Medical vs. Financial Engineering

I broke my elbow a month ago, pretty badly as I was told.  The surgeon screwed the pieces back together, using a steel alloy bracket and six screws.  Two hours later, I left the hospital with no cast, a bandage (just to cover a very ugly scar), a prescription for painkillers and therapy started a week later.

 

 

Elbow collectionThis isn’t Ramsey’s elbow specifically, but a random post surgery elbow collection from the inter-webs, to illustrate how it’s done. The contraption in the lower right-hand corner is generally used to hold an elbow together after a complicated fracture. As you can see from the x-rays, this is then complemented with additional thingamabobs as required.

Image source: eortopedi.com

 

What would have happened if I had suffered the same accident in 1975?  The surgery would probably be in-patient, requiring a couple of days in the hospital.  The broken fragments would take weeks to heal, in a cast.  Rehab would take many months while I may never regain the previous range of motion or strength again.  Medical engineering has advanced so much in the last forty years.

Before I stray too far, why 1975?  That was the year in which I entered the real estate market.  In comparison, real estate involves just simple transactions, nowhere near the complexity of cutting up a body, drilling holes and screwing some plate into human bones.

In forty years, the real estate market should have advanced to the point where a transaction is no more cumbersome than ordering some merchandise on Amazon, prepackaged with financing, right?  Wrong.

Not only has financing engineering not advanced like medical engineering, it has deteriorated into one of the most destructive forces in the modern world.  Pertaining to real estate, it was failed financing engineering that brought us the Savings and Loans debacle.

It brought us Greenspan bubble part one, which paused on September 11, 2001, then went ballistic with Greenspan’s sub-prime bubble.  It created derivatives and derivatives derived from derivatives.

 

The Helicopter Mortgage

Where has financial engineering led us to today?

Over a recent weekend, Mel Watt (FHFA), Jack Lew (Treasury) and Janet Yellen (Federal Reserve) held a summit meeting and came up with a plan that will forever eliminate the possibility of another housing crisis.  The plan is the Helicopter Mortgage.  Here is how it works:

 

Freddie and Fannie will originate mortgages that require zero down payment, zero interest and for a perpetual term.  FHFA will package them as HMBS (Heli Mortgage backed securities) while the Treasury will guarantee performance.  Since they qualify as agency MBS, the Federal Reserve will purchase them and keep them on its balance sheet until maturity (in other words: forever).

 

Of course I am joking but I am not the comedian.  The comedians are the central bankers and they are dead serious.  Central bankers are financing sovereign debt at negative interest rates.

 

helicopter_money_05-20-2016_normalIt will only be a small step from helicopter money to the helicopter mortgage…

Cartoon by Bob Rich

 

In other words, one arm of the government spends,  and the spending is financed by another arm of the government, which pays interests to the spending arm.  Just like the Helicopter Mortgage, though this has not been specified, we know these government securities holdings will be extended indefinitely with no maturity and bear no cost.

We are not far from the Helicopter Mortgage.  Take a look at this recent Fannie Mae guideline. A 3% down payment is now the norm, not just for FHA loans.  The Federal Reserve will continue its efforts to drive mortgage rates to zero, or lower.  Should yields on treasuries go below zero, agency MBS at zero will be relatively attractive.

One would think that the real estate market must be in dire conditions for policy makers to be so accommodating. As a matter of fact, many Metropolitan Statistical Areas (MSA) are already back to or above the peak price levels of the sub-prime era.  Defaults and foreclosures are back to pre-subprime era lows.  Case-Shiller has been reporting price appreciation at 2 to 3 times the inflation rate for several years.  Is this a real estate market that needs help?

 

1-case-shillerCase-Shiller composite home price indexes – while the overall market still remains below the peak levels of the sub-prime bubble era, the former price peaks have been eclipsed in a number of metropolitan areas (such as in San Francisco and Washington, to name two of the most egregious examples) – click to enlarge.

 

Since the real estate market has been placed in the capable hands of the Treasury as conservator of the agencies, CFPB as the watch dog, FHFA setting underwriting standards and the Federal Reserve as the supreme guardian, it will no longer fail –  they won’t allow it.

 

fannie-mae-cartoonThe conservator and his ward.

Cartoon by Steve Breen

 

Many, including myself, opine that we are in another housing bubble.  Regardless, all it will take is a minor setback in real estate for the aforementioned government entities to launch the Helicopter Mortgage.  Then what?

 

Conclusion

In closing, let me return to the subject of engineering advances in the past few decades.  Of all the government agencies, it appears that NASA is the only one with real accomplishments.  After sending a man to the moon, it regularly put astronauts in space for months at a time.  It sent up the Hubble telescope to peek into the universe, a rover to Mars and one of its probes is now reaching Jupiter after a five year journey.

Here is my thought: why not replace all the economists at the Federal Reserve with NASA engineers?  Let them put some science into policies.  If they come up with the Helicopter Mortgage, it might be dropped from helicopters that can actually fly.

