Tag Archives for " AlanGreenspan "

Dec 01

Ritholtz’ Brilliant Book, BailoutNation

By kevin | Current Affairs

Barry Ritholtz has written a must read book (assuming you’re interested in how we got in the pickle we’re in) called Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.  Basically I underlined the entire book when I read it.

[amtap book:isbn=0470520388]

Reading back over my notes I was re-struck (is that a word?) by Barry’s point of view on what drove the vaunted American Consumer-led economy (we buy all the world’s doo dads): Real Estate.

According to a 2005 study by Asha Bangalore of Northern Trust Company, 43 percent of all new job creation between November 2001 and April 2005 was real estate related.

So what did that mean . . .

The housing boom was creating jobs for builders, contractors, real estate agents, mortgage brokers, and even employees at Home Depot and Lowe’s. But the most significant impact to the economy came from home equity lines of credit (HELOCs) and cash-out mortgage refinancings. With wages stagnant, Americans turned to home equity withdrawals in order to maintain their standard of living.

This was one of the single biggest and most unexpected elements of the debt-driven economic expansion. Outside of real estate, employment gains were modest and real wage gains flat. It was debt that drove the increase in consumer spending. Mortgage equity withdrawals normally a small portion of consumer debt‚exploded.

Without this home equity-based consumption, the nation would have been in recession territory, with GDP flat to 1 percent. At least, according to an unofficial Fed study by none other than Alan Greenspan

And this . . .

The wealth effect of home price appreciation is much more widely distributed than stocks. This made the generational-low interest rates the single largest factor that resuscitated the economy. Sure, tax cuts, deficit spending, increased money supply, war spending, and the like all played a role‚but it was the ultralow rates and the mortgage equity withdrawal they allowed that dominated U.S. economic activity.

As a result, the economy will continue to look  crappy to wage earners for some time to come (assets are still mispriced).

The book is just brilliant. Read it.

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Nov 15

Lessons Learned From A Guy Who Made $20 Billion in Two Years

By kevin | Random Walk

Here’s a story lead from the WSJ that should get your attention:

Even as the financial system collapsed last year, and millions of investors lost billions of dollars, one unlikely investor was racking up historic profits: John Paulson, a hedge-fund manager in New York.

His firm made $20 billion between 2007 and early 2009 by betting against the housing market and big financial companies. Mr. Paulson’s personal cut would amount to nearly $4 billion, or more than $10 million a day. That was more than the 2007 earnings of J.K. Rowling, Oprah Winfrey and Tiger Woods combined.

Wow, $20 billion seems like a lot of money, even in these post-trillion times.  How did he do it?  The short answer is that he went short the housing market and then financial services companies.  For those not in the biz, it means he bought a bunch of insurance on the first and then bet on the second.  For those still not tracking the story, he was on the other side of . . .

  • All those credit default swaps that sunk the big financial companies, you know, the ones the tax payers bailed out? Well not all of them.
  • Investors, some of whom were folks like you and me, some of whom were some of the “savviest” investors in the game who wanted a piece of that free money.
  • Ultimately tax payers whose great, great grandchildren will still be paying the Chinese government for funding the clean up.

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