Where is all the money coming from?

[brandyn]

One piece of this puzzle that still has me baffled is why lenders are so eager to throw money into this particular fire.

Or, more to the point: Who’s money is it?

Does this come down to droves of bean counters at banks, S&L’s, mortgage funds, and whatnot, all crunching the numbers based on formulae that naively project recent growth forward and conclude it’s a great investment and so in the money goes? Is it foreign countries’ forced petrodollar purchases recycling as loans back to the US (treasuries mostly) and causing a general glut of cash which the mortgage industry is simply being forced to absorb? Is it, as with the S&L scandal of the 80’s, simply that the law permits throwing other people’s money into a fire (and taking your cut along the way) as long as you follow the rules, while simultaneously individual investors naively believe the rules are protecting them?

In the event of a significant decline in prices with associated (and probably historically unprecidented) foreclosure rates, who’s going to be feeling the pain? Home owners, obviously, but some not so much since many these days have nothing at stake–who’s taking that risk for them, and why?

Where is all this money coming from? Who actually paid for all those refi-funded Hummers?

[powayseller]

Holding the bag will be the investors in these mortgages. Investors funded the houses and refinancing boom and America’s big spending spree: Pension funds, hedge funds, and other investors who own mortgage backed securities, collaterialized mortgage obligations, and first and second deeds of trust, and bonds in government sponsored enterprises, and banks who directly hold these loans (i.e. Golden West Financial). Also stock holders in Fannie Mae, Freddie Mac, and Ginnie Mae, for mortgages under the “conventional” limit.

There doesn’t appear to be any data on who holds these investments. It’s not tracked, as far as I know.

The housing bubble collapse will wipe out some individual homeowners completely, and the general economy will suffer right along with them. Loan defaults will wipe out investors, pension funds, hedge funds. I think the fall out could be huge, but again, without the data regarding who’s holding what, we won’t know who’s swimming naked until the tide goes out (gotta love that quote!).

[DiveUrge]

All I want to know, given the expectation that the pain will be devastating & widespread, is what sort of investment is likely to feel the pain last — The last to get crushed. It might also be nice to have a plan for how to actually profit on the decline.

The problem is, this is all uncharted economic territory so seeing what worked last time isn’t likely to work now. The bubble makes all previous bubble look tame and the globalization of finance essentially means the spreading of pain could be almost intantaneous.

[brandyn]

Agreed. That’s certainly part of the broader motivation behind my question.

Along those lines, I wonder especially about the future value of the US $, and whether it is better to be in, say, stocks vs. something closer to “cash”. On one hand, will all the fluid markets retract, leaving a “cash is king” depression, or on the other hand will inflation soar making your cash worthless?

I’d be curious if anyone has a historical perspective on how this has worked in the past. (Or a good theory for how it will work now 🙂

On first blush, it seems that an over-extended credit market (which describes the entire US economy, not just the housing sector) has no choice but the lead to some serious inflation–when the people who owe are reluctant or unable to pay, the value of their IOU’s (which is all a dollar is) goes down…

[powayseller]

I’ve read good arguments for both sides. Goldbugs, cash holders, people shorting stocks, those who think we’ll have inflation vs deflation. No one can predict how this will play out. Lots of people make money trying to convince others that their vision will come to pass.

[DiveUrge]

We’ve experienced excess liquidity for years and I would contend inflation. Just because the government’s inflation index doesn’t show a large number doesn’t mean inflation doesn’t exist. Pick another measure!

Commodity prices have skyrocketed. Asset prices (RE) have skyrocketed. Energy, the ultimate tax, has shot up. Food prices are much much higher. The dollar is sort of weak…

It’s only a matter of time before all the evidence mounts up and shows up in the government’s index. I favor the inflation side of the arguement. I hesitate to buy gold however as it’s already very high. I may be moving some $$$$$$$ into gold stocks though rather than cash. Long dated maturity notes are the last place I would put any $$$$… perhaps TIPS?

[mckirkus]

That’s sort of asking someone on the Titanic if it’s better to hide in the galley or the boiler room. If you buy gold and it depreciates 50% but everything else depreciates more did you lose?

[brandyn]

“If you buy gold and it depreciates 50% but everything else depreciates more did you lose?”

Yes, since I can’t think of any meaning to gold depreciating other than to say it’s cash value went down–in which case, you lose compared to holding cash (or equivalents).

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