I spent a few days recently in the company of some money managers with a total of about $2 trillion to invest, precisely the sort of folks whose confidence the government is currently trying to win.\u00a0 How did they feel about all of the rule and policy changes coming out of Washington and the new more muscular government? Terrified.<\/p>\n
The “real money” investors didn’t want to invest alongside the government.\u00a0 Their concern is that if things go south, the government will take 100% of the value left in the bank or whatever and leave private investors, including recent ones, with nothing.\u00a0\u00a0 This is precisely what happened to recent investors in Fannie Mae.<\/p>\n
The “real money” investors didn’t want to see judges modifying contracts, e.g., bankruptcy judges resetting mortgage payments at a lower level and reducing the principal owed.\u00a0 As far as they were concerned, a central tenet of the U.S. Constitution is that people are free to make contracts.\u00a0 Given how mortgages are split up among investors, a foreclosure is greatly preferable to these folks than a modification.\u00a0 In a foreclosure the most senior investors get what they expected, i.e., their money back.\u00a0 The holders of the most junior tranches, which carried a higher return and were known to be high risk, would get nothing.\u00a0 This is also what they would have expected.\u00a0 If mortgages are modified by government action, however, it is unclear how the obligations among the various private parties should be adjusted.<\/p>\n
“What’s wrong with foreclosures?” some of these folks asked.\u00a0 “The historical rate of home ownership is about 60 percent and we’re probably going to revert to that sooner or later so why slow things down?\u00a0 How does it help the U.S. to have high housing prices?\u00a0 Isn’t it better for housing to be affordable?\u00a0 If we give a lot of money to people to prevent foreclosures in March, how is that fair people who were foreclosed on in January?”<\/p>\n
Much of the justification for government intervention comes from the assertion that markets have failed.\u00a0 One money manager scoffed at this idea.\u00a0 “The markets are working fine, but they’re giving people answers that they don’t like, so people cry market failure.”\u00a0 Stocks and bonds low?\u00a0 That’s because investors are afraid of a prolonged depression and continued government interference.\u00a0 House in a jobless region of Michigan worth almost nothing?\u00a0 A place with 50% of its former jobs only needs 50% of its houses.\u00a0 There are plenty of former steel towns where the price of a comfortable house stabilized at $20,000 decades ago and has barely moved since.<\/p>\n
What did these guys want the government to do?\u00a0 Nothing, basically.\u00a0 “Back in the 19th Century, there were a lot of steep crashes, guys got wiped out, and the economy came back quickly.”\u00a0 What’s different now?\u00a0 The government is a lot bigger and more powerful.\u00a0 Rich companies and people can put some of their wealth into lobbying and demand that the government prevent them from getting wiped out (or at least slow the process).<\/p>\n
Barack Obama promised on Monday\u00a0not to rest as long as this economic downturn persisted.\u00a0 He promised to act decisively, change whatever had to be changed, spend whatever had to be spent.\u00a0 This is precisely what worries the investors to whom I spoke.\u00a0 They’d rather see the audacity of doing nothing.<\/p>\n","protected":false},"excerpt":{"rendered":"
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