« BACK  |  PRINT

RS

FRONT PAGE CONTRIBUTOR

Unintended Consequences

Mortgage Interest Rates

By: Francis Cianfrocca (Diary)  |  October 17th, 2008 at 08:48 AM  | 

RESIZE: AAA

There are always unintended consequences. And they’re always so easy to see in hindsight.

So the government announces that banks will not be allowed to fail. What do you do if you’re a rational investor? You reason that there’s a floor under the debt-securities issued by these banks. You figure you might be able to exchange them for honest-to-goodness Treasury paper later on.

So you buy up bank-issued paper. What do you sell, to make room in your portfolio? Fannie/Freddie debt, which costs more because it’s presumed to be safer, so it yields less. It’s something like a pair-trade, or an arbitrage.

Unintended consequence? Retail mortgage rates have shot up nearly a full percentage point in just the last few days. Which makes housing all the less valuable and exacerbates the underlying problem.

This is fun, isn’t it?

Tags: , , , , ,

COMMENTS

POSTING RULES  |  LOGIN TO COMMENT  |  REGISTER TODAY
  • alchemist17

    that people have such faith in the government to fix and run things. What’s the last government action where you came out and said “Wow, that was well planned and executed, and went off flawlessly”?

    I fully expect the government to make a mess of this like they do everything else. I suppose it’s too much to hope that once we get through this that they leave well enough alone, even to the extent of allowing the natural recessions to run their course instead of delaying them in favor of one big crisis later.

  • aaronbg

    Too bad no one would listen. Too bad so many here were ready to get in bed with awful fiscal policy out of fear.

    I would equate it to a guy getting told he has AIDS and since he has AIDS why not have sex with the girl with Herpes…only problem is that the test for AIDS was wrong….now he just has herpes for the rest of his very long life.

    • blackhedd

      …the financial crisis wasn’t real. You’re saying the test was wrong and the patient didn’t have AIDS after all.

      You also have to assume that herpes is forever.

      To the first point: how many business people do you know that are suddenly very frightened and thinking about laying people off, because clients are bailing on new purchases?

      I know a lot of them. I’m one of them myself. You’re more than welcome to bury your head in the sand, but that won’t work for me. I have to make payroll every two weeks. This crisis is the real thing.

      To the second point: this is coming at a very unfortunate time, because we’re about to hand the reins over to a much-stronger Democratic majority. If Republicans had held on in this election, I’d have been reasonably confident that the extraordinary structures put in place to deal with the crisis would be temporary. But with Democrats in power, permanent herpes is a pretty good bet.

      • birdmojo

        Therefore the bailout was the right thing to do.

        • aaronbg

          The crisis was and is real…I just didn’t think it was AIDS.

          The point is that the crisis blinded the common sense.

          The AIDS blinded the man to the other diseases he could get.

          I understand that people in the business got frightened but instead of coming out and calming the fear and treating the root causes the Gov’t came out and said WE ARE ALL DOOMED. This only bred more fear and when people are scared they do stupid stuff. People started taking money out of the market because of fear, and this caused more fear because of a dropping stock market. This is a perfect example of a self fulfilled prophecy.

  • jpers36

    I mean, no one thought these bailouts would have negative consequences.

    We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all. — 2008 Republican platform

  • Herodotus

    It will take several years at the very least for all the economic distortions from the bailout to become apparent.

  • asleep06

    Blackhedd, you don’t have to worry.

    All these wonderful decisions our wise elders in power are making that are crippling future generations of Americans won’t actualize their worst consequences till after you’re dead.

    So everything’s fine for you. What’s to worry about? You got your own. That’s all that really matters, isn’t it?

  • Alberta

    Whether you were down with the socialite socialism or not, we now got like a trillion dollars in the pipeline. Thats gotta help.

    Hey black, why are you worried about mortgage rates? Dont you know that Obama or McCain are gonna pay for them for us? On a serious note, I woulda figured with all the intervention talk about mortgages (renegotiation of principle and rates talk), that a bank would only give you one if you had 75% down and payed 20 points on the interest.

    • gamecock

      repealing SarBox and infuisng banks with money for NEW loans and not a $700B bailout of the bad paper, in about 4-5 detailed columns during the crisis.

      • gamecock

        Something had to be done to ensure liquidity for NEW loans, but that didn’t require the bailout as first proposed, nor even the improved version that passed and the even better version that is being implemented.

        No reason to reward gamblers on housing prices to get to NEW loans. It doesn’t matter to WHOM the new loans go.

        • gamecock

          We are going to have a deep recession and nothing can stop it. Too much debt for too long.

  • aaronbg

    You are all correct that no one could predict what the unintended consequences would be, but that is not the point at all.

    The point is precisely that you cannot predict those. The point is that we could predict that there would be unintended consequences and that none of you would listen.

    You sold out for a lemon due to fear of known consequences, and know we will all reap the unintended consequences.

  • streetwise

    That woould be life, the leading cause of death, and also the leading cause of unintended consequences. :>)

    • Herodotus

      but I am not sure if we are going to see a deep recession, or even a mild one anytime soon in this country.

      • gamecock

        5

        • Herodotus

          Increases in the money supply do though have to increase inflationary pressures upon the economy.

          • kyle8

            I mean, yes we will have a recession, but not necessarily a long one. The global economy we have now is not the same as the national economy we had in the past.

            The global economy is robust, with the ability to move capital quickly to areas of need.

            Debt is a big problem you are right about that, but I think it will be more a problem of inflation rather than low or negative growth.

