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Asteve

Activist

Posts:922

20/06/2008 3:51 AM	Alert
A heart warming story on Reuters prompts the obvious question: Which are the hedge fund managers who have lent into even riskier UK markets? This, I hope, explains to a large extent where the money came from to drive house prices higher. It has never been about demand for housing - that's been pretty steady... it has all been about hedge funds taking highly leveraged positions (20-1 in the case above) in mortgage backed securities... in spite of the fact that they knew that the "investment" was bad... and where pension funds have invested in hedge funds. I wonder how many priced-out people pay into a pension that invests in hedge funds that speculate against them? I wonder if the FSA will ever get their act together - I wonder if we'll see similar prosecutions relating to wrongdoing with UK mortgage backed securities? The Times reports that Bear Stearns weren't the only precarious hedge fund.

chefdave

Activist

Posts:470

20/06/2008 10:03 AM	Alert
Arrested development...A truely awesome sitcom. Asteve wrote: "I wonder how many priced-out people pay into a pension that invests in hedge funds that speculate against them?" Conversely, I wonder how many baby boomers pension contributions have inadvetantly made them 'property rich' at the expense of riskier investments made on their behalf. I have some sympathy for hedge fund & pension managers that are expected to make record profits else risk losing their job, and knowing that these two have been arrested (though nor charged or sentenced yet) doesn't make me feel any happier. In a way you could liken it to a UK bank/building society that decided to stick to their guns and only lend prudently at 3.5x salary max. During the monster boom when prices are rising exponentially in relation to salaries business would have been increasingly difficult to come by, which is undesireable from shareholder point of view, and as the assets were increasing in value the risk on paper appeared lower anyway even if lending criteria loosened. Even if the managers did know that the market 'was toast' these bonds were still getting top ratings from agencies such as Standard and Poor and so if they only invested in these that could be used as a credible defence, which then puts others into the spotlight. I would like to see people pay the price for jeopodising the financial security of the uk but in truth where would we start? Most of the country were happy with the results at the time and it was only a few internet bods like us that really paid attention to the obvious risks.

Asteve

Activist

Posts:922

21/06/2008 1:35 PM	Alert
I don't think that asking what proportions of pensions for the "property rich" are dependent on risky loans likely to cost them dear is converse... on the contrary. ;-) I don't have sympathy for the hedge fund managers, but I accept that they did not act alone. The managers of these funds are paid spectacular bonuses and we expect only that they act honestly in favour of those whose money they invest. Of course the ratings agencies and the investment banks were complicit - may there be many more arrests - and, hopefully, convictions. In my opinion, the whole leveraged-investment structured-finance deal was a sham - and the perpetrators knew from the outset that they were acting deceptively. The ludicrous sums paid as bonuses oiled a corrupt system and I am almost certain that the treasury knew full-well what was going on. I can respect the perpetrators - in the same way as I respect the great train robbers and other audacious criminals. I do not think that their criminal conduct should go unpunished and I do not believe that these people should be able to enjoy the proceeds of crime. I can not see any way in which I can respect someone who outright lies to investors before taking their money. Sure, it would help if the investors were less stupid... but I do not think that this absolves the fully-aware perpetrators who were milking spectacular wealth from the confidence trick.

Magrathea

Activist

Posts:430

25/06/2008 5:07 AM	Alert
Asteve, you are ignoring chefdave’s point - Here- “I have some sympathy for hedge fund & pension managers that are expected to make record profits else risk losing their job” The same dismal logic cornered buyers into LYING about their income The same dismal logic cornered lenders into relaxing loan requirements The same dismal logic cornered the government into keeping money cheaper than it should have been If most of the community and government is being cornered into dishonesty by a dismal logic surrounding real estate then there is something SYSTEMICALLY WRONG. It is not a matter of these people’s dishonesty but of fundamental flaw in the reward systems real estate creates. In your enthusiasm for a particular set of convictions you are missing most of the problem

