If you got money, don't spend it. Hunker down. Don't listen to those miscreants in Capitol Hill. This is a deflationary environment that happened because there WAS a lack of collateral when you printed the money the first time.
Oh, you forgot what an investment bank is, did you? It simply is an institution whom the Government delegates money printing to. The government decides to print money for the public. You print money for the private sector, and you can do that provided the enterprise needing the money is worthwhile, or in other words, well collateralized.
Initially, you did the right thing. But in recent years, you PRINTED money with INSUFFICIENT collateral, did you not? $100 house whom you end up loaning $150?
Listen to me, I learned from you two once. Now it's time I pay the favor.
1. When you get the money from Paulson, curtail your lending and curtail hard. How hard? Create a supply and demand curve for mortgages, keep tweaking the credit requirement until you get approximately credit expansion of 3-4% a year. Otherwise you'd be diluting the value of the house with worthless paper, like what you just did. If that point is 35% down-payment, then so be it - that is the natural growth of credit that the public can SUPPORT for the long run.
2. Increase mortgage rate. A lot. Realize that housing is a twenty year cycle with 19 years of zero losses and 1 year of 100% loss. Charging the average, of 5% loss for example, is not the right thing to do, because when the 100% comes you would immediately be insolvent. And the 100% loss is NOT known up front where it would happen be it in year 1 or year 20. Charge a lot and combine with the credit restriction so that you don't expand credit greater than the public expand theirs, which is observable through the inflation rate.
For the congress people I have also a reminder. That the GSE was created so USA doesn't have to appear to borrow too much, was it not? So you ask private money to provide some equity, and it can survive because USA is like the illegitimate parent of these lovechilds. What happens if the children are broke because of you asking them to send money to you? They'd be looking for you and they ain't happy. Hands off - the deflationary process happens because the people you trusted, including the GSEs, were printing money indiscriminately to invest in projects that turns to be less worthwhile than the amount of money invested. It is USELESS trying to add more money into these "projects" because the value just isn't there to begin with. You cannot stop house prices to revert to what long term supply and demand dictates. Hunker down, spend less, and let prices go where they may.
The right enemy
5 years ago