Our Social Astronomy

Posted by: Tom Keene on September 27, 2010

Real Rates Matter

As a rule, we don’t read enough about saving. Saving in economics is different than saving at the kitchen table. Read more on saving. Martin Feldstein addresses Japan saving here. One percent minus a minus one percent deflation is a positive two percent deflation-adjusted real rate.


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PIDSDPS INDEX GP Y ROLL: Here is U.S. saving compared to disposable income. The half-century+ average is just above 7%. Economists care about “personal” savings but on a macro basis really care about the all-in savings. Say, Private savings (personal and business) and government savings.


Ready, Set, Cure

Here is a terrific proposal on exiting the housing mess. Truly, a must-read by William C. Wheaton. The distinction, edge-of-October 2010, is we have not begun to address the lender participation in any organized writedown.


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FORLTOTL INDEX GP Q ROLL: Wow. I new this was bad, but this bad? Here is foreclosures as a percent of loans.


Research (Disinflation or Deflation?)

Carl Weinberg at High Frequency Economics does not mince words: “The day Japan’s current account turns negative will be the day JGB yields explode.”


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GJGB10 INDEX GP Q ROLL: At 1.005% for 10-years, it is the gift that keeps on giving. It will be interesting to see the interdependent responses if we have a month of +2% yields in Japan.


Many notes on dis-inflation and deflation. This is the chart, below, that keeps cropping up. It is one measure of the inflation “guess” five years forward. Note how it is decidedly lower than 2004 to 2008.


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USGGBE05 INDEX GP Q ROLL: Thanks BNP/Paribas and Goldman Sachs.

Desai’s Revenge

Which book should I read? Many, but you’d do worse starting here. And then, celebrate. Lord Desai’s treatise on capitalism rewards on each-and-every page. There is the obvious and less obvious as he goes in search of our social astronomy.

Discuss.

Reader Comments

MattJ

September 29, 2010 4:06 PM

Wheaton's proposal is interesting, and seems the best of the proposals I have seen for dealing with the large number of underwater mortgages out there; however, it seems to have the same two problems all such proposals have.

1) It is a huge windfall for people who borrowed late and/or with no money down. Consider neighbors who bought $100k houses on the same day; the first put 20% down, and took an $80k mortgage. The second put 0% down, and took a $100k mortgage. Since they bought, they have each paid down $5k in principle. Now, the houses are valued at $75k.

The first homeowner owes $95k; he takes the deal Wheaton proposes, and convert his mortgage to $75k, and the bank gets the right to 50% appreciation going forward up to $20k. The second owner owes the $75k, and gets nothing. Nice deal for the first guy.

From the polls I have seen, most of us have been opposed to bailing out those who are underwater. This deal should include an unsecured note from the borrower to the lender for the difference between the amount owed and the value of the claim on future appreciation.

2) The major problem with all of the proposals for clearing the mortgage market since the days of the Super-CIV has been the willingness and ability of the banking system to acknowledge their losses. CLearly, with Wheaton's proposal, the lender would have to write off the difference between the amount of the mortgage reduction and the value of the claim on future appreciation. I would assume this would be roughly the difference between the lenders' current mark to model and the old mark to market that the banking system has been fighting so vigorously against. One thing the US taxpayer has opposed even more than bailing out the underwater borrower has been bailing out the insolvent lenders.

Until we as a country can agree to what extent we are willing to spread the losses incurred by thy imprudent lending of the last decade from those who currently stand to take them to those who don't, proposals like this have little chance of success.

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EconoChat captures Tom Keene's thoughts on economics, finance and investment. He is editor-at-large for Bloomberg News and hosts Bloomberg Surveillance and Bloomberg on the Economy on NYC1130, Sirius 129 and XM 130 and Surveillance Midday on Bloomberg Television. His complete interviews are at Tom Keene on Demand. Look for Tom on twitter @tomkeene

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