Asteve

Activist

Posts:922

26/06/2008 6:26 AM	Alert
Nope, I don't think I was missing Dave's point... I was suggesting that it was supportive rather than contrary to my own. Your comments about "dismal logic" are all true. Where you miss the point is that you assume other people here don't grasp the nature of land. This point of yours is a desperately simple concept - but it is not exclusive. Ask yourself: what (apart from land itself) leads to our current sad situation? Then ask if these other factors are more easily influenced. If the problem is the price of land, what, other than the land, affects this equation? If you answer "nothing" then I think it is you who has missed the point.

plainservice

Concerned Citizen

Posts:90

26/06/2008 4:05 PM	Alert
This, I hope, explains to a large extent where the money came from to drive house prices higher. Well that is a very misleading statement, it does not say anywhere that hedge funds where buying up houses.

Asteve

Activist

Posts:922

27/06/2008 2:01 AM	Alert
Posted By plainservice on 26/06/2008 4:05 PM Well that is a very misleading statement, it does not say anywhere that hedge funds where buying up houses. Erm, can you explain what you mean? Either you've lost me, or I lost you from the outset. No, hedge funds did not buy any houses - houses are risky assets. They simply would not (and could not) do something like that. However, they can and do facilitate (or maybe necessitate - in some circumstances) ordinary people to speculate in over-priced risky assets. The basic idea is this... up-until the 90s, most mortgages were issued by building societies - who lent against savings accounts using fractional reserve. This maintained something of a balance in the UK between savings and mortgage availability. Banks tended not to engage in such practices because money in banks tended to be short-term savings and current accounts... making mortgage lending (of large sums for long periods) too risky. Packaging as bonds allowed commercial banks (with the assistance of investment banks) to bundle mortgages and sell them to "investors" - internationally... hence breaking the previous "constraint" of domestic savings on domestic mortgage lending. Structured finance then came into play - since "investors" typically had no-where-near enough money to buy all the mortgages that banks wanted to earn fees by lending. Structured finance allowed tricks to be played to 'hide' risk and to rate bonds for ~80%+ of the value of every mortgage as being 'as good as cash'. Of course, everyone knew that these bonds were not as 'good as cash' - because they paid a marginally higher interest rate... but it was good enough to satisfy regulators. The upshot of this is that hedge funds were able to use extreme leverage to buy up the majority of the mortgage debt... with leverage of 20x or 40x being common. This means that not only was mortgage lending not constrained by domestic savings, but it was also not constrained by the finances of international investors either - it was like the buyer of your mortgage only needing to have, say 2.5% of the funds they lent you... making up the rest on the "international money markets" - in turn financed by fractional reserve and international central bank lending. The people who lent the money to mortgagors didn't have that money in the first place! To make matters even worse, derivatives were also employed... and bundled to form "Synthetics" - which refer to financial instruments that act like the difference between central bank interest rates and mortgage rates. Synthetics are traded "on margin" which, to an investor, means that every advantage of lending (in terms of the difference between interest rates) can be reaped without having to either borrow or invest even the tiniest fraction of the mortgage amount. To mortgage lenders, synthetics appeared to allow all the risks of lending to be mitigated (at least it appeared enough to satisfy the regulators) hence making the mortgage debt on their balance sheets, effectively, self-financing. So, in short, hedge funds are critical as they are major participants in both the asset-backed and synthetic bond markets. When times are good, they cream massive profits... when times are bad they're bankrupt... and someone else carries the losses. In the case of the recently insolvent Bear Stearns, JPM carried out a "bale out" using bale-out funds from the Federal Reserve. The upshot of this was to devalue every US dollar saved everywhere in the world - and also to devalue the value of every currency supported by a central bank with US$ reserves... through a mechanism equivalent to global currency debasement... which is, of course, highly inflationary. Does this clarify the role of hedge funds in mortgage lending? I've omitted a lot of detail, but I think this conveys the broad picture.

