Being somewhat preoccupied with a tour promoting my new book ( All The Devils Are Here: The Hidden History of the Financial Crisis, co-authored by Joe Nocera) and guessing that you, dear reader, are still a tad besotted from eating too much Thanksgiving turkey and apple pie (I certainly did), I lay before you this week a platter of lighter fare. What follows are nine intriguing thoughts, ideas, contradictions, and absurdities that I've lately collected but don't necessarily endorse. Your criticisms, follow-ups, and other reactions are, as ever, welcome in the comment space below. Happy grazing!
The housing crisis ain't over. My friend and fellow Williams graduate David Pesikoff this fall observed the following in a weekly newsletter for investors in his hedge fund:
So while we have sideshows like Greece and the Fed and our trade deficit and on and on, it's important to remember what got us into this mess we're in: housing. The price bubble we created in housing made the NASDAQ bubble of 2000 look like the work of amateurs. While home real estate value is back to where it was in 2003, mortgage debt is up 50% or $3.4 trillion. So while prices may have round-tripped into fair territory, it will take years to work off the increase in debt. And if we get deflation, all bets are off.
Have a nice day!
Are state and local bonds safe? On Nov. 8, the credit-rating agency Standard & Poor's released several reports on the health of municipalities and states. S&P's overall take was somewhat reassuring: "From a credit perspective, actions to restore fiscal balance will avert default." Then, on Nov. 18, state insurance regulators asked several rating agencies whether their ratings reflected up-to-date information about major factors like pension and health care costs. The agencies said that their ratings accurately reflected risk, and that they had strengthened their municipal-bond teams.
Should we believe them?
Matti Peltonen, a senior regulator in the New York State Insurance Department, told the Wall Street Journal that finding an alternative method "just isn't doable" and that "in all likelihood, we will be relying on the rating agencies going forward." In other words, the world is still every bit as dependent on the rating agencies as it was before the crisis. Analyst Meredith Whitney is bravely trying to start her own bond-ratings firm. But will Whitney meet with more success than others who previously tried and failed to challenge the incumbents with more rigorous research?
Is the mortgage boom really over? The persistence of the housing crisis (see above) would suggest it is. But in mid-October, the mortgage-finance bible Mortgage Daily reported that a mortgage lender in California was actually planning to increase its staff by some 80 percent and more than double its home-loan production. The growth, said Mortgage Daily, was being funded by an $8 million investment. The lender is Skyline Financial, and its CEO is a man named Bill Dallas, who founded First Franklin (which eventually contributed to Merrill Lynch's downfall) and then Ownit (which declared bankruptcy in late 2006, giving it the distinction of being one of the first lenders to fall victim to the spreading crisis). I like Bill Dallas because he is one of the few participants willing to look back at the mortgage meltdown with a fair amount of honesty. But if I had $8 million to invest, I don't think this is where I'd put it.
Stop worrying about the budget deficit. My friend John Hempton, who writes a brilliant financial blog, is bullish on the United States. I am not, but I find Hempton's analysis a breath of fresh air. In a recent e-mail, he wrote:
There is 5 percent of GDP on the table if you ever get health insurance right. Five percent of GDP covers many, many ills. Indeed, getting health right is enough spondulick [that's Aussie slang for money] to solve all the core U.S. problems. Australia spends 8 percent of GDP less than the U.S. and gets better health outcomes. That is true no matter how you cut it. The American system is imbecilic. In imbecilic I see opportunity.