29 May 2013

Not Again

"Double, double toil and trouble; Fire burn, and caldron bubble."

That's from Macbeth, or as recent history would call it, Freddie Mac. Today's "surprising" Case-Shiller data made me queasy. What's not immediately available is data for the ARM load over the last couple of years. The reports have pointed to the fact that C-S is for 20 largest metros, which were hardest hit by the subprime/ARM bubble; the reports, oft quoting those with skin in the game, say that those metros overshot house price on the crash, so this rebound isn't out of bounds. So to speak.

Since figures don't lie, but liars figure; I figure there's some lying going on. Off on a snipe hunt. After all, employment (by most measures) isn't any better, nor is median income (falling, by latest data). So, how's this all happening?

I did find this report from the New York Fed (hi, Tim) from December, 2012.
We conclude that the growth in the market value of originated mortgages remains something of a puzzle.

Dare I say it, "Oops!"

While at each point in time TBA contracts with different coupons trade, the current coupon is a hypothetical security that is trading at par and is meant to be representative of the yield on newly issued securities.
That sentence, in its entire meaning, requires reading the paper up to that point. You can do that. Even if you don't, note this: it's much the same mess as LIBOR was; a measure of market activity which never appears in the market. Can you say, foobar?

It doesn't copy all that well, so have a look at figure 5 on page 12. Mortgagers have never had it so good!

And now, some pages later, after discussing the arithmetic of costs, we get:
The discussion in the previous subsection appears to indicate that the higher OPUCs on regular agency- securitized loans are not likely to be driven exclusively, or even mostly, by increases in costs. As a result, the rise in OPUCs could reflect an increase in profits.

Ta Da!!

Now it gets interesting. The Great Recession was fueled, indirectly one may say, by lenders exploiting the weakest of the flock, with subprime and ARM (or both). So, what do we have now?
Thus, the evidence strongly suggests that originators make larger profits on HARP [Home Affordable Refinance Program] loans than on regular loans, by being able to exploit their pricing power.

In other words, just as QEx has been a moolah spigot to Wall Street, HARP has been music to the ears of lenders. Not so much for those having/getting mortgages. Ain't America such a country! So, we find that lenders are eager to lend.

Now, is there data on ARMs? Not that I've found, so far.

[That was all yesterday. I didn't get around to posting, so here's more carrots for the stew, from today's news.]

Thus, a riff on central bankers:
Because governments are not taking steps to revive economies, like increasing spending or cutting taxes, the traditional concern of central bankers that economic growth will cause too much inflation has been supplanted by the fear that growth is not fast enough to prevent deflation, or falling prices.
Ya think?

What we need to return to, if the Right Wingnuts allow, is to economy that looks like Wimpy, not like Schwarzenegger. Most of the weight right there in the middle.
The lackluster results have provided cover for the European Central Bank, which has remained the most cautious of the major central banks. It is sticking to the more traditional formula of cutting interest rates -- a string Japan ineffectually pushed for more than a decade -- in the hopes that it will encourage banks to lend more money to businesses.

That didn't work for Japan, and it's one country that can (and now is, more later) use the fiscal lever. There's that string metaphor again. I can't claim originality, but I've beaten that poor thing to death.

And what does Mr. King [the departing governor of the Bank of England] have to show for his monetary exertions -- beyond record stock market highs and bottom-scraping yields for British corporate bonds? An anemic recovery. Growth this year is expected to be 0.5 percent, according to the monetary fund, while Japan's gross domestic product grew at an annualized rate of 3.5 percent in the first quarter and the United States' is expected to grow a little more than 2 percent.

So, two decades, that's 20 years, of history and the Bank of England's leader still doesn't get it.

As to Japan:
[T]he country is coupling its central bank action with fiscal stimulus, which means that the new money created by the bank is put to use. Calls for austerity have largely fallen on deaf ears.

Yes, the Keynesians have been berating Japan for all those two decades. Will it work? Could be. But...
Falling prices can freeze economic activity as buyers wait for still-lower prices, a cycle that is hard to reverse. Japan, the only major economy to fall into such a pattern in modern times, has struggled to escape for almost two decades.

The problem with deflation is usually couched in these terms. But the dynamics is what really makes the difference. With wages preceding prices down the rabbit hole, and employment uncertainty increasing, it's less that consumers hold out for better prices (which never seem to overwhelm falling wages), but that they still can't afford the goods because their real wage is yet lower.

One of the maxims of economics is that price reductions raise all boats, to invert two metaphors. The issue here is that it's true only for those that can afford the lower price. If the price of a new Ferrari goes from $500,000 to $450,000, that's a neat reduction, but irrelevant to 99.44% of consumers.

As wealth and income concentrate, deflation and depression have to follow. That's the only way the arithmetic can work. Have a nice day.

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