Magrathea

Activist

Posts:430

27/06/2008 3:39 PM	Alert
“Where you miss the point is that you assume other people here don't grasp the nature of land. This point of yours is a desperately simple concept - but it is not exclusive. Ask yourself: what (apart from land itself) leads to our current sad situation? Then ask if these other factors are more easily influenced. If the problem is the price of land, what, other than the land, affects this equation? If you answer "nothing" then I think it is you who has missed the point.” The negative economic effects, of the trump card of land, shift depending in how the problem is negotiated. For instance, if credit and money supply etc is controlled heavily, the privilege expresses itself by rents being higher, and home ownership being lower (people being effectively trapped in renting) and even so, you still have speculative booms & busts. If money is made more available then home ownership rises but so does indebtedness to such a degree that it becomes unmanageable (what we are experiencing now). So, if you aren’t going to do anything about the core causal privilege, you have two main choices. High ownership and high debt leading to low security Low ownership Of course, you can do other things, and leave the cartel power intact, You could unionise heavily and force higher wages; this will push prices upwards, and thereby provide little or no real benefit to workers and eventually end in the destruction of the economy - and other things will tend to ‘alleviate’ land price by the amount they hamper production and so provide no benefit at all to anyone.

Asteve

Activist

Posts:922

28/06/2008 2:22 PM	Alert
Well, I'm afraid, as relevant as land has been throughout history, and will continue to be for the remainder of civilised time as we know it, I do not think it is a "trump card". You argue that there is a choice between "high ownership and high debt" and "low ownership" (and I presume you imply low debt). This is admitting defeat before we start - there is at least one other configuration to be considered: diversified ownership and low debt. The fact that you don't even consider this possibility seriously undermines your position. You might have given up on the idea that people can be free - maybe people are too stupid to be free - but to assume this outcome is to be pessimistic to the point of being self-defeating. While I am not a fan of unionisation, it does not "destroy the economy" - it merely shifts the balance of power - from the supposed "elite" to the supposed "working" class - usually accompanied with a downturn in overall material wealth... though material wealth is not the be-all and end-all. Under certain circumstances it seems obvious that unionised action will prove a long-term benefit... principally if/when a workforce is exploited unfairly. When cooking omelettes one always breaks eggs first. You argue that tight credit leads to higher rents - this is fallacious. Rents are far more likely to rise (relative to the ability of the renters to pay) in the same loose credit conditions that give rise to new indebted home-owners. The key problem is a positive feedback loop between real-estate prices and the suitability of said real-estate as collateral for loans. This results in a reduced social mobility and insane asset bubbles - which, eventually, inevitably, burst. These asset bubbles (and not just the bust, per se.) are hugely damaging both to the economy (in terms of material affluence) and in their emotional impact on individuals and humanity in general. It is for these reasons I feel that we have been substantially let down by regulators and government in allowing dishonest conduct to run rampant within financial services. This is the root cause that makes today's problem worse than those of, say, the 1950s - and it is there that we should look to resolving our problems.

Magrathea

Activist

Posts:430

29/06/2008 9:21 AM	Alert
Asteve wrote: “Well, I'm afraid, as relevant as land has been throughout history, and will continue to be for the remainder of civilised time as we know it, I do not think it is a "trump card".” A trump card because it is finite in extent, irreplaceable and use is unavoidable How would you describe private ownership with such properties? ”You argue that there is a choice between "high ownership and high debt" and "low ownership" (and I presume you imply low debt). “ ASteve, you missed my ‘IF’ statement I said, IF we do things your way and leave the causal privilege untouched then we have those two awful choices I’m not sure what you mean by ‘diversified ownership’, but the important reform that will solve the problem could be called ‘diversified land rent collection’ or ‘universal land rent collection’, so that the ownership of land can’t become an unfair privilege enjoyed by some at the expense of others, no matter what land’s price. “While I am not a fan of unionisation, it does not "destroy the economy" - it merely shifts the balance of power” I was talking about ways the real estate problem could be accommodated Using unionization to try and balance high real estate prices with commensurately high wages will destroy the economy. “You argue that tight credit leads to higher rents - this is fallacious. Rents are far more likely to rise (relative to the ability of the renters to pay) in the same loose credit conditions that give rise to new indebted home-owners.” You misunderstood me Trying to control rising prices by placing controls on borrowing will mean that rents will be higher than they would be without those controls This is because ‘lax lending’ acts as competition to landlordism without that competition the landlord is more empowered In summary my point is that if we refuse to do anything about that central problem of privilege (land) than there is no reasonably fair outcome

