Isn't the Fed Monetizing Housing Debt?

In reading the newspapers over the last eight months, since the Federal Reserve decided to print money on a massive scale in order to buy $300 billion in U.S. Treasuries along with about a trillion and a half dollars in mortgage related debt, these two groups of purchases have been viewed quite differently.

The former is seen as a particularly bad thing for a central bank to be doing as this money created "out of thin air" is used to directly fund government spending, spurring comparisons to Zimbabwe and Weimar Germany where similar efforts led to hyper-inflation.

However, the latter is viewed as something of a benign undertaking (by comparison, at least), widely perceived as providing needed support for housing in the U.S. by creating a market for housing debt that might not otherwise exist.

After all, would you buy 2003-2008 vintage mortgages that have been "securitized" by Wall Street firms or one of the two wards of the state - Fannie Mae and Freddie Mac - if the Fed wasn't buying the stuff too?

I wouldn't.

Is there really that big of a difference between these two?

Since the U.S. government and their "too big to fail" banking friends now essentially own the entire domestic mortgage market (causing understandable confusion as to which way the arrow would be pointing on a hypothetical org chart that included the U.S. government and "quasi-government" organizations like Citibank (C) and Bank of America (BAC)) is there really that much of a distinction between U.S. debt and U.S. housing debt?

By buying all this stuff, isn't the central bank effectively monetizing the housing debt?

And shouldn't a lot more people (particularly in China and Japan) be concerned?

As shown below in the now familiar depiction of the Federal Reserve's balance sheet, since the financial crisis has ebbed and banks are able to pay back some of the money they had to borrow when it looked like the entire world was going to implode, the only items that continue to grow are U.S. Treasuries, mortgage-backed securities (MBSes), and agency debt in the form of loans to Fannie (FNM) and Freddie (FRE).
Clearly, there are big differences between U.S. debt and these two forms of housing debt.

For example, when the government sells Treasuries to the central bank in exchange for newly printed money, it does so with the tacit understanding that the money will never have to be paid back.

But, when the Fed does the same thing in exchange for Fannie and Freddie bonds, then...

Well, actually, these two appear to be one and the same. The GSEs are fundamentally bankrupt, a characterization that, save for its ability to borrow and print money, applies to the U.S. government as well, and there would seem to be little chance of all the GSE bonds owned by the Fed being redeemed at full value unless the government steps in with borrowed money or, in the oddest of all circuitous monetary routes, with money it received from the central bank itself.

However, there is a distinction between U.S. debt and mortgage backed securities. In the case of the latter, newly created money is paid to whoever used to own the securitized loan - Fannie, Freddie, Citibank, Bank of America, etc. - and then, in theory at least, the central bank sees returns based on homeowners making their mortgage payments.

The only thing is, more and more homeowners are no longer able to make their payments and, as a result, the value of these securities would have tumbled to unknown depths if not for the central bank coming to the rescue and paying what others won't.

What is the true value of these mortgage backed securities?

In theory, we'll find out early next year when the Fed stops buying them, but, like the homebuyer tax credit, don't be surprised if this wildly popular program is extended, perhaps indefinitely as waves of foreclosures come ashore in 2010 and 2011.

Perhaps it would help to consider the similarities between the Fed using its printing press to buy Treasuries and to buy MBSes.

On the one hand, you have a government that got itself into a jam by spending more money than it could bring in or borrow at low interest rates, so the central bank had to print up money to make up the difference, trading newly created U.S. dollars for U.S. Treasuries.

On the other hand, you have a housing market that got itself into a jam, enabled by the 30-year government drive for higher rates of homeownership which was financed by the government sponsored owned mortgage giants and banks now deemed too big to fail, all of this culminating in one more in a long series of bursting asset bubbles that appears to be business as usual in recent decades for the U.S. economy.

That the Federal Reserve has to print money "out of thin air" to buy $1 trillion or so of this souring mortgage debt shouldn't come as too big of a surprise.

In both cases it's a matter of throwing good money after bad, the odds of the Federal Reserve getting anywhere near what it paid for these MBSes (if and when it ever goes to sell them) being about as good as the odds of the U.S. government running a sufficient surplus to pay back any of the $300 billion that was given to it by the central bank.

The system wasn't set up to work this way.

If the founding fathers knew that we had created yet another central bank and, not only was it printing up money to fund government spending but it was buying up home loans, they'd roll over in their graves (except maybe for Alexander Hamilton).

Since its founding almost a hundred years ago, the central bank has, for the most part, done its job simply by buying and selling treasuries, a fact that is clear to see in recent data below.
But, over the last year or so, there's been a radical change in what the central bank buys with money it creates with a simple keystroke and, now that housing and government activities have been so intertwined, is there any real difference between the U.S. government's finances and the finances of the nation's housing market.

