[ucodegen]

Add to the above, that the Fed has to find the financing for Congress’s deficit spending. That is finance either of two ways:

1) Printing money which increases money supply and is highly inflationary.
2) Issuing treasuries. The yield (fed rate) on the treasuries has to be high enough for people/institutions/countries to want to by it. Too low a rate, and no buyers. This means that the fed may not be able to lower interest rates very far.

[ucodegen]

Add to the above, that the Fed has to find the financing for Congress’s deficit spending. That is finance either of two ways:

1) Printing money which increases money supply and is highly inflationary.
2) Issuing treasuries. The yield (fed rate) on the treasuries has to be high enough for people/institutions/countries to want to by it. Too low a rate, and no buyers. This means that the fed may not be able to lower interest rates very far.

[ucodegen]

Add to the above, that the Fed has to find the financing for Congress’s deficit spending. That is finance either of two ways:

1) Printing money which increases money supply and is highly inflationary.
2) Issuing treasuries. The yield (fed rate) on the treasuries has to be high enough for people/institutions/countries to want to by it. Too low a rate, and no buyers. This means that the fed may not be able to lower interest rates very far.

[ucodegen]

@drunkle

I don’t think you’ll have to worry about ‘stability’. This fix is only temporary. My personal opinion is that Bernanke is trying to handle the economy at too fine a grain level. Either way, there is a lot of equity to balance out. You can do it by inflating everything else up to it.. or deflating the over inflated asset.

Deflating the inflated asset:
This can cause ripples where said assets were levered to purchase other assets. It becomes a house of cards issue. It will take down other assets that are fairly valued in the process as people have to liquidate to cover. Innocents get hurt on this one through the indirect effects (as well as the complicit).

Inflating everything else than the overpriced asset:
Biggest problem here is keeping wages and tax structures adjusted during the inflation. The other thing is to stay out of cash during this period because the value of the currency gets deflated. It has the advantages of also devaluing accumulated imbalance of trade. The complicit in this scenario often have their ‘proceeds’ devalued.

I think the real solution is to place mortgage brokers and RE brokers/agents under similar guidelines as Stock brokers. Houses and stocks are assets that can be invested in. Margin requirements are required for stock. Likewise, margin requirements (LTV) should be required in buying a house. Disclosure requirements exist for stock, they should exist for the state of housing. Stock brokers have to be very careful about pushing a stock as an investment (in particular if they don’t have a CFA/CFP cert) because it can cause them to lose their license. RE brokers should be regulated in the same manner.

In terms of getting the guilty.. this is going to be hard. There are too many. The underlying problem is that they guilty sold off the securities.. a long time ago. They mis-represented the condition of these securities. With the CDOs/MBS(s) being devalued, it is harming innocents instead of the guilty (who are now looking for the next scam) Basically, when a CDO/MBS’s risk factors have been misrepresented, the investor in the security can force the originator to buy it back at face value (as opposed to real value). This has been happening, and is causing the bankruptcy of many of the sub-prime lenders. The problem is that once a sub-prime has gone under, the other people who are trying to force the buyback for misrepresentation, can’t. The company no longer exists.

NOTE: The reduction of interest rates is not really a bailout. The guilty have already flown the coop. I anticipated a drop about this time.. but anticipate further tightening down the road. Bernanke is in a bind. He has to prevent a total collapse, while getting deficit spending financed for Congress and preventing inflation. The only tools he has to do this are; the prime rate, fractional reserve rates and money supply.

[ucodegen]

@drunkle

I don’t think you’ll have to worry about ‘stability’. This fix is only temporary. My personal opinion is that Bernanke is trying to handle the economy at too fine a grain level. Either way, there is a lot of equity to balance out. You can do it by inflating everything else up to it.. or deflating the over inflated asset.

Deflating the inflated asset:
This can cause ripples where said assets were levered to purchase other assets. It becomes a house of cards issue. It will take down other assets that are fairly valued in the process as people have to liquidate to cover. Innocents get hurt on this one through the indirect effects (as well as the complicit).

Inflating everything else than the overpriced asset:
Biggest problem here is keeping wages and tax structures adjusted during the inflation. The other thing is to stay out of cash during this period because the value of the currency gets deflated. It has the advantages of also devaluing accumulated imbalance of trade. The complicit in this scenario often have their ‘proceeds’ devalued.

I think the real solution is to place mortgage brokers and RE brokers/agents under similar guidelines as Stock brokers. Houses and stocks are assets that can be invested in. Margin requirements are required for stock. Likewise, margin requirements (LTV) should be required in buying a house. Disclosure requirements exist for stock, they should exist for the state of housing. Stock brokers have to be very careful about pushing a stock as an investment (in particular if they don’t have a CFA/CFP cert) because it can cause them to lose their license. RE brokers should be regulated in the same manner.