Asteve

Activist

Posts:922

29/06/2008 10:26 AM	Alert
"A trump card because it is finite in extent, irreplaceable and use is unavoidable" You can say that about most resources - energy, food, labour, time. Land is not a trump card. "I’m not sure what you mean by ‘diversified ownership’" By diversified ownership I mean ownership by a large group of people... compare and contrast with aristocratic ownership - where a small group of people (of a similar ideological persuasion) are in control - where all may be blinkered in the same counter productive way - irrespective of changes in circumstance. There need be no control on credit or on borrowing - per se - merely a strong requirement for solvency in financial services. The use of SIVs should have been considered criminal - since they amounted to continuing to run a company knowing full-well that it would (soon, if not already) be unable to pay its debts. This is a simple case of fraud and corruption - no different from the scams pulled by gangsters. I think you've an over-simplified view of what constitutes 'lax lending'. In recent years, lending has been lax because the funds that are lent have been dishonestly acquired. It has not mattered to those doing the lending if the debts can be repaid - since that would not affect their bonus. To argue that lax lending acts as a competition to landlord/tenant systems is as wrong headed as the idea that lending vast sums to the third world improved the quality of life of disadvantaged people. It is nothing of the sort. Where credit is unjustifiably easy, it undermines the value of labour - and over-values ownership of assets. The central problem is not land it is fraud. Land has always been a static issue for mankind for thousands of years - fraud, however, waxes and wanes over time.

Magrathea

Activist

Posts:430

29/06/2008 12:25 PM	Alert
A trump card because it is finite in extent, irreplaceable and use is unavoidable" "You can say that about most resources - energy, food, labour, time. Land is not a trump card." No you can't Energy is effectively produced, though technically it is collected from the environment and access to the environment (land) is the only contraint on it's 'production' - or more accurately - collection . Energy is also FULLY REPLACEABLE..it can be moved and entirely replaces other energy The same is true for food and labour We do not have private ownership of time (yet) I keep pointing this out to you each time time you try to dismiss this point, and each time your arguments fail, but you just repeat them "By diversified ownership I mean ownership by a large group of people... compare and contrast with aristocratic ownership - where a small group of people (of a similar ideological persuasion) are in control - where all may be blinkered in the same counter productive way - irrespective of changes in circumstance." Which is more or less what i advocate..except you want to the freebies that make this entirely impossible.

Asteve

Activist

Posts:922

29/06/2008 12:44 PM	Alert
My arguments do not fail simply because you deny them. I dismiss your "point" that "only land matters" because it is blatantly and trivially absurd. You suggest in half-baked terms that I "want freebies" - a completely fictitious non sequitur of such a nebulous nature that there isn't much point in attempting refutation. I think you would benefit by seeking some real statistics on progress with land ownership in the UK. We've come quite a long way since the aristocracy exploited the serfs. What's especially wrong today is something quite different.

Magrathea

Activist

Posts:430

17/07/2008 8:01 AM	Alert
"My arguments do not fail simply because you deny them." No, they fail because of logic "I dismiss your "point" that "only land matters" because it is blatantly and trivially absurd." The above is not my point; you keep re-animating this strawman each time i trip you up over this because it acts to obfuscate your error so you don't have to pay any attention to facts "You suggest in half-baked terms that I "want freebies" - a completely fictitious non sequitur of such a nebulous nature that there isn't much point in attempting refutation." A typing error Here is what i meant to write - "Which is more or less what i advocate..except you want to keep the freebies that make this entirely impossible." In other conversations i have explained at length why any system that pays people to hold on to real estate is unworkable

Asteve

Activist

Posts:922

18/07/2008 9:40 AM	Alert
"No, they fail because of logic" That is specious while we do not agree on axioms. "In other conversations i have explained at length why any system that pays people to hold on to real estate is unworkable" Absolutely. I, however, can see more than one fiscal/monetary policy that could achieve this end. It seems quite obvious that you've a blinkered perspective... you assume that my position must be untenable simply because it does not conform exactly to yours. I am a pragmatist not an idealist - I find it less frustrating and far more productive.