          • terilyn

            we are smack in a recession. Scary……

          • Alberta

            If you think giving the banks a trillion dollars for free wont help entice banks to loan again…I dunno man, what can I say. They only got so much debt to repay. Once they do that with the free money, they gotta lend it. Like you say, inflationary pressure will make keeping the money a stupid move.

          • LibRick

            “What’s the last government action where you came out and said “Wow, that was well planned and executed, and went off flawlessly”?

            Government covers a lot of ground. I doubt “flawlessly” is achieved in any endeavor but among Federal, State, or Local government, much has been accomplished. Here’s some examples:

            In my opinion, Desert Storm was planned and executed exceedingly well (90′s). And… how about Civil Rights legislation (60′s), or Capital Gains cuts (2000′s), or keeping interest rates down. I bought my first house in the 80′s at an adjustable rate starting at 11.5%. — some of you might remember.

            Even, “back in the day,” they planned and executed a Constitution quite well. They even fostered the creation of the greatest free market system the world has ever known.

            Government isn’t perfect but it does work and sometimes really well.

            In this financial situation, the Government is responding, as it always has. The actions are not “flawless” and may even hurt some individuals. Unintended consequences usually occur in large scale reorganization.

            But the Government is responding and in the long run, will help in everyone’s bottom line recovery. I’m confident that America (the People who are the Government) will excel.

          • kyle8

            Yes our military is a pretty good one, pretty effective, but not efficient. In fact it has long been one of the most expensive and wasteful parts of the government.

            As to tax cuts and the like, how is letting you keep more of your own money an example of a good government program?

            I can actually think of a few that went well, such as the Hoover Dam and the Interstate Highway system, but those are infrastructure which few people are opposed to, they are also old programs.

            How much good has the war on poverty done for us? or the war on drugs? Or the increased meddling of the federal government into education. Or has the dept of energy actually created any energy?

          • gamecock

            Not a government program. No.

            rather, that we turn Americans loose to drill, drill, drill

            We have lived off the fat of the land for 20+ years, passing paper around nd then eating the seed corn: our homes

            and the piper is here

            we are in a recession now

            and it will not be pretty no matter who is elected

            it will be MUCH worse if its Obama

            but no world economy, esp one that is dependent on selling to us, will save us

            they will go down too

            worse

          • LibRick

            but consider this…

            Military — Economically speaking, no Military is efficient to a Government’s current “bottom line.” History clearly shows that the Military does play an integral role in advancing economic opportunities and safety for it’s citizens. Factored in, the perceived efficiency would likely increase, dramatically.

            Taxes — If you have a government like ours, then some taxes are necessary. How do you have a Military with no taxes in the modern world? You want to keep “all” your money? What chance would you have of that if our tax funded military was not ensuring that?

            Infrastructure — We agree. Government needs to invest in all of us through sensible infrastructure projects. Everyone benefits and it’s something government can do well.

            War on Poverty, Drugs — Clearly not efficient. We all wish this could be fixed but government is not the way. Good family values are. Government should focus on that.

            Energy — The Government can play a big role in this. They can make it advantageous for businesses to push the limits and deliver technologies that free us from being mid east oil junkies.

            Just my thoughts.

          • alchemist17

            But I still don’t agree.

            Desert Storm – tactically a brilliant operation. Strategically, the price we paid for “multinational” support we didn’t need militarily was to prevent us from sweeping in and occupying Iraq at the time, which might have saved us from going back there in 2003.

            Civil Rights Legislation – For all the hoopla around this, I think far more significant were the protests and actions that convinced the people of the rightness of their cause. Racism wasn’t largely ended by government action, it was ended by people realizing that they were wrong and changing their behavior.

            Capital Gains – the rate should be 0%. The fact that 15% is all they could manage isn’t all that great to me.

            Interest Rates – Sure, they’ve managed interest rates to “fine tune” the economy. So instead of small frequent recessions we get rare ones that threaten the whole financial system. How is this better again?

            I agree that the writing of the Constitution and Bill of Rights was a good start, but it was primarily the negative aspects that limited government that I’d champion.

          • Susannah

            Aaron, Biggator5 emailed me and asked me to tell you that you are his hero and to please email him at admin@biggator5.net. I am just passing on the message. :-)

          • LibRick

            on my point that government, though not flawless, gets the job done in many cases?

            I know my examples aren’t bullet-proof, as you have clearly shown but America is us and we are the government. America does fall short of a perfect solution, but for 232 years we’ve consistently had the best solution.

            Can’t please all of the people all of the time kinda thing. But we get it right most of the time.

          • alchemist17

            is in the idea that “for 232 years we’ve consistently had the best solution”. I don’t really believe that – I think that initially we had the best non-solutions, leaving most of the important decisions to the states and the people and keeping the federal government out of the way.

            Over the course of the 20th century I think we’ve gotten worse – I can’t see Social Security, Medicare, the Great Society, Nixon/Carter economics, or fiscal/monetary fine-tuning to have been particularly successful, let alone the “best solution”. In fact, I think many of them just made things worse.

            Broadly speaking I see government as the highest-cost, lowest-quality provider of goods/services you’re likely to find – significant change often requires an act of Congress, and effective competition is usually minimal. I’m not claiming that government can’t do the job in some cases, but rather that non-governmental actors could do it cheaper and more efficiently.

          • Herodotus

            If the problem (or part there of) is that there is too much debt, then more debt might not be the solution?

          • Herodotus

            Perhaps it would be a good idea to ask yourself: how could aNy governmental or quasi-governmental action produce less that its stated desired results.

          • Herodotus