinks is slowing our economy: have the federal government take all of the underwater homes by eminent domain, paying fair market value for the homes, and then sell the homes, hopefully to the previous buyers. Since the federal government will be able to sell the homes for what it paid for them, it won’t lose money, and fewer residents will lose their homes, so it sounds like a win-win solution.
Although the plan has been endorsed by Yale housing economist Robert Shiller, the Antiplanner is not so enthused. Hockett and Shiller barely hint that it is not exactly a win-win plan, and the big losers will be those who invested in mortgage-backed securities. The forced-sale of the homes backing these securities for less than value of the mortgages means many of these investors will lose their money.
No doubt many will say tough luck. But this attitude has become characteristic of the Obama administration, and it probably threatens our economy more than the “mortgage impasse.”
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Recall that in 2009 the federal government took over GM and Chrysler in order to save those companies from bankruptcy. How did it save them? It ordered them both to file for bankruptcy. Only in a normal bankruptcy, investors who loaned the companies money would be first in land to receive any repayment out of corporate assets or income. Instead, Obama gave the investors nothing and instead moved the labor unions, who ordinarily would be ignored by a bankruptcy court, up to first in line.
Now Obama and others fret about our sluggish economy even as they criticize big investors as part of the so-called “1 percent.” But if the administration is going to short investors whenever it tries to deal with an economic sector, those investors are simply going to put their money elsewhere.
The feds have inadvertently given investors some important lessons: (1) never invest in any unionized company; (2) never invest in any federally-backed activity.
U.S Bonds? Somebody better tell China.
China knows. Look for decoupling to occur after the market’s second attempt to correct. And bonds an investment? Have you seen the “yields“?
Bonds are where everyone is going to shelter their money. It is the safest course available at the moment while we give the theives our free money, no strings or threats of hard prison time attached. I’m not so sure China can divest itself either as it is heading down the economic contraction road as well, and needs dumb consumers to consume their trinkets. Not 100% convinced, tho…
DS
“Bonds are where everyone is going to shelter their money.”
Not everybody. Individuals and central banks (including China’s, which recently overtook India as the world’s biggest source of gold bullion demand) have been buying gold. Look for gold and silver to ignite this week.
US bonds are not an investment; they’re losers to inflation. A five-year with a .70 yield? And safe? Several US cities have announced they’re bankrupt. The fed gov ain’t far behind, but as others here have pointed out, the fed can’t go bankrupt because it has a printing press, so look for lots of losers in the bond market when the rest of the world wakes up to the fact that we can’t repay without significant devaluation, and when interest rates go up, we won’t even be able to service the debt, even with devalued dollars.
Not to say that all bonds will lose. There are some Eastern European five-year bonds yielding almost five percent, and if I had money to invest, I’d be looking outside the dollar as a reserve.
And yes, China’s manufacturing growth has slowed, but it’s still growing. And trinkets? These are trinkets? “[L]arge gas turbines, large pump storage groups, and nuclear power sets, ultra-high voltage direct-current transmission and transformer equipment, complete sets of large metallurgical, fertilizer and petro-chemical equipment, urban light rail transport equipment, and new papermaking and textile machinery. Machinery and transportation equipment have been the mainstay products of Chinese exports”.
I agree CHN is purchasing gold. They are also purchasing land. They are simply buying stuff all over the place in order to have future resources and buffer against the future shortages. They are simply being smart about the future.
The US bonds are being bought by many folks and institutions in Yurp because their inflation and other instruments are swirling down the bowl in response to their dumb reactions to the downturn. Some of the bank jogs and bank walks went right into the US Fed. Not ss an inflation hedge, but because that’s where the safety is. Hard to make good returns right now, so best not to lose.
DS
A sound analysis.
It is risky to those not of the Austrian ideology, but I think commodities are going to show good returns in the next year.
I think commodities are going to show good returns in the next year.
I think probably more than a year, but that depends upon whether Europe comes to their senses and how much risk some are willing to stomach. And depending on tariffs, trade disputes and US coming to their senses, REMs too – maybe a Moore’s Law there too, if only as a hedge against CHN cornering that market.
DS
Frank:
The US Treasury Bonds ARE the printing press. Issuing bonds is how money gets made, and when a surplus is run, money is extracted from the private economy anpermanently destroyed.
China and Europe and the Arabs must buy bonds because they run a trade surplus with us. If they want to stop buying bonds, they have to stop selling us so much stuff, or buy more stuff from us. There is no alternative. The dollars keep pouring in, and they have nothing better to do with them than park them in Trasuries.
China and Europe also buy bonds to get dollars to buy oil and airplanes, which are only sold in dollars.
The interesting question is:
Who is guilty in the housing bubble:
1. The buyer who knows nothing of bubbles, econ etc. and were seeing housing shoot up out of reach?
2. The speculators who expected to sell to the bigger fool?
3. The buyers who lied?
4. The loan originators who knew the buyer lied?
5. The loan packagers who didn’t care about lies?
6. the institutions that loaned money with creative terms like little down?