It's one thing to step in and provide support for commercial paper markets and money markets, but it's quite another to step in and support the housing market that is now almost wholly owned by the U.S. government in one way or another.

You don't just "unwind" this kind of support.

Of course, if home prices zoom back to their 2005-2006 highs, it's quite possible that the GSEs will spring back to life despite being in the hole by over $100 billion with the red ink still flowing freely. In this case, the Fed could probably sell all its MBSes back into the market and all would be square.

But, that seems about as likely as the U.S. government running a surplus.

If the mortgage backed securities do get sold back into the market in the coming years at anywhere near the price the Fed paid, then all we'll have succeeded in doing is re-inflating the housing bubble, which, come to think of it, is probably the current plan.

But, more likely than not, all this new money that has and will continue to be conjured into existence to buy bad assets - be they U.S. treasuries, bonds issued by Fannie and Freddie, or home loans made against overpriced houses - will all just make the rest of the U.S. money currently in existence less valuable simply because there is more of it.

Maybe a lot less valuable.

Comments

[User 493781:]

"What is the true value of these mortgage backed securities?

In theory, we'll find out early next year when the Fed stops buying them, but, like the homebuyer tax credit, don't be surprised if this wildly popular program is extended, perhaps indefinitely as waves of foreclosures come ashore in 2010 and 2011."

Great article. But will we really know the true price only when they STOP buying MBS? Won't we know the ture price ONLY when the real market buys them back. Right?

Nov 12 03:56 PM

[Ed Zimmer:]

Let us not forget the latest plan, the GSE will take over the mortgage and you become the renter for 12 months, then we'll see about renegotiation. That's another can of worms that will get reguritated a year down the road (let's just keep pushing it off, until we can't push no more). Eventually this all has to come home to roost.

Nov 12 04:02 PM

[DCBill:]

Before the recent real estate disaster, Fannie and Freddie securtiies always traded at a premium to "private label securities (PLS)" commercial and investment bank debt and mbs.

With the "federalization of the residential real estate market" (a very appropriate description), I wonder if the market is making any prices distinction between F&F securities and those TARP funded banks?

That would give you some indication of their relative value.

I also don't think that there has been much deterioration on GSE MBS issued befroe 2006, since those "books" are bleeding the least and contain the fewest number of Alt A and PLS securities.

Nov 12 04:36 PM

[ryanclarke:]

The author wrote, "If the founding fathers knew that we had created yet another central bank and, not only was it printing up money to fund government spending but it was buying up home loans, they'd roll over in their graves (except maybe for Alexander Hamilton)."

My comment it is : This is why Jefferson and Hamilton fought on a daily basis while Washington was president.

Jefferson is supposed to say, "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

I really don't care if Jefferson made the remark or not ... nor do I care who was the first president of the United States ... something a teacher in grade school told me was something very important to know.

All I know is when I have to go to a bank in order to ... live in a house ... get a skill from a school which charges money for me to learn the skill when in fact I have to learn it on my own .... drive in a car to go to work ... or even pay for a meal at a local Chinese Restaurant ...

I might as well go live in a national forest somewhere with all the other animals where the cost for being free is ZERO ... as it's always been since the day God created mankind.

Nov 12 04:49 PM

[Left Coast ...:]

The key to watch is not the value at the time they stop buying, but when they start selling. The quality of the paper that the Treasury is buying now will be important (and I understand it, the underwriting standards have been tightened for these loans), as will be the long-term interest rates at the time of sales. If the paper has good payment histories and equivalent interest rates, then being redeemed at par is a good outcome.

This is analogous to the government providing liquidity to the commercial paper market. The mortgage market needed liquidity, as well. However, the purchases must to continue to be done with prudent underwriting of the underlying credit and real estate to protect the capital outlays, or the author's fears that it's wasteful will be realized.

Nov 12 05:13 PM

[robert.b.fe...:]

Fox News reported today that the FHA is insolvent and will need to borrow more tax payer cash. Sure just print up another batch of hundreds get em while they're hot.

Nov 12 05:18 PM

[hide your b...:]

that was an eloquent post, but you are missing some of the point, which is that we are rewarding bad behavior all around us now.

you, on the other hand, are willing to excuse some bad behavior because other bad behavior is worse.

you don't reward bad behavior - whether it is an illegal immigrant breaking the law, a single mom scamming welfare, a corporate tax cheat, or the top tier of crooks, the wall street manipulator / cheaters. they all break down the entire system, as they build resentment from the people who are expected to subsidize them all, and thus this creates a moral hazard to the entire country, as well as growing apathy towards the country.

