Zeev's Turnips Patch-No Politics (ZEEV)

[Joe Stocks]

Greenspan Feb. 2004; This was just months before he started raising interest rates. In fact, the federal funds rate was just 1% when he made this speech endorsing ajustable rate mortgages. In June of 2004 we saw the first of 17, .25% increase in rates.

http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

"One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise. Homeowners pay a lot of money for the right to refinance and for the insurance against increasing mortgage payments. Calculations by market analysts of the "option adjusted spread" on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners' annual after-tax mortgage payments by several thousand dollars. Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

American homeowners clearly like the certainty of fixed mortgage payments. This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common and where efforts to introduce American-type fixed-rate mortgages generally have not been successful. Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

Conclusion
In evaluating household debt burdens, one must remember that debt-to-income ratios have been rising for at least a half century. With household assets rising as well, the ratio of net worth to income is currently somewhat higher than its long-run average. So long as financial intermediation continues to expand, both household debt and assets are likely to rise faster than income. Without an examination of what is happening to both assets and liabilities, it is difficult to ascertain the true burden of debt service. Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress. And, in fact, during the past two years, debt service ratios have been stable. "
http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/

Greenspan Sep 2002;

"No one can deny that fully informed market participants will generate the most efficient pricing of resources and the most efficient allocation of capital. Moreover, it could be argued that, if all information held by individual buyers or sellers became available to all participants, the pricing structure would more closely reflect the underlying balance of supply and demand. Thus full information would appear to be the unambiguous objective. But should it be? "

later same speech...
"An example more immediate to current regulatory concerns is the issue of regulation and disclosure in the over-the-counter derivatives market. By design, this market, presumed to involve dealings among sophisticated professionals, has been largely exempt from government regulation. In part, this exemption reflects the view that professionals do not require the investor protections commonly afforded to markets in which retail investors participate. But regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure and forced disclosure of proprietary information can undercut innovations in financial markets just as it would in real estate markets.

All participants in competitive markets seek innovations that yield above-normal returns. In generally efficient markets, few find such profits. But those that do exploit such discoveries earn an abnormal return for doing so. In the process, they improve market efficiency by providing services not previously available.

Most financial innovations in over-the-counter derivatives involve new ways to disperse risk. Moreover, our constantly changing financial environment supplies a steady stream of new opportunities for innovation to address market imperfections. Innovative products temporarily earn a quasi-monopoly rent. But eventually arbitrage removes the market imperfection that yielded the above-normal return. In the end, the innovative product becomes a "commodity" made available to all at a modest, fully competitive profit."

"quasi-monoploy rent"? Greenspan arguing for no regulation and supporting huge bonuses to WallStreet.

Greenspan was the one person who was in a position of power who could have stopped all the financial nonsense that was going on that created the problems we have now. Greenspan was incomptent in his job.