7. the Feds who “encouraged” more lending?
8. the planners who made building houses difficult?
Should we try to assign proportional guilt an send them a bill?
Thanks
JK
I’d add a couple more, but the point is well made. However, my understanding is that Mr. O’Toole believes that #8 is the sole culprit according to his many book reviews on the housing/financial crisis.
Noticeably absent is the Federal Reserve, which set and kept interest rates very low, which distorted the market and allowed marginal buyers into homes.
which set and kept interest rates very low, which distorted the market and allowed marginal buyers into homes.
It was his 7., and nevertheless the bankers lent to risky applicants seeking the American Dream, despite not being credit-worthy, because they knew they could hide the bad loans in a blizzard of paper and schemes. And not get penalized for it.
And they are still at it, and Rmoney is going to hook up with Barclay’s this week. And Dimon isn’t in jail (or out of his office) for the lastest heist, nor will any of them do time while they take our money.
DS
It is the job of the FedGov to “coin money and regulate the value therof”. To regulate the value of money, one must set the market interest rate.
The people complaining about low interest rates are all your typical entitled bond holders crying in their beer about their reduced income stream of interest payments for their risk free investment. Boo hoo.
It is the power of Congress NOT THE FEDERAL RESERVE to COIN money and regulate the value thereof.
Re-read with post-high school reading comprehension. Emphasis added to help you out. Here’s a vocab lesson: word meanings change over time. “Regulate” in the century the Constitution was written meant to “make regular” not to fix interest rates, something Congress is not doing; it’s being done by a quasi-private bank.
Guess it was an easy step to forget the limitation of the words “to coin” and to expand on the words “to regulate.”
“…and the big losers will be those who invested in mortgage-backed securities.”
Um, yeah. The have already lost and will continue to loose unless there is another bubble ready to inflate right around the corner. The biggest losers are those that took out bad loans (loosing their house) and those that invested in those bad loans (loosing their shirt).
These investors were already screwed by the investment banks and ratings agencies that (either by incompetence or by lack of ethics) assured them that these investments were safe in the first place. While the Hockett solution is extreme and fraught with ways to go wrong, it my be like ripping off the band-aid for the investors.
Maybe I’m wrong. Is there a way that these investors will make money on their horrible investments?
“Um, yeah. The have already lost and will continue to loose unless there is another bubble ready to inflate right around the corner.”
I agree. As long as the mortgages taken out were reasonable, taking on the houses as social housing, and charging a small rent to the householder, is the best of a bad job. The investors have already lost their money, irrespective of the nominal value of the property. Later on, the householders can be evicted, and get first refusal on a mortgage for the property.
I believe that Mr. O’Toole’s research (See his new book “American Nightmare”) has revealed that the crash in housing prices was the worst in those areas that had the strongest regulatory regimes in place, and least where regulation was the weakest. Perhaps the other items noted above were made possible or encouraged by the artificial shortages fostered by over-regulation?
Okay. Suppose I concede your point. Where do we draw the line between the NYC zoning code and completely unfettered land development markets. There has to be rules to the game and the government is going to be the referee. What should those rules look like.
Separation of uses? Impact fees? Restrictions on runoff, height, intensity?
Or do we just let the market sort it all out? If this is the case I think most people would be sorely disappointed with the outcomes. People tend not to like free-for-alls.
that the crash in housing prices was the worst in those areas that had the strongest regulatory regimes in place, and least where regulation was the weakest.
We’ve discussed this false narrative many times here. My favorite part of the routine is about when Glaeser gets trotted out, and we point out that th’ regalayshun emplaced by gate-closers and pols is exactly antithetical to the American Dream
DS
Randsl,
Lowell’s solution to under water homes.
1, Lender takes a deed
2. Owner gets a 2-3 year lease and owner becomes a tenant.
3. Owner/tenant gets a right to match any offer lender agrees to accept for the sale of the home in the future.
No vacant homes. No management problems for lender. No foreclosures destroying the area.
Owner/tenant hopes to again reclaim ownership at a fair price and so takes care home. A win win solution.
1. The Cornell plan would probably be an unconstitutional use of eminent domain.
2. Most residents would not be able to buy their homes back because they received no money from the eminent domain (as all money would go to the bank) and NOBODY would make home mortgage loans again for a generation, except for extremely bank-favorable terms, as they would fear the government would again step in and rip them off again.
So the federal government buys a home and then sells it. My real concern is the time in between. That could be years. And what will the government do with said homes. Will they refurbish them? Finish construction on the unbuilt ones? Repair sidewalks, mow the grass, trim the trees, de-weeding, painting, paving streets or pass on the costs of time in neglect and defered maintainence to the very people, some of which were probably not suited to be homeowners? What makes them think they know how to manage property. Judging by the level the Housing department treats it’s current supply of government run housing projects or the rate of which public forest land is currently turning into ashes, or the timeframe it takes to clean up a Superfund sites; I severely doubt they’ll be excellent managers.