The Mess That Greenspan Made - Part 415

The Fed’s Ulterior Motive in REO Rentals

The Federal Reserve’s new white paper about the U.S. housing market released just yesterday – The U.S. Housing Market: Current Conditions and Policy Considerations (.pdf) – contains the following paragraph and a good deal of supporting rationale for their  recommendation to sell GSE-owned foreclosed properties in bulk to investors so that they can be converted in bulk into rentals.

The price signals in the owner-occupied and rental housing markets–that is, the decline in house prices and the rise in rents–suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties. In addition, the forces behind the decline in the homeownership rate, such as tight credit conditions, are unlikely to unwind significantly in the immediate future, indicating a longer-term need for an expanded stock of rental housing.

While, on the surface, this makes a good deal of sense after the nation painfully learned a few years ago that home ownership wasn’t what it was cracked up to be and, ever since, home prices have been falling while demand for rental properties has grown, a massive conversion of REO properties into rental properties would also have the convenient side effect of helping the Fed keep inflation low, giving it more leeway to print up another trillion dollars or so for the greater good, should the need arise.

How so?

Recall that, part of the reason that the housing bubble grew so big was that the inflation statistics include rental prices as a proxy for the cost of home ownership, a change that was made all the way back in 1983 and that forever changed how inflation is reported and how high home prices could rise (see this Seeking Alpha article on the subject from a few years back that still ranks quite high on a search of “owners’ equivalent rent”).

After years of being subdued because everyone wanted to own a home (and nearly did), lately, rents have been rising – up about 2 percent over the last year – and, since rents account for 40 percent of the Fed’s “core” inflation rate, you can see why lower rental prices might be in the central bank’s interest.

Psychoanalyzing the Gold Owner

David Tuckett, a professor at the University College London and a former president of the European Psychoanalytic Federation talks about what makes people buy and sell gold, via this story at the Wall Street Journal.

As far as I could tell, the comment below does not appear in the video above. Nevertheless, it was seen as a fitting conclusion to the WSJ piece:

“It is all about what stories are believed today, and today, while it belies any sort of commonsense that gold is worth twice as much as it was two years ago, this is what people are believing in.”

Why does this defy common sense? Credit markets around the world are a complete mess in the aftermath of the worst financial crisis since the Great Depression and the only solution policymakers can come up with is to print trillions more dollars of paper money.

I’m not sure what’s more fascinating to watch – the 11-year old gold bull market that has seen the price more than quintuple or the reaction to it by the mainstream media.

Thursday Morning Links

Euro drops to 16-month low over bank concerns – BBC
Demand halves at crucial French bond auction – Telegraph
Hungary Fails to Raise Target at Auction, Yields Soar – BusinessWeek
ECB Cash Averts ‘Funding Crisis’ for Italy, Spain – Bloomberg
ECB balance sheet grows, gold reserves increase – MarketWatch
Oil Price Would Skyrocket if Iran Closed the Strait of Hormuz – NY Times
Doug Casey Addresses Getting Out of Dodge – Casey Research
An epidemic of mortgage modification scams – Detroit Free Press
Lessons for Europe From America’s First Great Depression – Bloomberg
Consumer bureau: Now, it can do something – CNN/Money
What are asset bubbles and why do they happen? – Noahpinion
The Decline of the Public Good – Robert Reich

Oil below $103 amid mixed supply signs – AP
Gold slips on Europe debt concerns – Reuters
What OPEC, the IEA Say About an Iran Embargo – CNBC
Anger grows as nest eggs don’t – Globe & Mail
Wall St. gurus find predictions game getting harder – Reuters
Gold May Be Establishing Bullish Double Bottom – HAI
How Did Gold & Silver Perform in 2011? – Resource Investor
After a Rough Year for Gold Stocks, What’s Next? – Resource Investor
Is The Gold Bull “For Real?” – Implode-O-Meter
Is $5,000 Gold a Myth? – Nestmann

Planned job cuts up 14% in 2011 – CNN/Money
Harder for Americans to Rise From Lower Rungs – NY Times
Don’t Count on Housing Market to Lead Recovery – Bloomberg
Big cities’ home prices slide again – China Daily
Papademos: Economic Collapse Looms Without Sacrifice – Bloomberg
Chinese Government Battles ‘Demographic Tsunami’ – Bloomberg
House Prices and the Unemployment Rate – HousingViews
The Real Estate Market that Defies the Trends – Time
Richard Cordray Appointment Could Play Big for Housing – CNBC
Bernanke Tells Lawmakers More Action Needed to Fix Housing – WSJ
QE3 in 2012? ‘Only as a last resort’ – CNN/Money
Ron Paul and the Banks – Johnson, NY Times


Merkozy “Dinner for One”

I don’t know about you, but when I watch this video with the heads of French President Nicolas Sarkozy and German Chancellor Angela Merkel superimposed on characters from a 1963 sketch that, for some reason, is wildly popular when broadcast on German TV on New Years Eve, I can’t help but think of those Saturday Night Live caricatures of German TV personalities somehow working behind the scenes.

This story at Spiegel Online has all the particulars about the video that has gone a bit viral, also known as “The 90th Rescue Summit” or “Euros for No One”.

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‘Ol Greenie in the News Again

Former Fed Chairman Alan Greenspan was in the news again this morning writing in the Financial Times about how a more austere future awaits America. This item at CNBC appears to have a good summary of the key points (the old trick of Googling the article’s title to access the FT subscriber section doesn’t seem to be working anymore).

In an opinion piece for the Financial Times, Greenspan argued that the political landscape in the United States was more divided than ever, resulting in political paralysis as the Tea Party’s influence had created “an effective veto of new legislation before the current heavily Republican House of Representatives”.

The failure last year of the Super Committee — a congressional committee tasked with finding spending cuts to reduce the United States’ ballooning budget deficit — to reach a deal underscores this shift in U.S. politics, Greenspan said.

“A political tsunami has emerged out of our past in the form of the Tea Party, with its ethos reminiscent of rugged individualism and self-reliance,” Greenspan wrote.

The Tea Party “has so altered the distribution of votes within Republican Party’s House caucus that the party’s center has moved closer to the Tea Party,” he added.

And with an ideological battle raging over the future of the welfare state, “Congress, having enacted increases in entitlements without visible means of funding them, is on the brink of stalemate,” Greenspan wrote.

The only viable long-term solution appears to be “a shift in federal entitlements programs to defined contribution status” — programs that require employees to make a set contribution to their pensions, Greenspan said.

Defined contribution retirement programs have worked so well for the rest of America (that is, until stocks stopped rising a decade ago), it’s only fitting recipients of government benefits have the pleasure of fretting over their future too.

By the way, I’ll try to get in as much Greenspan related material as possible over the next month or so since a new combined blog/investment website will be launching sometime in February sans the TMTGM moniker. (Yes, it’s time…)

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