Magrathea

Activist

Posts:430

18/07/2008 1:24 PM	Alert
”Absolutely. I, however, can see more than one fiscal/monetary policy that could achieve this end. “ I disagree To back this, I point to the failure of similar restrictions in the past to prevent real estate booms. If the system won’t work if people are paid to hold real estate and in your system real estate booms will result in people being paid to hold real estate and your system will allow real estate booms to occur, then it follows logically that your system won’t work! The reason your reforms will fail is the same reason all the historic restrictions on banking failed to address this problem; you are determined to leave the subsidy to real estate intact and so were they. They did it because they understood the significance, while you want to do it because you can’t see the wood for the trees. “I am a pragmatist not an idealist - I find it less frustrating and far more productive.” It isn’t pragmatism to do the wrong thing because it is easier.

Asteve

Activist

Posts:922

19/07/2008 12:08 PM	Alert
You have not shown that taxation is the only strategy by which the hoarding of land does not benefit the hoarder. The simple fact that we currently have several forms of land-tax in place (namely council tax; business rates and stamp duty) is strong evidence that a tax policy is, in itself, insufficient - and might be counter productive under some circumstances. I disagree that, historically, addressing the financial system held no advantage... this is factually inaccurate. As interesting historic background, I suggest you look into the South Sea bubble in England and Law's Mississippi scheme in France. The key problem is debasement of currency - which nurtures the basis for future poverty and prevents social mobility. Debasement of currency caused the apparent increase in value of assets - when, in fact, what is really happening is a decrease in the value of wages and savings. Debasement of currency (financial fraud) is the most insidious crime there is - and one which, if left unchecked, would necessarily drown any other endeavour. While I have no wish to decrease land tax - and would support any credible reform to increase it - contrary to your claims - it is not a silver bullet. Increasing land tax alone would definitely result in greater poverty for those who do not own land and foster a(n even more) ruthless culture among those who do. The critical point is to prevent there being an advantage in holding real-estate as an investment over holding cash. This is the sole most important key to resolving house prices. I'd rather be a pragmatist working to improve a failing system than an idealist failing to establish a new flawed system.

Magrathea

Activist

Posts:430

19/07/2008 1:45 PM	Alert
“I disagree that, historically, addressing the financial system held no advantage... this is factually inaccurate.” No it isn’t We have had damaging real estate booms under all sorts of banking constraints; some of the most spectacular and damaging while money was (for instance) still connected to the value of gold. “While I have no wish to decrease land tax - and would support any credible reform to increase it - contrary to your claims - it is not a silver bullet. Increasing land tax alone would definitely result in greater poverty for those who do not own land and foster a(n even more) ruthless culture among those who do.” A total nonsense assertion; entirely bald and without even a fig of explanation; unless that is your definition of ‘tax’ goes way outside anything I have remotely advocated If you ask you to back this, do you have anything, or are you just slinging mud around?

slicedcake

Activist

Posts:272

20/07/2008 2:29 AM	Alert
"Increasing land tax alone would definitely result in greater poverty for those who do not own land and foster a(n even more) ruthless culture among those who do.” How would this work? If there is an explanation for this, then I'd be interested in reading about it.

