Monday, August 29, 2011

Relevant Articles

I've been derelict in referencing articles relevant to my blog, but here are three I perused over the weekend. (A quick aside - most of these articles come from Yahoo Finance. I like to use yahoo as a browser for several reasons, and their articles are esay to access and comment on.)

#1: "Debt Will Haunt the Market for Years to Come" by Howard Gold. Title pretty much says it all, altough I would assume that to mean that we 'stay the course' and do nothing. The article quotes Raghuram Rajan (google him up). Relevant quotes: "Recoveries from crises that result in overleveraged balance sheets are slow and are typically resistant to traditional macroeconomic stimulus."
"Overleveraged households cannot spend, banks cannot lend and governments cannot stimulate." Another quote attributed to Carmen Reinhart and Kenneth Rogoff:
"...Large public debt overhangs do not unwind quickly, and seldom painlessly... The debt-reduction process goes on for an average of about seven years."

#2: "Beranke Offers No New Steps But Leans On Congress" by AP Economics writers Martin Crutsinger & Paul Wiseman. Relevant quotes: "The economy is still hobbled by a depressed housing market ..." and "They say the main problem is that consumer spending remains too weak. So businesses feel little incentive to hire, expand and invest."

#3: "Recovering From a Balance-Sheet Recession" by Laura D'Andrea Tyson. While I have issues with some of the article, she does point out: "To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand ...". "In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabalize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending." Although she definitely grasps the big picture, I disagree with 'reducing principal balances' for two reasons. 1) I don't think that it's necessary. If you reduce the cost of home ownership by lowering interest rates, the market turns around and home values increase, so the principal comes back. 2) Reducing principal hurts the holders of the all the toxic paper out there, and it is substantial. Since home values will come back once the market turns around, just lower the interest rates as I propose and pay off as many of the bad loans as possible at face value.