Friday, 19 September 2008

Am I A Communist?

Two thoughts occurred to me last night as I was doing a set of 2x20s on a spinning bike. First, for all the fashionability of Pete Cannell's suggestion that LT intervals are nearly completely where it's at, I think those who would adopt this philiosophy are maybe underestimating it. It's hard work. As boring as winter training can be, and no one is more sensitive to that than I am, 20 or 30 or 40 minute LT intervals are freaking tough. I want to see how many people can actually hold to this training for an extended period. This is nothing against Pete, whom I don't know and have never met, and whose cycling achievements certainly don't need my endorsement. Rather, it's more of a recognition that "talent" comes in different ways. Some have the kind of talent that lets them jump on a bike with no training and shellac people. Others have the talent to read a race like they can see in the dark. Others, and you'd have to include Pete in this, have the talent to do workouts whose intrinsic discomfort and boredom level would send others racing for the exits. If I had to pick, I'd guess that this last type of talent would yield the most results for most people, but most people don't have it.

The other idea was that a stop loss to the housing/credit/name du jour crisis should start with homeowners. This is less a fully developed ideology than a nascent idea on perhaps a more effective plan, and even as I thought about it, it was the thought equivalent of the sound of fingernails scraping a black board.

The biggest issue is that no one knows what these tranches of mortgage backed securities/CDO's are worth due to a higher than planned default rate. The enusing effects of the default rate all compound the problem into an ever worsening spiral of lower home prices and more defaults feeding off of one another. So the bonds created by these debts are of unknown and potentially ever declining value. The penalty for unknown value in the current climate is high. Quite high. As in "if we don't know what it's worth, it must be worth nothing."

The only way to begin to put a value on these things is to stabilize the value of that from which they originate - houses. If default instances were brought more in line with a historical rate, then a better value could be put on the bonds. The bonds get marked to a now somewhat believable market rate and the surprise write downs (which are seemingly only surprise those who ought to know best) go away.

What this $180 billion liquidity fund that the central banks agreed to yesterday, or the re-born Resolution Trust Company that Paulsen is I guess backing, do is really let the companies that piled themselves into deep doodoo cut and run on their stupidity. I haven't heard of any effective tie to the resolution of the underlying problem. For all I've heard, they can throw their sludge into the central bankers' trash cans, redeem them for the value on offer, and move on to their next great mistake. They can find mistakes to make faster than regulators can mend the corrals, trust me on this. You know it's true.

By stabilizing home ownership, you detoxify a lot of the sludge that's on balance sheets, give it a viable value and redevelop the market for all of this stuff. Institutions which got involved in all of the tomfoolery are made to stay involved in it and work it out for themselves with the reasonable assumption that a realistic floor has been identified. But they keep the baggage.

As for the homeowners, this is the nails on a blackboard part. Morally, they were no better than the banks. It was greed and/or stupidity that got them into this, just the same as the institutions. To mollify that moral hazard, I'm thinking you hit these people with a pretty big scarlet "A." You sign up for this program (and the mechanics of it are someone else's job) and your house gets pegged to a certain level. There is a value escalation clause built into it, based on the escalation of values surrounding you. You are not allowed to sell your house for more than the excalation clause says. This has all kinds of precedent in affordable housing schemes. Your credit file also gets a record of this, just like if you'd had a foreclosure or a bankruptcy. Maybe the most critical part is that you are ineligible for home equity loans against any properties you own, and your access to unsecured credit (i.e. credit cards) is tied to some low percentage of your home's marked value.

To me, the option of given the hens the means to clean up the hen house, rather than the foxes, is probably a better deal. It's not something I propose from a populist or ideological perspective (the people who got themselves into this were idiots to do it and ought to get tagged), but I think it's a more practical deal and healthier for our ongoing economic prospects when all is said and done.

I'll be the guy doing hip stretches over in the corner.

5 comments:

SD said...

Pretty effing brilliant. I like it. I think it should be at least as big a hit as a bankruptcy. Maybe some kind of payback coming out of further escalation? Say your house shoots up in value, the mortgage payoff, plus refund of some bailout?

Chuck Wagon said...

Yeah, either way. You either regulate the outgoing price of the house sales affected, or the net proceeds over a predetermined escalation clause schedule go to paying you and me back for our largesse in bailing these donkeys out in the first place.

Peter cannell said...

Ok - so your comment about my workout style was funny, true as well. Good lcuk with the training!

Kyle Jones said...

I have not done any of the 2x20's yet. I am thinking they will be painful but will think of it like lifting weights.

Just to psych yourself up to push you to the level is amazing how taxing it can be.

You have to remember you are now starting do intervals. I always struggle the first few weeks with getting them done. After a while you start to get used to them, or at least can deal with the pain/discomfort better.

Ken said...

Are there really people who "have the kind of talent that lets them jump on a bike with no training and shellac people"? I'm kinda skeptical that happens in MABRA.

I'd guess the shellackers have worked their butts off to be able to do the shellacking.

But I'll trust your expertise on the financial crisis.