Regarding the ‘home as an investment’ model, I like you am far from sanguine on this. We subsidize it too much, I agree. But what are the alternatives. if we had, as I suggest, the option to invest individually in long-term public debt as a store of personal asset accumulation, many might choose to rent and carry their capital in another form. I would love to see something like the Japanese Postal Bank with preferential rates for small depositor-investors. But we don’t have anything like this. Moreover, the social profile of owning property will not go away in ten lifetimes in our country. This is part of our cultural macrogestalt. The question is how to limit speculation and get people to invest in more sensible housing. I detest most of our housing stock now; that is one reason I’ve had little incentive to even attempt to buy in. Condos are ugly cracking wrecks which bring all the problems of neighbors with little of the benefits of community. We could build energy efficient, beautifully built, rammed earth dwellings which would last two hundred years with reasonable maintenance but instead we get ugly, inefficient, resource stupid, cardboard packing crates in Sprawlville which are uninhabitable in a generation. Let’st promote sustainable urban design and architecture, and then see what our investments look like. . . . I’m not going to live to see this, either, I’m afraid.

And re: those ‘not backed by government labels,’ that is language for lawyers, but everyone has always known that the government would back these notes, and the government has implicitly promoted the understanding that they would. I seriously doubt that anyone buying GSE debt in 1975 remotely considered that the government would permit a default on it. The labels are part of a domestic political game, but the use of the debt has been part of a public financial process. I think that we have to give up the coy lie and accept the wink-and-a-nod promise. But yes, if we can negotiate down from face by all means let’s do it.

Your comments well taken, but I must differ with you a tad on a couple of points,

First, I note that even an economist that does not hew to radical views, namely James Hamilton, says that creditors should stare in the pain of restructuring Fannie and Freddie. Roubini admits his proposal will never be implemented, but it is a useful thought exercise.

Moreover, as one reader has taken to reminding me repeatedly, the securities (and presumably all offering documents) very clearly DISCLAIM being obligations of the government. They are not merely silent on this point. They affirmatively disavow it. That would give the US a tad stronger footing in any restructuing conversations (yes, I know this will never happen…..)

And more important, there is no free lunch for our friendly money sources. If the government takes on the obligation for the GSEs, Treasuries will go down , or rather have per this comment from Accrued Interest:

This is the first time in my career that I truly believe U.S. Treasury bonds sold off on credit concern. By this I mean, the credit of the U.S. Government. Long time readers know I’m not an alarmist type, and I’m sure not saying the United States is going belly up, but credit default swaps on the United States of America moved 11bps wider today (from 9bps to 20bps). The 10-year Treasury moved 15bps higher. All on a day when people are scared shitless and there should have been strong demand for “risk-free” assets.

I guarantee you will see even stronger purchases of gold (I’m annoyed that I can’t get over my goldbug prejudice and am now probably too late for that idea).

I think a modest restructuring could be pitched to GSE creditors as no worse than the alternative (provided the US does chip in as a gesture of good faith) of tarnishing Treasuries (although we’d probably have to pitch that measures would be taken to improve the creditworthiness of the GSEs, so that they could hope for a later partial recovery of the restructuring loss via ratings gains).

As for “housing as an investment” I think that very idea is what got us in the mess we are in, treating housing as an asset.

In the stone ages of my youth, the big reason for buying housing was personal risk reduction and better use of funds. The logic was you could pay rent and have nothing to show for it, or put some money down and maybe stretch on your monthly outlays, and have something to show for it.

Another big advantage was the increases you would face as an owner would be lower than as a tenant. The big number was the mortgage; those payments were fixed (at least in the pre-ARM days) and would fall over time in real terms thanks to inflation. So as an owner, you were at risk mainly of property tax increases and unexpected expenses (hopefully, the buyer budgeted for ongoing upkeep).

As a tenant, the landlord can raise the rent when your lease is up for renewal by however much he think he can extract, which could be a lot.

The forces savings/equity build up was a nice side bennie, but in the bad old days, many people planned to stay in the same house into their retirement years. Thus, the lifetime cash outlay would match their lifetime earnings profile: pay the mortgage off in your working years, enjoy much lower payments thereafter.

And I am not certain that home ownership makes much sense in a US with a much job instability as we have. Even if you can sell your home at a profit, transactions costs are very high relative to your equity (if you assume the historic 25% plus some appreciation). And if the market has traded down, it creates an impediment to relocating.

Yes, I know this posture is opposed to the idea of local communities, and I recognize and am saddened about the social costs. At the same time, this is the world we live in, and until things change, it behooves us to be realistic about it.