Nov 12 06:09 PM

[The Geoffster:]

The FED can only hope that inflation will be sufficient to raise the value of the underlying collateral. Right now, it's pushing on a string.

Nov 12 07:20 PM

[Sean Olender:]

I'm not talking about someone scamming welfare. I'm talking about the general lack of dignity and compassion that has developed in American society. I'm not anti-capitalist, but it seems like there is nothing else here anymore. There is no real community. There is no real citizenship. There is no real common or common interest.

There are fake "common" interests, like people very concerned about the quality of their local schools because they influence property values. But ultimately there is nothing except vanity, envy and greed. I read an interesting article in the Atlantic a few days ago about "prosperty churches" where people pray to get rich and where people genuinely believe that Jesus cares a lot about money and rewards the faithful with Lexus SUVs and low interest refis on zero down investment homes. I couldn't believe it. But then, I sort of could.

Happiness is not a "metric" worth measuring any longer Nor is satisfaction. We're building a sociey without any thought of whether anyone here is every happy.

We even victimize children. I remember when the closed the school lunch program for hungry poor children. They just couldn't "afford it." And those kids were probably "scamming" the schools. They should have gone out and gotten jobs in factories or something.

I don't think that the United States should provide a comfortable living for people who do not work. But I do think that things have become so stark here that our rich civilization for many people is little different than living in the wilderness with all of its attendant dangers and deprivations. Actually, I imagine that the wilderness is more forgiving in many respects than everyday American life. At least the cops don't come to roust you in your tent with tasers and pepper spray if you are camping in the wilderness as opposed to that tent city in Sacramento.

I can't imagine where this is going. It seems like a day will come soon when Americans are so sick that they are completely politicaly neutralized. They will have to beg for their "insurers" not to cancel their coverage and beg the government or hospitals for their chemotherapy and cholesterol lowering medication and diabetes medication and bypass surgeries. There is a time coming soon when everybody will require some medical care and because it's not a "right" to get medical care, it will mean that the entire population is highly vulnerable and politically weak because they'd trade anything for another vial of insulin.

This is not the stuff of democratic governance. It's the stuff of a population living in fear and afraid to act politically, afraid to speak up. Debt and sickness, obesity and variable interest rate loans. They all do the same thing to the fabric of republics: weaken people into nothings.

You can't have a functioning society where there isn't so much as a tiny bit of dignity for an ordinary person.

The median income family of four in the United States makes $65,000 a year. After taxes that group qualifies as spectators -- half the country are spectators who dare not speak because a three weeks out of work might mean homelessness, or it might even be a death sentence (if you get cancer and you can't get treatment).

What I'm saying is that we ought to rebuild this place from the ground up. Everything in the country has become a con game. Even "higher education" with university administrators and admissions offices taking illegal kickbacks and bribes and extravagant vacations to promote certain lenders on campus and through the financial aid office. Even university has become a racket where tuition is driven up by federally guaranteed loans with the lenders and the schools working together to figure out what is the maximum lifetime debt that some poor young kid can take on. And this is the "path to success" that is tauted as what "responsible people do."

Everything about this place has taken on the appearance of some dark 19th century carnival with its side shows and snake oil salesmen. Every institution from the SEC to the Fed and Treasury to HUD, Department of Education and so many others have been caught making policy that is handed to them by private industry along with some kickback like a $500,000 a year job for their idiot niece or nephew.

And it's not entirely government because business encourages it. They fight in court every day to get their right to bribe our Congress declared protected under the First Amendment. They fight every day to find new ways to funnel money and favors like Friend of Angelo mortgages to Chris Dodd and Bank of America writes the $700 billion bail out bill and hands it to Dodd marked "confidential" so that Dodd can have his secretary retype it and then introduce it like it was Dodd's idea.

These private, anonymous people make our laws now and hand them to our elected legislators along with pamphlets of retirement spots in Nice and Cannes and St. Tropez.

So what I'm saying is how can we say that some sick soldier is trying to "scam" the VA with a claim and use taxpayer money to litigate the claim for seven years until the soldier dies or commits suicide just to "make sure" that he wasn't "scamming" the system for his $10,000 in medical and psychological treatment, but hand out $1 trillion to anonymous billionaire bond investors?

You can't have a society without any compassion or dignity like this. People will start killing themselves and killing others and generally behaving very badly. And if you look around, that's what you see. You see people walking into employers where they were laid off and opening fire. You see young people age 13 raping and murdering people. You see violence and sadism at every age and every corner of the society from the young to the old, from the cops to the criminals.