In terms of getting the guilty.. this is going to be hard. There are too many. The underlying problem is that they guilty sold off the securities.. a long time ago. They mis-represented the condition of these securities. With the CDOs/MBS(s) being devalued, it is harming innocents instead of the guilty (who are now looking for the next scam) Basically, when a CDO/MBS’s risk factors have been misrepresented, the investor in the security can force the originator to buy it back at face value (as opposed to real value). This has been happening, and is causing the bankruptcy of many of the sub-prime lenders. The problem is that once a sub-prime has gone under, the other people who are trying to force the buyback for misrepresentation, can’t. The company no longer exists.

NOTE: The reduction of interest rates is not really a bailout. The guilty have already flown the coop. I anticipated a drop about this time.. but anticipate further tightening down the road. Bernanke is in a bind. He has to prevent a total collapse, while getting deficit spending financed for Congress and preventing inflation. The only tools he has to do this are; the prime rate, fractional reserve rates and money supply.

[ucodegen]

@drunkle

I don’t think you’ll have to worry about ‘stability’. This fix is only temporary. My personal opinion is that Bernanke is trying to handle the economy at too fine a grain level. Either way, there is a lot of equity to balance out. You can do it by inflating everything else up to it.. or deflating the over inflated asset.

Deflating the inflated asset:
This can cause ripples where said assets were levered to purchase other assets. It becomes a house of cards issue. It will take down other assets that are fairly valued in the process as people have to liquidate to cover. Innocents get hurt on this one through the indirect effects (as well as the complicit).

Inflating everything else than the overpriced asset:
Biggest problem here is keeping wages and tax structures adjusted during the inflation. The other thing is to stay out of cash during this period because the value of the currency gets deflated. It has the advantages of also devaluing accumulated imbalance of trade. The complicit in this scenario often have their ‘proceeds’ devalued.

I think the real solution is to place mortgage brokers and RE brokers/agents under similar guidelines as Stock brokers. Houses and stocks are assets that can be invested in. Margin requirements are required for stock. Likewise, margin requirements (LTV) should be required in buying a house. Disclosure requirements exist for stock, they should exist for the state of housing. Stock brokers have to be very careful about pushing a stock as an investment (in particular if they don’t have a CFA/CFP cert) because it can cause them to lose their license. RE brokers should be regulated in the same manner.

In terms of getting the guilty.. this is going to be hard. There are too many. The underlying problem is that they guilty sold off the securities.. a long time ago. They mis-represented the condition of these securities. With the CDOs/MBS(s) being devalued, it is harming innocents instead of the guilty (who are now looking for the next scam) Basically, when a CDO/MBS’s risk factors have been misrepresented, the investor in the security can force the originator to buy it back at face value (as opposed to real value). This has been happening, and is causing the bankruptcy of many of the sub-prime lenders. The problem is that once a sub-prime has gone under, the other people who are trying to force the buyback for misrepresentation, can’t. The company no longer exists.

NOTE: The reduction of interest rates is not really a bailout. The guilty have already flown the coop. I anticipated a drop about this time.. but anticipate further tightening down the road. Bernanke is in a bind. He has to prevent a total collapse, while getting deficit spending financed for Congress and preventing inflation. The only tools he has to do this are; the prime rate, fractional reserve rates and money supply.

[ucodegen]

@One_Muggle

401Ks
I have to agree with FormerSanDiegan. It is much better to have the money taken out pre-tax. It drops your taxable income. It removes the income from AGI calculations entirely. This means that if your deductions are being limited for any reason, you still get the tax reduction/effective deduction.

Medical spending account:
This allows you to pay pre-tax and is not subject to the 7% of AGI minimum threshold on schedule A of the 1040.

[ucodegen]

@One_Muggle

401Ks
I have to agree with FormerSanDiegan. It is much better to have the money taken out pre-tax. It drops your taxable income. It removes the income from AGI calculations entirely. This means that if your deductions are being limited for any reason, you still get the tax reduction/effective deduction.

Medical spending account:
This allows you to pay pre-tax and is not subject to the 7% of AGI minimum threshold on schedule A of the 1040.

[ucodegen]

@One_Muggle

401Ks
I have to agree with FormerSanDiegan. It is much better to have the money taken out pre-tax. It drops your taxable income. It removes the income from AGI calculations entirely. This means that if your deductions are being limited for any reason, you still get the tax reduction/effective deduction.

Medical spending account:
This allows you to pay pre-tax and is not subject to the 7% of AGI minimum threshold on schedule A of the 1040.

[ucodegen]

@Fearful

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns.

Actually it does increase the rate of return, but he did not calculate the rate of return right because he was using different comparison types. It also does increase the risk associated with those returns. In fact risk and rate of return go hand in hand. On a more risky asset, you will always expect better returns. What this points to is the difference in ROI and ROE. ROI = Return On Investment. ROE = Return On Equity. In the scenario, The equity is the price of the house, the investment is your down payment and the sum of monthly payments (discounted by time). In the scenario above, if the purchase was cash (no mortgage), the results would roughly be
ROE = 4%
ROI = 4%

With the mortgage as described, the numbers end up being:
ROE = 4%
ROI = 20% because only the down was the invested capital considered. The monthly payment was omitted, which is also invested capital.

