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Saturday, August 14, 2010

The truth behind Encouraging home ownership

Here is a link I got today through Yves Smith at Feds rethink policies that encourage home ownership - With the amount hubris exposed in recent months I doubt if home ownership was promoted for the sake of citizens.

Asset backed paper vs. Casino's deck of cards
A casino has as many decks of cards as it needs. The real world casino "the financial markets" do not have such access. They need each card to be backed by an "asset". Asset could be wide variety of things. It could securities or bonds which are ownership title of businesses. Assets could be the resources in stock piles or a right to use (mining) those resource like oil, coal etc. Now what if there is too much money at the hands of the too few people (mostly what I call big money - funds). These people can gamble a bit but soon the price behind one deck of cards goes through the roof. That is the time to bring in additional deck. So how can we create such real world card decks easily? Home mortgages!

If homes were exhausted, we can create MBS, CDO - more decks! Once that is done we can create default swaps on them. If those were exhausted we can create CDS on insurers of CDOs. Jolly God! here is the eternal fountain of asset paper - inexhaustible source of deck of cards!

Morality for you - profits for me!
I am surprised how economist expect the homo economicus can be expected to behave rationally for everything else except for mortgages defaults. I would rather encourage people who cannot pay to default. After all companies do it all the time and their credit rating does not get impacted.