Everybody says, "well, we've got to jail more criminals and maybe just start bugging everybody's phone so we know what's going on." But the United States already has the largest percentage of its population in prison of any society in human history. You know who number two was? The USSR under Khrushchev when they had so many political dissidents. And the solution is to lock up more people?

Americans take huge amounts of illegal drugs resulting in these horribly violent drug wars in Mexico and the US and people say, "We need to punish users more to put a stop to this." And another question you could ask, is "Why are people so unhappy here that half the population is stoned?"

Because more people die now from prescription drug overdoses and complications than from illegal drug use and I think someone should ask the question why are so many people taking legal and illegal drugs? What's wrong with this place that 20% of the population is on antidepressants and another 20% is smoking marijuana? Why is this place so unpleasant that half of the people living here have to be sedated legally or illegally to tolerate it?

It's neither practical nor desirable to build a society where people are so unhappy that you have to drug them on the one hand and then on the other threaten them with imprisonment or in the case of medical care, with death, if they don't drag themselves through life doing what you want them to do.

The effect on a whole generation of children will be painfully evident. Kids today don't even wander around their neighborhoods because everybody is worried that someone is going to kidnap them and sexually molest them. People claim, "Oh, I live in the most posh and wonderful neighborhood. Home prices never go down here. It is 'highly desirable' to live here." But then they will tell you that they would never let their kid walk five blocks to their friend's house alone because they could be kidnapped, raped, and killed. And I ask them, so this is what a nice, expensive neighborhood is like in America?

So all the kids now grow up with "play dates" where their parents choose who their friends are and they are confined to odd, Orwellian one hour blocks of playtime often indoors or at least under the watchful eyes of adults. Just the stuff to stimulate creativity and a love of freedom.

If we don't do something about all of this, it is we who will suffer. And our children.

Most people seem to have the strategy that they will make a lot of money so that their kids can buy Mercedes S-Guard sedans (although the E-Guard is more manageable) and live in guarded compounds with lots of Prozac running through their veins so that they can "block out" the unpleasantness and get to the important job of living life to the fullest by working, shopping and watching TV.

And now the broadest public policy goal seems to be to trick people into borrowing a lot of money and doing some serious shopping this Christmas. Nothing is said of buyer's remorse and all of the unhappiness that will come when people get the bills from their guilt-fueled shopping binges to make sure their children love them as much as the other parents' children (an emotion measured in dollars spent by a ruthless spectacle of advertising-enforced shame).

Something has got to give here before this place just collapses in one big heap of suffering.

We can change this in one day. Literally, one single day. If even a substantial number of people in this country became genuinely fed up, in just one single day everything would change.

As regards Iraq and Afghanistan, Americans could just say, we're not going anywhere until those troops come home. We're not going to work, to school, to the mall. We're not going to drive anywhere and we're just going to sit around until someone puts a stop to that war. I bet within one day, enormous joy would break out in the streets with everyone talking with their neighbors in a way that has not occurred here since the 19th Century and then within two or maybe five days, those troops would come home.

70% of Americans wanted troops out of Iraq at the 2004 elections -- FIVE YEARS ago -- and they are still there. I don't know about you, but I am ashamed of my impotence as a US citizen. I'd love to feel like the majority had at least a small influence on something as important as the life and death of young Americans and Iraqis too.

And so we have some time to work this out. But it's like I said, a sick, indebted population is much less likely to make trouble and do something than one that is healthy and debt free.

And for that reason, I think these trends in obesity, diabetes, illegal and legal drug use and the unbelievable indebtedness of Americans, I think this is not a coincidence. It's by design. If you encourage it, you end up with a population that is weak and afraid and even if 70% want something very badly, you can just say to them, "No. And what are you going to do about it? That's what I thought."

Nov 12 07:25 PM

[surfgeezer:]

As a real estate investor I value cash flow as my main determinate. Notice I said investor instead of flipper. I think you make the same mistake in this article as the flippers.

Yes you can by an asset based on a guess of the future appreciation. Or, like me, buy an asset on cash flow and expect to hold it. These mortgage securities or debt have a value based on cash flow alone, not what you can trade them for immediately.

The problem of course is getting a picture on the rate of failures vs the performing, and make no mistake the performing will be profitable with the miracle of compound interest.

In fact the main determinate of whether the government will get it's money back is how long the performing keep paying- the loss's of non performing. Delaying the losses is hugely beneficial and with compound interest we could end up with a + sign in front of all that printed money behind the house's.

Nov 12 11:58 PM

[term2:]

Our children wont pay for all this government printing of money. WE will pay for it through inflation and the resulting effective depreciation of our savings. This will transfer the wealth of the citizens to the government more than ANY tax could.

