In my opinion, the “Wall Street Welfare” author confuses relationships among increased mortgage delinquencies, foreclosure rates, decreasing property values, inflation, the Federal Reserve Bank, politicians, and Wall Street, or is intentionally adding to the insidious propagandizing efforts of Wall Street players which hope to sway public support towards their opaque, self-serving calls to wage preemptive attacks against deflating property values. Any self-respecting Wall Street analyst will admit that Wall Street’s post-dot.com, bubble-bursting fortunes have been largely due to the Street’s massive speculation in real estate investment debt.

The “Wall Street Welfare” posting unfortunately perpetuates many currently popular media and political myths concerning the extent and cause of the “housing crisis.” It also panders to the escalating media attempts to manipulate taxpayers into supporting direct government intervention in the alleged “housing crisis.” Regarding the media ploys to alter public perceptions about the need and acceptability of direct government intervention, the public has been feed: articles presenting only anecdotal evidence of a few individuals just “walking away” from their properties or using “jingle mail,” articles about escalating foreclosures among “home owners” (instead of “property investors/speculators with zero or little equity”), and now, articles complaining about the unfairness of more Wall Street bailouts in the absence of more Main Street bailouts.

The author of this posting successfully imitates the media’s propensity to spread misinformation brokered by the wealthy and powerful. Like so many in journalists/editorialists, the posting describes the involvement of the Federal Reserve Bank in the JPMorgan Chase acquisition of Bear Stearns with a flippant disregard for objectivity and precision. The author refers to “the Fed’s deal” instead of “the Federal Reserve Bank’s deal,” allowing readers to unconsciously replace a mental image of the Reserve Bank with the federal government. The author also falsely describes the Reserve Bank’s loan guarantee as an outright loan to JPMorgan Chase, incorrectly explains that the Reserve Bank’s involvement in the JPMorgan acquisition of Bear Stearns represents a taxpayer-funded bailout, and simplistically argues that the Federal Reserve’s involvement with the JPMorgan Chase acquisition of Bear Stearns creates economic and moral justification for a federal government bailout of “those facing foreclosure.”

The Federal Reserve Bank is not a federal government entity. In theory, it is a quasi-government body that is subject to Congressional review. In practice, despite the belated whining from the Senate Finance Committee concerning the Bear Stearns acquisition, Congressional oversight is absent. Second, the Federal Reserve Bank has guaranteed $29B of potential write-down losses that JPMorgan Chase may be forced, at some unknown date, to take from bad Bear Stearns mortgage holdings. This guarantee would be met by the Reserve’s minting of $29B which it would deliver to JPMorgan’s coffers; no raiding of taxpayer monies would be required.

Because the serious distortions in this part of the posting serve to repeat and amplify the common media myths regarding the “housing crisis” the “economic crisis” and the “Wall Street crisis,” it is doubly important to critically evaluate the other cavalierly expelled relationships and insinuations made in this blog.
For example the author makes a vague, but empathetic, reference to “those facing foreclosure” without noting that many are investors in Las Vegas, California, and Florida properties, the nation’s epicenters of the grandest real estate speculative activity in history. Not coincidentally, these regions also have experienced the greatest declines in property values. But how deeply are these two simultaneous facts related? And is one the cause and the other the consequence? The author, like so many journalists in the media today, fails to present these questions to critical thinkers.

It seems that the author hopes to assure readers that rising foreclosure rates is the exclusive, or major, cause of the concomitant drop in property values across the nation. And leaping with the rest of the media lemmings, the author ventures the popular view that increased foreclosure rates may actually represent a larger problem…bank failures! (Never mind, Dorothy, that banks are not holding the bad-mortgage bag. Ignore Wall Street lurking behind the curtain. The Wizard says that increasing foreclosure rates are significantly diminishing the assets of financial behemoths such as Bears Stearns. The Wizard has spoken.)

So let’s look at the miniscule media data available to evaluate these myths.

