Andreesen nails Buckley
http://feeds.feedburner.com/~r/pmarca/~3…
Item: Daddy, what was conservatism?
Well, son, it’s a long story…
William F. Buckley (yes, that William F. Buckley) in the National Review:
The federal government being the only agent that can possibly intervene, it needs to do so, by forbidding the liquidation of mortgages until the disparity between true value and hypothetical value is pounded away by time and inflation – and a revitalization of the functions of the marketplace.
Zing! Two points to Andreesen!
But, seriously, what, exactly, is the problem that additional regulation would solve?
Some people offered foolish loans.
Other people took them.
The fools who offered the loans are losing money.
The fools took the loans are losing the houses that they never really owned in the first place.
What’s the problem?
Buckley seems to hint at the end that the problem is that foreclosures are lowering all property prices…but are they? The supply of houses is what it is, and the demand curve is also what it is. How is the fact that prices got artificially inflated, and are now dropping back a problem?
What exactly would the government do? Intervene to stabilize prices at a level above that that supply and demand can justify?
I’m puzzled (and saddened by Buckley).
January 16th, 2008 at 12:30 pm
The fools who offered the loans are losing money.
The interesting part is why the loans were suddenly offered in such quantity. Of course we already know where the money came from: Greenspan’s pedal-to-the-metal monetary policy achieved its partisan goal (it kept us out of recession for three years in which we were creating no jobs at all), but left a lot of dumb investor liquidity sitting on the sidelines, looking wistfully for something better than a 1% CD yield in which to park “safely”.
The other half of the story, as told to me in October by a friend who works at one of the relevant hedge funds (not Magnetar), was really quite clever. High-risk mortgages are not an attractive lure for the safety-oriented investor, but once a CDO slices the market into tranches, the low-risk slice of a pool of high-risk mortgages looks, well, safe as houses. If only some idiot would take all the risk off our hands by buying the bad slices, right?
Well, when dumb people with money start looking for a idiot to offer them the best of it, there are usually clever people who find a way to oblige them; this is arguably how evolution works in our social species. In this case, the clever strategy was to buy high-risk tranches and short the low-risk tranches to pay for it. The hedge fund is at risk if only a few mortgages go into default, but if a lot of them start to fail, the bottom drops out of the low-risk slices as well, and the short position covers the losses on the “risky” debt, leaving the hedge fund whole. And the very fact that dumb money keeps flowing in steadily increases the macroeconomic risk.
Effectively, several big hedge funds were arbitrageurs posing as speculators: they quietly set up a risk engine where safe money was pumped into unsafe investments (the housing bubble) with the risk fed invisibly back into the entire market instead of concentrated in their “speculative” high-risk positions. Like heat engines, risk engines with no exhaust are eventually guaranteed to either stop or explode.
I agree entirely that there is no cause for new regulation here; I am, in fact, greatly cheered that perhaps as much as $100B was creatively transferred from stupid greedy people to smart sneaky people in this little morality play. That a couple of $T of collateral damage was done to needy people (the actual homeowners) in the process is unfortunate, but publicly funded education is never cheap.
As for Buckley, well, he’s a Yale man.