The number are staggering. Baby boomers saved a lot during their lives, and these savings will be stolen by the government to pay for all these 'programs'.

Nov 13 12:00 AM

[Phillip Jain:]

Great Article Tim.

I noticed that the Fed buying of Fannie & Freddie debt SO FAR is very small compared to the Mortgage backed securities (I assume MBS are from private sellers). Also

This is really fishy. I don't think there was ANY obligation for the Fed to buy MBS first - and later on they will probably have to buy $1 trillion+ of more F&F. Looks like they are crying "the sky is falling" so they can bail out their bank (or other hidden/international) buddies.

Basically, the Fed is AGAIN choosing who gets paid out - and it is all OPAQUE. Just like in AIG.

Nov 13 12:36 AM

[Moon Kil Woong:]

Good article. Your money is a lot less valuable already. Oil companies, commodities sellers, and everyone overseas sees it quite clearly. Buying mortgaged backed bonds from the Mae's is just transferring losses into another even less transparent agency. At least the Federal Reserve buying US Treasuries is a bit safer than mortgage bonds. The Treasury will always pay. With assets to equity above 40x now the biggest too big to fail bank is quickly becoming a zombie Federal Reserve. As it becomes this way it increasingly becomes like Japan, refusing to raise interest rates because they will loose so much on their QE policy positions they simply can't afford the losses.

As we all know, Zirp policies forever = decades of high unemployment and economic hell. The Fed's response so far has been better you than us. No wonder no one is happy. Even though they say it is all to help us, low rates are good for the economy, the saying too much of anything is a bad thing certainly applies. We are injecting corruption, cronyism, and a culture of socialized risk unlimited risk taking into our economic lifeblood and it's killing us.

If Fannie Mae and Freddie Mac are dying please don't ask the Federal Reserve to buy up all their loans to continue the unprofitable business. Just let them die.

Nov 13 12:59 AM

[Andrew Butter:]

I wouldn't be surprised if they are "valuing" then at face or somewhere around that.

By way of example try having a look at the "valuation" of MBS held by FDIC insured banks (www2.fdic.gov/qbp/inde...), in July 2008 those "assets" were "worth" $1.3 trillion, in July 2009 they were also "worth" $1.3 trillion.

Err...didn't something happen between July 2008 and July 2009 that made some people suspect that what they were worth then they are not worth now?

Mmm..I can't quite put my finger on it, something to do with Hank Paulson's declaration back then that "The US Banking System Is Safe and Sound"?


On Nov 12 03:56 PM User 493781 wrote:

> "What is the true value of these mortgage backed securities?
>
> In theory, we'll find out early next year when the Fed stops buying
> them, but, like the homebuyer tax credit, don't be surprised if this
> wildly popular program is extended, perhaps indefinitely as waves
> of foreclosures come ashore in 2010 and 2011."
>
> Great article. But will we really know the true price only when they
> STOP buying MBS? Won't we know the ture price ONLY when the real
> market buys them back. Right?

Nov 13 02:51 AM

[dondon:]

It seem Sean has taken every nasty headline story from every tabloid and news rag and made those stories the de facto truth about the US. I am not sure where in the US Sean lives, but I have lived here all of my life starting out poor and working my ass off to get where I am today. I employ people and pay them well. The US Sean is pointing out is but a small part of our existence and while it should be highlighted to help bring attention to problems it should not be thought of as how the entire citizenry works.

Nov 13 02:57 AM

[dondon:]

Tim,
Excellent article. Please keep them coming.

Nov 13 02:59 AM

[Heaven, Hel...:]

Great article.

>> As a real estate investor I value cash flow as my main determinate. Notice I said investor instead of flipper. I think you make the same mistake in this article as the flippers. <<

Surfgeezer, everything you say is valid but the issue here is that the Fed will not be able to hold these securities long-term to realize their intrinsic value, but instead will need to move to unwind this lever of monetary stimulus once the velocity of money picks up, otherwise it runs the risk of creating some level of hyperinflation. Again, I agree with what you are saying, it's just that the Fed does not have the luxury of being a fundamental investor here.

Nov 13 10:24 AM

[TeresaE:]

While the "true" value of these securities could be argued about for hours, the real scare (for me at least) occurs when you realize the terms of the mortgages and the effect it will have on the chances of the Fed ever making money on the mess.

Most of these are mortgages that are being set at around 5% interest rates. These rates are abnormally low, not the norm most seem to think, and there will be a huge increase in current mortgage interest when the Fed is finally forced to raise prime.

Then, what will these securities be worth on the open market when new mortgages will have much higher yields for the investors?

