naked capitalism

attempter says:

The Panaritis piece is tantalizing, but I felt the same way the first commenter there did: she kept describing the problem abstractly but didn't give examples or prescriptions, so I was left unclear on what she was saying, other than the obvious point that the "efficient market hypothesis" is a fraud because (among other reasons) the information necessary to render it "true" is always dispersed, obfuscated, and destroyed.

Ironically the second commenter (who said he had read Panaritis' book), in saying the first was off-base in his complaint, gave more concrete information than the post itself did.

My own critique goes to the fact that land is not a conventional market good since "they're not making it anymore", so it can't possibly be (legitimately) priced and exchanged the way widgets are.

To treat it that way is bound to lead to market distortions and disasters, in the same way that treating finite, non-replenishable oil as an infinite market good has resulted in absurd price behavior and frivolous use allocations.

With oil the myth is a thing called Hotelling's Rule, which tried to pretend that the market would rationally take oil's finitude into account in pricing and rationing. Pundits often try to pretend that it has operated this way, but in reality it never did.

I don't know if there exists a similar myth for land. If I understood Paniritis correctly, she was deploring the absence of any such rational practice, at least regarding the quality if not the quantity of real estate.

A rational land distribution would acknowledge first the finite quantity of land, and how this must set up a conflict of rights (so-called "property rights") vs. rights (to free movement, to decent food, to a decent job for anyone willing to work the land, which was the classical basis of property in land in the first place, but which has been completely discarded by now).

Then it would acknowledge the quality of land, namely as productive farmland, as providing environmental services, and as anchoring social stability.

A true land reform program would focus on this core. This in turn is the necessary basis for all reform.

As for the rotten, perverse "market", it has proven its abject failure, and I don't think the anodyne reforms Panaritis implies would be sufficient.

MarcoPolo says:

Reader Steve, nice pics. I envy you. I spent some time with those hill tribes a few years ago and would go back in a heartbeat. Would advise others to avoid Burma though. My Thai friends told me that every thing had been quiet, but 24 hrs. after I left the place blew up.

John Galt says:

On the Watergate story, PB Capital is Deutsche Postbank's CRE lending arm and lends outside Germany in areas like London and across the US.

fresno dan says:

"Looking for an exit"
Interesting. Long story short, no matter how many feigns, manipulations, contrivances one can think up, at some point, income, expenditures, and value must be in a sustainable balance. At some point, people will realize that "dollars" are a piece of paper, and "treasuries" will be paid back with pieces of paper that may be worth a lot less than the lender presumed.

Kevin Kleen rpakkleen@gmail.com says:

I agree with Paranitis that value uncertainty is a problem, but that's because even in the best of times the real estate market is illiquid and thinly traded. Also, there's no way to homogenize assets as heterogeneous as real estate.

Ricard Green has a partial solution – report the level of uncertainty in appraisals (see link below)

http://real-estate-and-urban.blogspot.com/2009/07/two-ideas-for-appraisal-reform.html

Charles says:

Yves, I left a comment on the FT's blog. Yet, as you expressed interest in reader's reaction, here is my post :

There are indeed markets that are very transparent and with low transaction costs, and that still exhibit wide swings (including an overhang of negative equity mortgages on the down legs). Check for instance the Singapore real estate market.

To paraphrase the author, she didn't touch the roots of the crisis either, because the real root of the crisis is faulty Asset Liabilities Management : lenders and borrower should endeavor to match durations and,not only that : for long durations, index the notional of liabilities with the type of asset they finance. Such matching increases the resiliency of the economy and diminishes the risk of massive deflationary defaults.
For instance, homeowners (in the US) should borrow with a mortgage whose notional is linked to the Case-Shiller index of their region. Power Plants Projects should borrow against monetary flows linked to the value of future electricity outputs, etc…

There would be appetite for such index linked asset : household that don't qualify yet for a mortgage would invest in the MBS that could be made from indexed mortgage and be reassured that they do not have the risk of being "priced out" of a rising market. Conversely, household that were "forced" to buy a house to live in would not suffer unduly from a falling market if they were holding an indexed mortgage.

A liquid interest rate curve on the Case Shiller index on a large span of maturities would be an extremely useful tool for the Central Bank to get fine information on inflation expectation. It would also solve the vexing issue of inserting real estate prices in the CPI : if mortgages become linked to the Case-Shiller, it is completely legitimate to replace the owner's-equivalent-rent by the change of the real estate price index on YoY basis. With such a CPI, the Fed would have put the monetary breaks much sooner in the early noughties. Last, but not least, mortgages become counter cyclical, rising real estate doesn't generate excessive wealth effect, and falling real estate provides mortgage repayment relief.