Freddie Mac has reported only a 0.71% mortgage delinquency rate as of January 2008, up from 0.65% in December 2007 and from 0.43% in February 2007, despite having increased its portfolio by 12% between January and February 2008. Using these figures, let’s assume that X lender has provided 100 mortgages of $200K each, and thus owns $2M in outstanding loans (debt). In February 2007, the lender thus risked a loss of $86K on every $2M invested. In February 2008, the lender now risked a loss of $142K on a $2M investment. The lender bears a higher risk to be sure, but, by current investment standards, a relatively trivial one. However, the bet on Wall Street was that the $2M debt – repackaged as SIVOs or CDOs, etc. – investment would decline at the same, or faster, rate as the losses. This wisdom of projecting declining debt obligation values, despite increasing risk arising from incautious lending behavior, remains a smart investment strategy for so long as property values are increasing.

Now the above data looks only at increased risk of foreclosure. How does the picture look with actual foreclosure data? The highest reported foreclosure rate is in Nevada at 3.4% of total housing units for January 2008. In California for the same period, the rate stood at 1.9%. At the same time, foreclosure rates dropped in eighteen other states including Pennsylvania, West Virginia, and Vermont. Averaging out these figures out across the nation for January 2008 might yield some interesting data…data that might make it more difficult for the peddlers of the “housing crisis” myth to gain public acceptance. Suspicion regarding the veracity of allegations by many media sources that foreclosures generated a “housing crisis” is exacerbated by the media’s serious lack of reporting of data on delinquencies and foreclosures by subprime, conventional, and equity mortgages across the country. Notably, the Wall Street Journal, bucks this unfortunate media reporting trend, with the recent publication of an excellent analysis available at http://www.realestatejournal.com/buysell/markettrends/20080326-hudson.html. The article clearly displays the limited nature of current foreclosure problem across the nation.

Although meager, the data available on real estate and mortgage trends do not support a conclusion that the foreclosure rate is the primary driver in the current national trends towards lower property valuations. Nor does it support the conclusion that either current, or estimated future, foreclosure rates around the nation or depressed property values will lead to bank failures. Most mortgage originators (banks) no longer own the loans. Most mortgages have been combined and repackaged as fancy, unregulated, highly-leveraged investment instruments traded on Wall Street. Investment houses, such as Bear Stearns, are risking great loss, not banks. Perhaps Jesse assumes, as does most in the media, that the public will simply be convinced by dire warnings that significant losses on Wall Street will eventuate in horrific economic consequences. (This assertion may be valid, but I have not yet seen any media source venture a detailed and critical analysis.)

The comparison of delinquency and foreclosure data with falling property values and real estate sales (particularly, and significantly, for new construction) lends credence to my hypothesis that the singular problem facing Wall Street (and local governments) is lower real estate valuations. A lower rate of return on decreasing property values for Wall Street investors represents real losses and fabulously exploding investment risks. Eroding property valuations and real estate development slowdowns represent reduced revenue for local governments.

The demands for federal government intervention to help those at risk of foreclosure are often thinly-veiled attempts to push policies that are hoped to re-inflate property values. For without rising property values, the bets that Wall Street has placed on the real estate leveraging markets cannot support current Wall Street stock valuations. Hence, we have media cheerleaders galore for taxpayer-financed plans that would covertly reduce property valuations and provide “special financing” for a select group of investors. We do not have media cheerleaders hailing the return of housing costs to realistic, income-based levels. We do not have media cheerleaders demanding increased regulation of predatory lending practices, more risk-averse corporate accounting standards, and more open financial markets. The author conveniently fails to mention these options. The poster also fails to note that federal government recently provided bailouts to taxpayers long before the Federal Reserve Bank brokered the JP Morgan Chase – Bear Stearns deal. The federal government is providing advance refunds to taxpayers this year, increased access to foolish mortgages (lower down payments and bigger loan amounts through Freddie Mac and Fannie Mae), and taxpayer-supported, foreclosure-avoidance intervention services.

Still this author, along with the rest of the media, seems strangely fixated on whipping up public support for inflicting further cost-offsetting injustices to taxpayers. These writers never seem to tire of citing the “housing crisis” media darlings such as Richard Reich, Christopher Dodd, and Mark Zandi (all of whom have conflicting interests in Wall Street) who demand that MORE taxpayer funds be used to stem the rising tide of foreclosures and o-my-god, impending economic collapse. I guess I can’t find good op-ed pieces on these critically important economic and moral dilemmas even from alternative media sources.