There is one problem here. The amount for payments on the mortgage are offset against the rent it displaces. The comparison shown is not appropriate for this scenario. You want to compare return on the $80,000 when invested (rent scenario) vs the gain in owning the house (buy scenario). Doing this, you can balance out the monthly rent vs mortgage payment. You would have to get 20% or better return on $80,000 to make renting match buying. Less than 20% return on $80,000 would mean buying is better, greater than 20% return means renting is better (of course not taking into account taxes on gains).

In terms of leverage increasing returns on investment, look into something known as ‘carry trade’ and spreads. Leverage gains you when the growth rate of the asset is higher than the interest rate you are paying on the loan for the asset. If it is the other way around, you are sucking wind.

[ucodegen]

@Fearful

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns.

Actually it does increase the rate of return, but he did not calculate the rate of return right because he was using different comparison types. It also does increase the risk associated with those returns. In fact risk and rate of return go hand in hand. On a more risky asset, you will always expect better returns. What this points to is the difference in ROI and ROE. ROI = Return On Investment. ROE = Return On Equity. In the scenario, The equity is the price of the house, the investment is your down payment and the sum of monthly payments (discounted by time). In the scenario above, if the purchase was cash (no mortgage), the results would roughly be
ROE = 4%
ROI = 4%

With the mortgage as described, the numbers end up being:
ROE = 4%
ROI = 20% because only the down was the invested capital considered. The monthly payment was omitted, which is also invested capital.

There is one problem here. The amount for payments on the mortgage are offset against the rent it displaces. The comparison shown is not appropriate for this scenario. You want to compare return on the $80,000 when invested (rent scenario) vs the gain in owning the house (buy scenario). Doing this, you can balance out the monthly rent vs mortgage payment. You would have to get 20% or better return on $80,000 to make renting match buying. Less than 20% return on $80,000 would mean buying is better, greater than 20% return means renting is better (of course not taking into account taxes on gains).

In terms of leverage increasing returns on investment, look into something known as ‘carry trade’ and spreads. Leverage gains you when the growth rate of the asset is higher than the interest rate you are paying on the loan for the asset. If it is the other way around, you are sucking wind.

[ucodegen]

@Fearful

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns.

Actually it does increase the rate of return, but he did not calculate the rate of return right because he was using different comparison types. It also does increase the risk associated with those returns. In fact risk and rate of return go hand in hand. On a more risky asset, you will always expect better returns. What this points to is the difference in ROI and ROE. ROI = Return On Investment. ROE = Return On Equity. In the scenario, The equity is the price of the house, the investment is your down payment and the sum of monthly payments (discounted by time). In the scenario above, if the purchase was cash (no mortgage), the results would roughly be
ROE = 4%
ROI = 4%

With the mortgage as described, the numbers end up being:
ROE = 4%
ROI = 20% because only the down was the invested capital considered. The monthly payment was omitted, which is also invested capital.

There is one problem here. The amount for payments on the mortgage are offset against the rent it displaces. The comparison shown is not appropriate for this scenario. You want to compare return on the $80,000 when invested (rent scenario) vs the gain in owning the house (buy scenario). Doing this, you can balance out the monthly rent vs mortgage payment. You would have to get 20% or better return on $80,000 to make renting match buying. Less than 20% return on $80,000 would mean buying is better, greater than 20% return means renting is better (of course not taking into account taxes on gains).

In terms of leverage increasing returns on investment, look into something known as ‘carry trade’ and spreads. Leverage gains you when the growth rate of the asset is higher than the interest rate you are paying on the loan for the asset. If it is the other way around, you are sucking wind.

[ucodegen]

“It’s an old stereotype but true,” said Richard Peterson, a psychiatrist who specializes in investment psychology. “Women access their emotional center,” tapping into how they feel about a purchase. Men typically don’t. Turns out, he added, those emotions lead to better decision-making.

When enough people do the same thing, it becomes a self fulfilling prophesy… until the market behavior shifts. This is why “technical analysis” works for quite a while until it doesn’t, at which time it fails spectacularly. Witness also all the ‘models’ that companies were using for investment in CDOs and MBS(s).

[ucodegen]

“It’s an old stereotype but true,” said Richard Peterson, a psychiatrist who specializes in investment psychology. “Women access their emotional center,” tapping into how they feel about a purchase. Men typically don’t. Turns out, he added, those emotions lead to better decision-making.

When enough people do the same thing, it becomes a self fulfilling prophesy… until the market behavior shifts. This is why “technical analysis” works for quite a while until it doesn’t, at which time it fails spectacularly. Witness also all the ‘models’ that companies were using for investment in CDOs and MBS(s).

[ucodegen]

“It’s an old stereotype but true,” said Richard Peterson, a psychiatrist who specializes in investment psychology. “Women access their emotional center,” tapping into how they feel about a purchase. Men typically don’t. Turns out, he added, those emotions lead to better decision-making.

When enough people do the same thing, it becomes a self fulfilling prophesy… until the market behavior shifts. This is why “technical analysis” works for quite a while until it doesn’t, at which time it fails spectacularly. Witness also all the ‘models’ that companies were using for investment in CDOs and MBS(s).

[Author]

Posts