March 28, 2008
Buying and Selling Housing Accounts as a Commodity
What Greenspan (and Paulson) euphemistically call 'mis pricing risk' by the nation's financiers is more aptly described as their collective purchasing of 90% to 100% leveraged commodity accounts.
At the end of the day, homes are a commodity. There are laws regulating the purchase and financing of commodities; there are strict margin requirements and lots of bold print that purchasing a commodity carries a high degree of risk, to wit, you may lose your shirt.
Having thought about this for a moment, the question becomes who in their right mind would set out to purchase someone else's commodity position which had little or no equity, just the position holders' promise to pay interest on the borrowed funds?
If you have access to buyers that accept the premise that housing always increases in value, then by all means, create or buy this type of account, warehouse them and resell them. It's a business plan. I package and sell, you package and sell, just be mighty careful when the music stops because at that point you own these crap assets that you intend to sell off to others. Merrill Lynch got caught and burned warehousing several billions.
Gold is a commodity which has the flavor of always going up but yet there are margin requirements. Housing, given that the number of buyers always increases and they ain't making any more land you know, seems a sure bet "over time." Near term however it's a commodity, subject to rises and falls in interest rates, recessions, speculative fevers and inflation.
The banks, etc are idiots for placing their firms' equity in jeopardy by creating and holding no equity housing accounts.
But. And this is a huge but as we head into an election year. Imagine if Mr. Bush had wooed America into placing social security assets into private accounts (because the stock market always goes up ye brethren.)
What would have occurred is that the housing speculation bubble would have lasted six to eighteen months longer as Wall St. packaged and sold retail strips of near worthless housing accounts to the nation's social security network.
Just, dad gum, think about that. These financial critters move capital back and forth on any pretense as long as they can wet their beaks as they package and sell these often unnecessary products ad infinitum. They're sorta kinda like having a somebody who up and mows your lawn four times a week. If ya don't put some controls on them you're surely headed for the poor house.