Thursday, October 23, 2008

It's the housing markets, stupid!

Greenspan confirms the assessment given here weeks ago, but stops shy of the proposals advanced here for a Brady-like plan for home-mortgage defaults, in which the temporarily lost collateral value of home equity is shared by the deep pockets and long-term holder status of the U.S. Government. (Even a small amount of insurance will go a long way to stabilizing the market's assessment of the collateral's prospective worth - it can put a floor under value, without removing all uncertainty, a sound outcome of "intervention").

Anyway, here is the operative quote, from the maestro, Greenspan:

Indeed, a necessary condition for this crisis to end is a stabilization of home prices in the U.S. They will stabilize and clarify the level of equity in U.S. homes, the ultimate collateral support for the value of much of the world’s mortgage-backed securities.

"Preventable foreclosures" has centerstage..

The rest is noise, backward looking and important for understanding how free markets can fail to regulate themselves -- as if that would come as a "shock" to anyone but Milton-Friedman-fed ideologues, raising questions about settlement and securitization.

What's missing? A fair amount.

For one, there are other storm clouds to diffuse. (I've forgotten to include synthetics in my frequent lists, sadly). There continues to be a need to be broadly anticipatory, to forestall unmitigated blows to confidence. One has to imagine that the markets as a whole would be served by taking an upper hand on events and "force" an unwind, at current prices, of synthetic CDOs, to the extent that something like that could be coordinated.

That's exceptionally tough medicine. However, waiting on events, as Paulson has suggested, only presents another opportunity for the markets to lose confidence in 'The System'.

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