The principal issue is that more than 20% of GSE bonds—appreciably more than $1T—are held by foreign central banks including in China, Russia, Japan, and Korea. The support of these central banks for the dollar and the US generally is a sine qua non for any recovery in the US financial system. Any repudiation of the GSE bonds in this context is unthinkable, in my view. I made a long comment to one of Yves’ posts on the GSEs yesterday which I won’t repeat here in total, but I’m much in favor of the public capital infusion approach being mooted, diluting out existing equity but retaining the institutions, their staffs, and their bonds intact. Yes, there are many problematic aspects of the ‘mortgage subsidy industry’ in the US, particularly the flat guarantee of GSE MBSs which I think should be capped. It might be a good idea once the GSEs are stabilized to spin off the existing guarantees into a separate enterprise where those guarantees may take a writedown so that the public till doesn’t have to guarantee bubble-top housing prices. But GSE _bonds_ are going to have to be repaid at par, so it seems better to keep the GSEs in business to do that, at the very least.

I would take issue with several of Roubini’s characterizations in his post, but there are too many points to really take this up but for one issue. I wouldn’t dispute as technically correct R.’s characterization of housing investment in the US as ‘unproductive’ from an investment standpoint—which, however, completely misses the point to such a degree as to call R.’s judgment into question. In the US, if I buy equity I’m a peon, and the company can dilute or go broke. If I buy bonds or an index fund, I can make money or lose it but I’m a flea in someone else’s game. If I buy a house, _I hold the title_, and the asset is mine, legally. This is a huge social difference. It is an issue deeply embedded in American history and society beyond anything Roubini remotely grasps given his cavalier dismissal of housing: Most of the initial immigrants who can to the US (and stole the land from the indigenes, but) came specifically to acquire clear title to real property as vested stakeholders. The entire American idea that they/we/you/ are not beholden to politicians, the rich, to industry, to creed, or to class is fundamentally pinned on the concept of smallholding property, modest but with clear title, enforced by law. The concept of ‘owning one’s home’ is a latter day derivative of owning one’s homestead. I’m not saying that we all should own a home; I don’t. The social history of this is non-neglibible.

Now, land speculation has a long, bad history in the US. Speculative property bubbles are supremely ‘unproductive’ as we see once again. And moneied sharps preying upon the social desire to own property are the odious campfollowers to ‘The American Dream’ through more than 400 years; Mozillo the Godzilla and the fixed income boys on the desks at Lehman’s and Bear are just the latest mob of carpetbaggers. (You can look this up.) To the extent that government support for homeowning promotes property speculation—a very considerable exten over the last twenty years—then yes, those government policies are by definition ‘unproductive.’ Roubini discusses all this as if the perspective of economists on money and property are the only ‘right and valid’ ones. I think he is mistaken, and that’s even before raising, yet again, the delusions of economists regarding the value of anything, begining with their advice.

Although that said I surely agree with Roubini that the US has needed and yet needs much, much more productive investment, and desperately so. We need to get the middle class saving again, and one way to do that is to direct their savings into productive investments outside of their own property, yes. Of course, a big focus for recent thieves in politicians’ clothing was to siphon off all of that ‘personal investing’ into Wall Street speculation on bad terms for the hoi poloi, so the concept comes tainted to the tongue. It isn’t, though, an either or, either own a home or invest personal savings ‘productively.’ One might well do both, and all the better as there would be diversity in one’s personal assets. What we need not to see are individuals speculating on the price appreciation of their primary residences: that is supremely unproductive and a fool’s gambit for most property owners. A few sell in time, but most can’t and simply take the bitter after the sweet.

Well, how much does your house contribute to your ability to be more productive in your job? Unless you are one of the few who are self-employed with a home office, I can’t exactly see how.

The house is merely a place of shelter when you are not at work. Perhaps it is an intangible asset that provides psychic income as a place of refuge from a day of slaughter at day-trading. But then again, if you are affected by the housing crisis, maybe it is more like a liability… Even in the most normal of times (non-bubble and non-recessional), housing is a depreciating asset.
Hmmm. Depreciating asset. There’s an oxymoron for you.

Furthermore, I object to the notion housing “has zippo effect on the productivity of labor.” This conjurs images of human cattle herded into unheated huts who work until they collapse dead. Is Mr. Roubini a fascist?

IF both FNM and FRE have much higher cash interest income and guarantee fees than cash interest expense and non-interest expense (and they do), then the only way they get in real economic trouble is if the market for some reason were to stop letting them roll their short-term financing deals. Even though the panic level in the markets are about as high as I’ve seen in the past 25 years, I don’t see the markets running away from the two GSE’s. Of course, the nice thing about short-term financing is that you keep getting those current datapoints over-and-over again. FRE’s deal on Monday will be interesting.