The first obstacle to such common sense solution is, as the author noticed, opaque price signals. To get proper indices, one needs proper raw data. It is difficult for real estate, but I believe it can be solved in a satisfactory way (perfection is neither needed or possible). I think Case-Shiller is good enough.

The second obstacle is much more daunting : it is the greed of economic agents that want to become rich the easy way with their balance sheet rather than the hard way with their cash flows.

This is true both from the borrowers and the lenders. It will require therefore lots of financial education for households and their financial advisers to bring them back to their senses after the current folly.
As for the lenders, don't count on the usual suspects (think "Giant Squid"…) to introduce such stabilizing financial innovation : it cuts too much into their monetizing franchise. However, it would make sense for chastened GSE to lead the way on this. Indexation would indeed be an elegant route to the mortgage modification that are needed to get the US/UK economies back on their feet.

Diego says:

carol765,

you are right securitization and easy credit were instrumental to the housing bubble in the US. However, some specific aspects of the US property framework contributed to the financial collapse the housing bubble triggered.

I'll name two: 1) not having a Government guarantee on property titles, since the US has no property registry; and 2) in many states, negative mortgages can be canceled out by "jingle bells" or handling the mortgaged home back.

You may have read that Spain and others had a big housing bubble, despite them having full-recourse mortgages and national property registries; what you will never read is that those bubbles triggered a major financial collapse, as it has in the US, where the banking system became insolvent.

Anonymous Jones says:

Eric — Try to use actual facts in your argument. State income taxes are deductible from federal taxes, but the deduction is often heavily circumscribed by the AMT; so your 'stealing money' is not only factually suspect but ludicrous in light of the federal government (rather than California) enacting the rules that allow such a deduction. Also, state income taxes are but one of many state taxes. They are higher in California because state property taxes are kept so low by prop 13. California's total tax burden is high, but it is not completely out of line with other high income states such as New York. I'm not saying that higher taxes are the answer, but it's difficult to believe that they are not at least part of the solution, unless you want to turn California into a high crime cesspool with an obscene wealth gap a la those wonderful cities like Mexico
City or Jo'burg.

Steve Koch says:

Yves:

Elena Panaritis has interesting ideas (some good) but her writing is so poor that I found it painful to read her post. You provide a splendid service when you go to the trouble of paraphrasing this kind of material.

The idea of retaining the original info about individual loans that are bundled into a security is great. A non market based approach to valuation seems wrong. It is straight forward for an experienced real estate person (who has local knowledge) to estimate the value of a home based on recent comparable values and the condition of the home.

Diego:
There is no connection between government guarantees on property titles and the US housing bubble or subsequent financial bust. What % of the foreclosed homes were foreclosed because there was not a clear title? Nearly 0%, right?

My experience is that surveys are quite worthwhile. IIRC, I have bought 8 properties. Most of the time the fence turned out to not be on the property line. It turns out that some people are dishonest enough to move the property markers. No matter how good the national registry, you still have to verify the info in the field. This is especially true on a foreclosed home because the disgruntled foreclosed owners frequently strip and/or vandalize the foreclosed home before they depart. You also have to gauge what is happening with the local neighborhood,

Carol:
Securitization of mortgages is not intrinsically bad. It does seem that turning subprime mortgages into AAA securities is an inherently bad idea.

Mammon says:

Seems this pathetic moron never encountered the term "rent", which is omnipresent in the writings of the precursors of political economy (Ricardo, Marx, Schumpeter, inter alia)

carol says:

Steve Koch,
"Securitization of mortgages is not intrinsically bad."

But what was wrong with the 'old fashioned' way: you qualify for a mortgage from a local bank, and that bank keeps the loan, until you've paid it down?
Recent history has proven that banks, expecting to sell that mortgage (sliced and diced and unrecognizable bundled with many others) to an anonymous investor, perform less due diligence. This is bad for the debt-owner (erroneously called home-owner): foreclosure-stress, bad for the investor, and now even bad for the society at large.

" It does seem that turning subprime mortgages into AAA securities is an inherently bad idea."

Only a bad idea? Let's agree it is fraud! Were are the legal actions?

Diego:
“you are right securitization and easy credit were instrumental to the housing bubble in the US. However, some specific aspects of the US property framework contributed to the financial collapse the housing bubble triggered.”

Sure, but I disagree with Elena Panaritis, who calls those aspect the primary reason for underwater mortgages.