 

planningWe have to disagree with Ramsey on the final point, even though it is made tongue-in-cheek: it actually won’t matter. The NASA helicopters might fly, but it will still be impossible to centrally plan the economy, or even just aspects of it (to be precise: it will be impossible for such a plan to deliver an outcome superior to a free market outcome and it will produce even greater impoverishment in the long run). This does not depend on the quality of the engineers – it is a result of the fact that economic calculation is nigh impossible for bureaucracies (in fact, central banking is a special case of the socialist calculation problem pertaining to the area of finance).

Cartoon by Fritz

 

Chart by: Core-Logic / S&P

 

Chart and image captions by PT

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Great Debasement - Precious Metals Supply and Demand
      Fiat Money Woes Monday was Labor Day holiday in the US. The facts are that the euro lost another 1.4%, the pound another 1.1%, and the yuan another 0.9% last week.   Assorted foreign fiat confetti against the US dollar – we have added the Argentine peso as well, as it demonstrates what can happen when things really get out of hand. [PT]   So, naturally, what is getting play is a story that Bank of England governor Mark Carney said the dollar’s influence...
  • Hong Kong - Never the Same Again
      Freedom Rock Hong Kong ranks among the freest societies in the world. Not only economically, but socially it is a very liberal place. It was marinated in British ways until 1997, much longer than Singapore and other colonies. Then China took it over as a special administered region, which according to the agreement with the UK meant that it was only nominally to be under Chinese control for the next 50 years. It was possibly the only colony in which a vast majority of citizens did not...
  • Suffering the Profanity of Plentiful Cheap Money
      A Case of Highway Robbery What if the savings in your bank account lost 55 percent of its value over the last 12 months?  Would you be somewhat peeved?  Would you transfer some of your savings to another currency?   USD-ARS, weekly. For several years the Argentine Peso has followed a certain pattern: it declines mildly, but steadily, with little volatility for long time periods, and then spikes in crash waves whenever a crisis situation comes to a head. In early 2011, it...
  • Don’t Be Another Wall Street Chump
      The Future and the Past Securities and Exchange Commission Rule 156 requires financial institutions to advise investors to not be idiots. Hence, the disclosure pages of nearly every financial instrument in the U.S. are embedded with the following admission or variant thereof:   “Past Performance Is Not Indicative of Future Results”   “Buy and hold”... “The market goes always up”... “No-one can time the market”... “Buy the dip” “With what? You...
  • A Wild Week - Precious Metals Supply and Demand
      Paying a Premium for a Lack of Default Risk The price action got pretty intense last week! The prices of the metals were up Monday, Tuesday, and Wednesday. But Thursday and Friday, there was a sharp reversal and the silver price ended the week below its close of the previous week.   The net speculative position in gold futures has become very large recently – the market was more than ripe for a shake-out. [PT]   Silver made a round trip down from $18.35 to...
  • Will the Nikkei Win the Next Olympic Games?
      Listless Nikkei On 24 July 2020 the Olympic Summer Games will begin in Tokyo, the capital of Japan. Olympic Games and Soccer World Cups are among the largest sporting events in the world.  Do you perhaps also think that these events may affect the performance of local stock markets?   Olympic Summer Games 2020 – official logo (left), and a fan-made logo (right) by designer Daren Newman [PT]   Let us examine whether and in what way such major sporting events impact...
  • The Weird Obsessions of Central Bankers, Part 3
      Inflation and “Price Stability” We still remember when sometime in the mid 1980s, the German Bundesbank proudly pointed to the fact that Germany's y/y consumer price inflation rate had declined to zero. It was considered a “mission accomplished” moment. No-one mentioned that economic nirvana would remain out of sight unless price inflation was pushed to 2% per year.   CPI, annual rate of change. During the “stagflation” period of the 1970s, Congress enacted the...
  • The Weird Obsessions of Central Bankers, Part 1
      How to Hang on to Greenland Jim Bianco, head of the eponymous research firm, handily won the internet last Thursday with the following tweet:     Jim Bianco has an excellent idea as to how Denmark might after all be able to hang on to Greenland, a territory coveted by His Eminence, POTUS GEESG Donald Trump (GEESG= God Emperor & Exceedingly Stable Genius). Evidently the mad Danes running the central bank of this Northern European socialist paradise were...
  • The Weird Obsessions of Central Bankers, Part 2
      The Negative Interest Rates Abomination Our readers are probably aware that assorted central bankers and the economic advisors orbiting them occasionally mention the “natural interest rate” (a.k.a. “originary interest rate”) in speeches and papers. It is generally assumed that it has declined, which is to say, time preferences are assumed to have decreased.   This is actually an understatement...   Although interest is generally associated with money, the...
  • Why Are People Now Selling Their Silver? Precious Metals Supply and Demand
      Big Moves in Silver Last week, the prices of the metals fell further, with gold -$18 and silver -$0.73. On May 28, the price of silver hit its nadir, of $14.30. From the last three days of May through Sep 4, the price rose to $19.65. This was a gain of $5.35, or +37%. Congratulations to everyone who bought silver on May 28 and who sold it on September 4.   The recent move in silver [PT]   To those who believe gold and silver are money (as we do) the rising price...
  • Fiat Money Cannibalization in America
      An Odd Combination of Serenity and Panic The United States, with untroubled ease, continued its approach toward catastrophe this week.  The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement.  Yet, on the surface, all still remained in the superlative.   S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]   Stocks smiled down on investors from their...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!