What amazes me the most is the apparent disdain Geithner, Bernake and Congress holds for our foreign investors. They have to think that foreigners are ignorant, can't read English or financial statements, and that they are living in bubbles which has rendered them unable to see that the US taxpayers will NEVER be able to afford to pay our past debts - let alone the new debt being piled on daily.

If I was China, I would feel insulted, disrespected and not more than a little antagonistic towards continuing to fund our party.

Funny, China just announced they are looking internally to fuel demand for their industries. What a shock when their middle class is twice the size of our entire country.

Nov 13 11:34 AM

[Sean Olender:]

I agree with you that it's not the whole country. But I think it's more than you may realize. I live in the Silicon Valley where 20 year olds often pass by in brand new Tesla Roadsters or Mercedes SL convertibles and you see at least four times a week a Lamborghini Gallardo parked at a restaurant.

There are no homeless people in Saratoga or Cupertino. I don't see any poverty here either. But I know there's a lot of poverty. I know it because I read the news and the data.

More than HALF of all bankruptcies in the United States are primarily due to unpaid medical bills and there are a lot of bankruptcies in the United States right now and over the past ten years.

More Americans commit suicide than are killed by another person. Only 4% of violent deaths are "gang" related. But if you watch the TV, you get the sense that "gang" violence is the big threat to the average person who then wants to buy a gun and live in a "gated community" and is happy to see the local police department wearing uniforms and carrying weapons that look more like the getup of a Latin American paramilitary unit than the old fashioned civilian police we used to have in the United States.

None of my information comes from tabloids. Tabloids are a distraction just like much of the main stream news. The main stream news makes people afraid that they are likely to suffer violence at the hands of gang members or terrorists and the tabloids chronicle the lives of desperately unhappy rich celebrities (because apparently even the rich aren't happy here). Neither source comes out and says that according to the numbers, the hard facts, the data, that the most likely person to kill you, is, well, YOU.

The reason it's gotten like this here is that people have a false image in their heads about what it's like to live here. That image is deposited in the mind by television and advertising. Just try to take a walk from your house to the grocery store and take a look around you. Look around at what's going on. The first thing you'll notice is that you are the only person walking anywhere. The sidewalk is 24 inches wide and next to it is a 20 yard wide street with cars passing by pretty fast with one person in each car. Give a try to talk to some of those people. You can't. They are isolated.

Part of what's happened here in the United States is that we've built out a topography of isolation where everyone is alone at their house and alone in their cars and alone at the mall, etc. The only time you're with loved ones and friends usually is at home with your family, or at work (or school for kids). But that's it. If you stop by the grocery store or the mall, the odds you'll see someone you know are close to zero because everybody drives everywhere which isolates people. There is no community. There is only a topography of ugly tract houses piled on broad flat streets packed with cars and garages and more cars.

And because we're human beings, we get used to it. We can get used to almost anything. But it's unpleasant. It's unpleasant to even walk to the grocery store because of how we've built this place and that's why no one walks there. It's nicer to drive because with the windows up, you don't get dirt kicked up in your face and the loud thunder of street traffic everywhere all the time.

And there are consequences to this. People are isolated in their cars, we have bad air because of it and people don't hardly walk around because it's unpleasant to walk around outside most places. We've managed to make "outside" unpleasant unless you drive to a special, designated area like a park or a shopping mall that is designed to not be unpleasant to be outside.

So yes, I think it's great that you made it and you worked hard and I respect that, but if you look at the numbers, you are an anomaly. A majority of Americans watched their wages decline over the past ten years at the same time that health care costs and other costs rose. So hard work alone isn't enough.

And success may not be enough here soon either. Because if there are enough poor people, it will become as violent as Mexico here and wealthy people will need bullet proof cars and briefcases with machine guns built in (they sell these things to all wealthy people in Mexico City).

I grew up in Los Angeles and because I used to drive on the freeway from Woodland Hills to Sherman Oaks and then to Westwood or West Hollywood or Santa Monica, I got the sense that LA was a really nice place and people lived comfortably there. But one day I was bored (25 years ago) and I just drove around a bit and I was stunned to figure out that 4/5 of the surface area of the City of Los Angeles is occupied by fairly poor people and maybe 1/3, or half of it is occupied by very poor people.

Americans are 41st in the world now in life expectancy, but we pay more than double on health care that the number two biggest spender does. So we're number one in spending by double, but 41st in life expectancy. That has got to tell you something about what's going on here that has nothing to do with tabloids. And you can't say, "Oh, it's because we're so wealthy we can afford to get fat." Because that's nonsense. Poor people get much fatter than rich people and countries like Switzerland with a high proportion of wealthy people living there have much lower obesity rates.