Asteve

Activist

Posts:922

20/07/2008 5:57 AM	Alert
Magrathea: Yes, we've had real-estate booms in the past... and we've had real-estate busts too - as well as periods when real estate has been sensibly priced and where ownership has become more widespread. Thank goodness things have improved since the renaissance - when a handful of aristocrats owned pretty much all the real estate in Britain. Today some 70% of residences are privately owned - and around half of those are free of mortgages. This is spectacular progress - so, at some point, the system must have worked - even if it has not done in recent years. To assume that a "connection with gold" was somehow "correct" is to utterly miss my point. I am vehemently opposed to the gold standard. Under the gold standard we had some of the worst debasement of currency and worst social inequities. The gold standard was not a silver-bullet either (no pun intended). It did allow monopolistic control of credit and for dishonest wealthy individuals to transport untraceable physical wealth from one nation to another in order to avoid taxes, debts, civil and criminal justice. Fiat currency, in itself, is extremely positive for mankind - fraud within credit markets is not. Where debts are falsely accounted in an endemic systemic manner, social injustice will prevail - irrespective of, pretty much, all else. Sliced (I'll reply to your less aggressive approach to Magrathea's objection): I don't have a suitable reference to succinctly justify my claim... to my mind it follows directly from an understanding of the nature of credit. In short, in today's society, real-estate (land) is still considered valid collateral for credit... Consider a typical land-owner with tenants - say he owns the Baker's & Butchers' and the homes occupied by the workers. If the land-owner is taxed on his holdings as a going concern, the costs will be passed on to the tenants. The tenants will not be free to vacate and move to a other premises - since all premises will be subject to the same taxation. The land-owner remains in control... plus, feeling persecuted, he is likely to establish alliances with other land-owners to arrange price-fixing in order to reduce the risk of voids. The real problem is the expansion of credit secured against real-estate. This gives rise to an asymmetric short-term competitive advantage to the owners of real-estate. Where the owner of land can always pay his bills by borrowing against his assets, he controls the market prices - both for rent and for his assets. It is only when there is either a problem with the availability of credit - or the cost of credit - that the balance of power tips the other way. We've just lived through an unusual period... where, while our economy has been stagnant (few new assets have been established) credit expansion has been rampant... and seriously under-priced. This has lead to a bizarre period where not only has it has been possible to fund the acquisition of assets using debt (and almost, or literally, no money) but it has been possible to service the debt with further debt secured on the increasing price of that same asset (think MEW). While the preposterous situation arises in which exponentially increasing credit is available to asset holders, taxing these assets (as opposed to income) will have little effect. The balance of power will remain with the asset owner. The one critical change that will redress this balance is the proper account of risk in the credit markets. Think of it this way... say a 'friend' borrowed £10 from you in January (promising you his unique watch as collateral if he can't pay back) until February... then in February £20, from which he repaid the £10 from January... then in March, £40 - from which he repaid £20 from February - then in April £80 from which he repaid the £40 from March - and in May £160 from which he repaid the £80. By the end of the year, there'll be a loan for £20,480... and £83m by the end of year two. To a lender who does not take account of risk, this appears to be good business... though, I hope, you can see the flaw. This is remarkably similar to what has happened to the housing market. It will continue until, at some point, you say "no, you can't borrow more than last month." At this point, there is a crisis - then a crash... suddenly it becomes necessary to re-appraise the value of the watch... find out what it is really worth. It is important to note that, while credit expanded, the owner of the watch seemed to be a model debtor... he'd not sell the 'golden goose' watch for any price - never failing to repay bigger and bigger loans purely because he always had ample credit. This is exactly what has happened to the housing market. The effect of mortgage credit expansion has dwarfed almost every other economic influence. I could bore you with the mechanisms by which the credit markets were deceived and the manifold ways in which the exponential expansion of credit was kept going - even when it was clearly stupid to an objective observer. I could indicate where I think self-serving political interests hog-tied and undermined regulation; where financial "innovation" debased the nature of money and why this most affected western economies since the mid-1990s. I could explain where the risks now lie and what I anticipate will be the likely consequence... as inept regulators scramble alongside central banks worldwide in order to avoid a collapse of currencies. Where prices are wrong, while taxation may influence the economy, the elephant in the room is not tax, but credit.

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