Friday, May 02, 2014

The Essence Of Bubble Finance: If You Don’t Like Free Market Outcomes, Change The Rules

David Stockman reports:
If you don’t like how things work in a free market, just change the rules and financial engineer whatever the results of which you like to achieve. And so, since 1995 we have been going from boom to bust from one bubble to the next as we try to navigate the financial markets that have been turned into a circus act.

You want to securitize home loans and dump them on the public? Package Collateralized Mortgage Obligations with AAA ratings. The masses cant afford a mortgage? No worries, have the Federal Government back and guarantee loans from Freddie and Fannie and simply change the underwriting rules so they can. Want to move the equity markets considerably higher? Start cutting interest rates to as close to zero as you can and force investors into equities.

In order to fully grasp what has been done here, you have to take a look at what is currently going on. Last year in 2013, it is estimated that 60% of the homes purchased were purchased with cash. In contrast, since 1988 only 6% of the homes purchased were purchased with cash. Additionally, studies have shown that historically US homeowners typically finance 50-60% of the purchase price of a home. At the peak of the real estate bubble in 2008, some folks were purchasing homes with no money down and financing 100% of the purchase price. Even more staggering, are all the diffent types of loans that have been created to accommodate the appetite of Wall Street and the securitization of them. And finally, 75% of the loans written since 1988 have been conventional loans. That too has been re-engineered, at the peak in 2008, we had more flavors of loans than there are ice creams. Adjustable Loans, Interest Rate Only Loans and Jumbo Loans to name a few that can and did accommodate anyone who wanted to purchase a new home regardless of income and credit rating. It didn’t matter if you couldn’t afford it.
An artificial boom will be followed by a nasty bust.