I talked to a lady in a cafe in San Francisco about health care and the wars and some other things a few days ago. She told me that she had been disappointed by those things, but that it was too much to think about it, so she "blocked it out" and tried to think happy thoughts.

While I can understand that, it's the reason why this place is falling apart. Everybody wants to think happy thoughts rather than look around and be honest. Some of this place is nice and some of it is crap. Some things are just fine, and some desperately need to be changed. But I get the sense that most Americans don't want to think about what is really going on in front of them because it's unpleasant and so why not think happy thoughts since there's nothing you can do about it anyway?

That apolitical culture where Americans are relatively uninformed about the activities of their government is what has led to these enormous frauds. If the public isn't paying attention to the laws that are passed and reading some of these bailout bills and putting politicians' feet to the fire, you can bet that corruption will result and every law passed in this country will be like the bank bailout bill written by Bank of America and introduced by Chris Dodd, or whoever.

The politicians and economists always tell us that self interest is what powers this place and that pursing self interest is good. But the singleminded pursuit of self interest leaves the commons vulnerable to pillaging and it's been fairly well picked clean while we were watching reruns and eating popcorn (with partially hydrated oil and artifical butter flavor).


On Nov 13 02:57 AM dondon wrote:

> It seem Sean has taken every nasty headline story from every tabloid
> and news rag and made those stories the de facto truth about the
> US. I am not sure where in the US Sean lives, but I have lived here
> all of my life starting out poor and working my ass off to get where
> I am today. I employ people and pay them well. The US Sean is pointing
> out is but a small part of our existence and while it should be highlighted
> to help bring attention to problems it should not be thought of as
> how the entire citizenry works.

Nov 13 01:56 PM

[ThereIsNoFr...:]

Sean, I know several poor people who still have cable TV, lol.

Nov 13 02:38 PM

[Sean Olender:]

Yes, and there are a lot of poor people who scrape together enough money for antidepressants or illegal drugs. Part of it is the absence of community and living in the lonely topography of the land of happy motoring.

It is true that many poor people could live more comfortably if they gave up alcohol, television, marijuana and prescription drugs. But then what would they have? What would they do then? There are no community centers, there isn't anything here anymore except places to work and places to shop. Everything else has been demolished so as not to distract the public from the task at hand.

It's true that if people had a little more backbone they could give up all of it and live comfortably and happily on a less than median income. But this place is packed to the gills with hucksters and so apparently the average person is unable to resist. The average person has been hopped up on high fructose corn syrup, antidepressants and momentous loud explosions in action movies. It's hard for someone accustomed to the loud, incessant bombardment of the behaviorally deranged television personalities always talking loudly in funny voices and making ridiculous facial expressions nonstop -- it's hard to go from that to normalcy. It's hard to know what normal is. But it's sure not the newscaster/sitcom/prim... histrionic freakshow. And so quiet, for many people, is probably a bit jarring at first.

Nov 13 03:40 PM

[OldSusanna:]

As always, Tim, great article--despite the fact that it gave me a headache.

Nov 13 08:29 PM

[Fabien Hug:]

Sean
As a European living in the US, your comments helped me put words on that strange feeling I have since living here. Feeling I get not be interacting with people but by reading the blogs and the paper press. However, I think and always thought that this the price the US has to pay to be the boss. Roughly, the US spend in military what Europe spends in social and education and vice versa. Life in Europe in much sweeter but, because there is always a but, without the US military, I think Europe would be in deep trouble also. With resources getting scarce and competition for them increasing with the emergence of India and China, I think it is unfortunately essential that a Western power shows a strong hand. Irak was effectively not a threat on the strict military sense but was certainly one on the political scene. If we loose our grip on these countries, we are going to feel it badly. Fortunately, the US still has what it takes to guarantee a favorable trade.

Nov 13 09:41 PM

[CODERED:]

The GSE's were to the government what the "off balance sheet" entities were to Enron. The buyers had implicit "put" options back to the government on the bad assets they purchased at prices which are higher than the market price / true value.

Nov 14 08:52 AM

[bob adamson:]

Of course the US Treasury’s purchase of trillion and a half dollars in mortgage related debt is (but only in part) monetizing debt. By October of 2008 it became clear that for an unforeseeable future period of time the Treasury would have to soak up that debt or the residential housing market, banking system, the financial system, the US economy and the global economy would simply implode into a deep deflationary depression. By soaking up that debt that fate was dodged and better prospects are at least possible.