Anonymous says:

Maybe you should invite Inhacio Lula da Silva to be your next President, complete with his team of economic advisers and central bankers. He's obviously done a much better job than any of the previous billionaires. Perhaps that's because his education didn't go beyond primary school and metalworker apprenticeship. And don't worry about corruption, lobbying, maneuvering congressmen and putting bankers in jail, he's got a lot of first hand experience.

Brazilian democracy works much better than the US "democracy", because instead of special interests buying candidates, there it's the voters who sell their votes to the candidates. Better a bribe in the hand than a politician's promise.

Dan Duncan says:

Diego, if those quotes come directly from Panartis' blog, then you really are wasting your time in reading it.

Take the following: "Title insurance…is the main system through which information about property valuation flows. Plus, you have to pay for the information. This leads to all sorts of problems, and fuels speculation."

This is flat out wrong. In fact, it's a stupefyingly ignorant statement by Panaritis.

First off, the closest you'll get to valuing property from the county records is the tax assessors office. This information is notoriously inaccurate for current valuations. Nobody who is active (and competent) in real estate relies on the tax assessor's office (or any other municipal authority) to get information about property valuations.

The main system through which (residential) real estate valuations flow is through realtor multiple listing services.

Independent Accountant says:

YS:
I lived in Los Angeles, 1985-2006. I escaped. I wish California the best of luck. Disagreeing with the Daily Kos, the tax paying public is following Lenin's dictum, it is "voting with its feet". Soon California will consist of some wealthy people west of the 405 in Los Angeles, a few more in North San Diego County, San Francisco and the Silicon Valley and millions of illegal aliens and their offspring. As the ethnic composition of California more closely appriximates Mexico, why wouldn't living standards follow? I suspect California's "Gini Coefficient" has fallen significantly since 1985 and continues to fall. In the limit it will reach Mexico's.
Good luck Arnie.
The Daily Kos did not refer to the recent California referendum. I wonder why?
Hahahahahaha, would the Mogambo Guru say.

Dave Raithel says:

I read the read the Panaritis article this morning and went to work with the same perplexity expressed by others above. I work at a small vineyard – an abandoned one that is being "re-built", if such things are built to begin with. By coincidence, this happened: My boss pointed out that the adjacent property owner had placed two markers on a plot of ground, that we'd been mowing the last three years, to indicate where the adjacent owner thought the property line is. (Our regularly maintaining HIS property would be relevant, oh, in a generation or so.) My boss then observed that by his viewing of the plat lines, another neighbor's fence line ran 30 feet into the place we work – pulling off a piece of ground about 30' by 200'. He had suggested to the investor of the vineyard years ago that a survey be done – to which the investor countered: The worst thing one can do to rural neighbors is do a survey ….

I can't make this stuff up. I don't have the imagination. And what I describe may be irrelevant to the issue perplexing me. But after reading the article the other day about BANKS walking away from foreclosures (such that those "foreclosed" upon discover months later that they still "own" the property"), I'd have to say that something isn't sufficiently bureaucratic about something as important to most people as real property …

Anonymous says:

Steve said:
¨I'm not sure that bundling subprime loans into AAA securities was
fraud. Only the rating agency can say that the security is AAA,
right? The company that bundles the subprime mortgages into
securities cannot rate its own securities.¨

Hm, they cannot officially rate their own securities. But if they bundle subprime, jumbo, alt-A together, and without blinking an eye, accept the AAA-stamp-of-approval, they know (please remember: these are the self-acclaimed best and brightest) that something is wrong.

It is even worse: giving securities to the rating agencies, and agreeing to a pay structure, which pays more fees, the higher the rating received, is sollicitation for fraud.
Please note that this business model will *not* change under proposed legislation sent to congress this week (July 21th)!

¨ Do you want to prosecute
the rating agencies for fraud?

If I were a financially independent attorney general: YES, I would have pressed for charges, and would have had wall street inundated with search warrents (remember Elliot Spitzer: even before the news was out, some of his wall street enemies already had claimed victory: they knew that the FBI was hitting him. How?… Of course, the ´case´ against Spitzer was dismissed, but the signal to others was loud and clear: do not try to fight against Wall Street).

¨A lot of problems with the process have been exposed, we now need to
improve the process.¨

I believe there are so many fundamental problems, that merely improving the process will not be enough. We need fundamental changes, but with lobbyists all over WashDC, Wall Street the biggest donor to both parties, the oligarchs too powerfull, I am becoming doubtfull….
´The audacity of hope´ could very well end up in the futility of hope.