The extent of this monetization will, as Mr. Iacono infers, depends on the extent to which mortgagors actually pay off or refinance their mortgages to private lenders and, for those mortgages that are defaulted, the extent to which underlying value of the land exists and can be realized. Given that much of this debt is leveraged the risk of loss caused by mortgage default is correspondingly increased and so therefore the risk that there will be a need to monetize. In short, it is somewhat premature to assume that the trillion and a half dollars in question is monetized but clear that a significant portion will be. We all must hope and press for practical reforms and measures that will sustain the economy, reform its institutions and allow this debt (however it is ultimately shared between government and various classes of debtors) to be either carried , paid down, monetized or defaulted upon in an orderly fashion.

Too many articles such as this by Mr. Iacono seem to imply that there was some better option than for the US Treasury to follow the course described above. The truth is that as of 2008 there were no good options available and the least bad was followed.

To Sean Olender, good to read your comments which nicely balance the 'let them eat cake' comments of some others.

Nov 14 12:36 PM

[bob adamson:]

It is relevant to note that in Canada where I live the Federal Government at the end of 2008 purchased a substantial portion of the residential mortgage debt held by the Canadian Chartered Banks. Remembering that the Canadian economy is about 1/10th the size of that in the US, the value of this Canadian Government purchase was at least roughly equivalent for Canada to the trillion and a half dollars in US mortgage related debt referred to in Mr. Iacono’s article. At this time the Canadian housing market had only softened modestly, there was little or no increase in mortgage defaults, these mortgages were well secured by personal guarantees and federal insurance and the banks were in good financial shape and seen to be so. Why did the government buy and the banks sell and why did both consider that this was a good thing to do?

The issue for both the banks and the Canadian Government was the growing threat of a global credit freeze. While Canada’s domestic economy was in much better shape than the economies of most other nations, the fact that banks globally were refusing to lend to each other and to companies and individuals that were good credit risks and borrowing for sound reasons threatened Canada’s economy and banking system; the risk was that the global credit crunch threat would be quickly imported into Canada. The purchase of well over 100 billion Canadian dollars of mortgage debt from the Canadian banks by the Canadian Government meant that the banks had amply short term money to lend to each other and to their customers and Canada had a good long term investment in sound mortgages (which, in any event, it had guaranteed anyway). More importantly, this was a vote of confidence (soundly placed) in the Canadian economy.

The relevance of the forgoing to the discussion about Mr. Iacono’s article is that there are some broad parallels between what the US Federal Treasury did and the actions of the Canadian Government. It is true that the underlying quality of the mortgage related debt in each case may prove in the long run to have been significantly different and that the consequent risk that Canada will have to monetize a portion of its acquired debt is small. The differences are not, however, so much in the nature or motivation of the debt purchase initiatives in the two countries as in the quality and extent of the potential risk for the state in each case.

The comments are noted of others to the effect that the capacity of the US Fed to hold this debt to maturity may be constrained and this will force monetization to the extent that there is not a viable market in which the US Fed can sell holdings that it can no longer hold. This is clearly a significant element of the contingent risk that was undertaken to forestall the meltdown threatened clearly by October of 2008.

In short, the forgoing illustrates that the monetizing risk to which Mr. Iacono refers is a contingent risk taken to address a clear and present risk of economic collapse.

Nov 14 05:12 PM

[User 109762:]

Sean..

But I think it's more than you may realize. I live in the Silicon Valley where 20 year olds often pass by in brand new Tesla Roadsters or Mercedes SL convertibles and you see at least four times a week a Lamborghini Gallardo parked at a restaurant.

Don't trust your eyes,they can decieve you,many of these people will do whatever it takes to been seen in that Mercedes etc..but behind the scenes,it leased or rented or bought with debt up to their eyeballs.Its no different really than as to what happened with the real estate boom and then crash..people bought half a million dollar homes on huge loans/debt,you could drive thru a housing development and look at these houses and say wow..but underneath the flash and wow..these people no real net worth,it was all bought on large debt and smoke and mirrors

Nov 15 06:22 AM

[Gary A:]

Raising the value of underlying collateral was fine when gas was relatively cheap in the 70's and wages were rising. It won't work now because assets will explode in cost and the recovery will tank again. This time is truly different but that intellectually bankrupt Larry Summers doesn't get the difference. We are in a depression because we can't afford to raise the value of the underlying collateral.


On Nov 12 07:20 PM The Geoffster wrote:

> The FED can only hope that inflation will be sufficient to raise
> the value of the underlying collateral. Right now, it's pushing on
> a string.

Nov 15 11:00 AM

[437339:]

Sean,

Your spot on Bro- Amerika is a cold , cold, place !

in north metro Atlanta , in subdivisions where folks have lived next to each other for 9-12 years , folks have NEVER spoken
to one another . Yes " happy thoughts " is ALL they want to hear ". Give them all MORE prozac + paxil rather than face reality .

Nov 16 08:29 PM