Housing Doom

1:36:34 … This crisis was caused by massive government subsidies to purchase homes by people who couldn’t really afford them. So what does Congress do? They pass an $8,000 tax credit for people who can’t really afford to buy a home to buy one. I mean, how stupid can you get? - John Makin

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a complete unauthorized annotated transcript for the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹ The event site has a variety of resources including both an audio and a video of the proceedings. There is as yet no official transcript.

Table of Contents

[link navigation works best when full article displayed]

1. 0:00:00 - Alex Pollock intro (preview post)
2. 0:11:43 - Tom Zimmerman presentation (preview post)
3. 0:26:50 - Chris Whalen presentation (preview post)
4. 0:37:03 - Nouriel Roubini presentation (preview post)
5. 0:54:19 - John Makin presentation (preview post)
6. 1:08:20 - Desmond Lachman presentation (preview post)
7. 1:21:56 - Panel discussion (preview post)
   1. 1:22:08 - Roubini discussion
   2. 1:22:59 - Whalen discussion
   3. 1:23:57 - Lachman discussion
   4. 1:25:24 - Makin discussion
   5. 1:28:01 - Whalen question
      1. 1:28:18 - Makin response
      2. 1:29:19 - Pollock response
   6. 1:29:51 - Pollock (with Roubini) aside on Canada
8. 1:31:26 - Q&A (preview post)
   1. 1:32:00 - Bert Ely question
      1. 1:33:04 - Zimmerman (with Roubini) response
      2. 1:34:29 - Whalen response
   2. 1:34:58 - Brian Gardner question
      1. 1:35:43 - Makin response
      2. 1:36:59 - Whalen response
   3. 1:38:18 - Steve Votaw question
      1. 1:38:59 - Lachman response
      2. 1:40:38 - Roubini response
      3. 1:41:22 - Zimmerman response
      4. 1:41:49 - Pollock response
   4. 1:42:11 - Jack Phelps[ph] question
      1. 1:42:54 - Makin response
      2. 1:43:24 - Whalen response
   5. 1:44:40 - John Serrapere question
      1. 1:46:02 - Roubini response
   6. 1:46:27 - anonymous question
      1. 1:47:44 - Whalen (with Pollock) response
      2. 1:48:44 - Roubini response
      3. 1:49:52 - Makin response
   7. 1:50:42 - Barry Wood question
      1. 1:51:12 - Roubini response
      2. 1:54:36 - Whalen response
   8. 1:55:02 - Christine Eisner[ph] question
      1. 1:55:24 - Zimmerman response
   9. 1:57:22 - Dale Kinsella[ph] question
      1. 1:57:55 - Makin response
   10. 1:58:44 - Pollock brief wrap-up
9. 1:59:06 (end)
   • Notes and References

Alex Pollock: [0:00:00] Good afternoon ladies and gentlemen. [slide² 1]

When in the course of financial events we have a huge bubble and the inevitable succeeding huge bust, a decent respect for the the opinions of mankind requires that we try to learn something useful from the painful experience. That’s the point of these deflating bubble series of AEI conferences, which you all have so kindly supported with your participation. So welcome to Deflating Bubble Roman numeral VI, "The Lessons of the Bubble and Crisis."

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1:27:42 No, might go wrong. - Allan Meltzer

Doom Transcripts: Index & Guide

Almost 19 months later, Doomers may enjoy putting some of these opinions up against what actually took place.

Housing Doom is pleased to present a complete unauthorized annotated transcript for the American Enterprise Institute’s April 28, 2008 event "What Lies Beyond the Credit Crunch? Part II".¹ The event site has a variety of resources including a summary and both an audio and a video of the proceedings. There is an official transcript, but the link to it does not seem to be currently working.

Table of Contents

[link navigation works best when full article displayed]

1. 0:00:00 - Peter Wallison Intro
2. 0:07:43 - Charles Calomiris presentation
3. 0:24:33 - Kevin Hassett presentation
4. 0:36:53 - (interruption for computer problems)
5. 0:39:20 - Desmond Lachman presentation
6. 0:55:22 - John Makin presentation
7. 1:15:02 - Allan Metzer presentation
8. 1:36:04 - Vincent Reinhart presentation
9. 1:55:20 - Panel discussion
   1. 1:55:36 - Calomiris discussion
   2. 2:00:18 - Hassett discussion
   3. 2:01:55 - Lachman discussion
   4. 2:03:41 - Makin discussion
   5. 2:06:49 - Meltzer discussion
   6. 2:10:30 - Reinhart discussion
10. 2:12:34 - Q&A
    1. 2:12:59 - Jeff Wrase question
       1. 2:13:28 - Makin response
       2. 2:13:39 - Wallison digression
          • 2:14:33 - Calomiris response
          • 2:15:47 - Lachman response
       3. 2:16:26 - Lachman response
       4. 2:17:06 - Makin (with Wallison) response
    2. 2:18:34 - Bert Ely question
       1. 2:19:21 - Calomiris response
    3. 2:20:38 - Pieter Bottelier question
       1. 2:21:11 - Meltzer response
       2. 2:23:52 - Makin response
    4. 2:25:00 - Steve Entin question
       1. 2:26:05 - Meltzer reply
       2. 2:27:39 - Lachman reply
    5. 2:28:18 Wallison brief wrap-up
11. 2:28:54 (end)
    • Notes and References

Peter Wallison: [0:00:00] OK, I think we’ll get started. Everyone take his or her seat. I want to welcome you all on a pretty raining and nasty day. I’m delighted that all of you came out. This should be one of the more interesting conferences of the year, and I can understand why you’re all here.

This is the 2nd conference on exactly the same subject. The last time these esteemed AEI economists got together to discuss the future of the credit crunch and the US economy was in December of 2007. At that conference there was sharp disagreement at to whether the US, as a result of that housing meltdown, the credit crunch and other factors was headed for a deep recession, a shallow recession, or merely a slowdown for a quarter or two.

The data presented at that conference showed a serious breakdown in trading in the credit markets, and major losses in housing values. These factors would suggest a serious recession. But at that point there was no clear evidence of a recession, during the 4th quarter of 2007, at least. The Dow, which opened at 13,339 that morning, was down from its high of 14,000, but certainly was not signaling a serious recession.

All the participants in the December conference thought that their predictions would be proved correct when several months of additional data was available, so we scheduled this conference to see [laughs] whether in fact their positions have changed, and whether things have become any clearer to our AEI economists.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a sixth selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the presentation by AEI’s Desmond Lachman.

Desmond Lachman: [1:08:20] Alex, thank-you very much again for organizing this conference at a 6-monthly interval.

I think one’s got to go through life counting one’s blessings, and one of the blessings that I’ve realized that I’ve got to count on now is that my name isn’t Tom Zimmerman, and that I come at the end of the presentation.

Because much of what is said, I really agree with. So I can walk through a presentation. I’ve entitled it "A False Dawn for the Housing Market?" [slide 1²]

In the interests of being optimistic I’ve put a question mark whereas I really meant putting an exclamation mark. [laughter]

Let me start just with the lessons that one can draw from this crisis, and I think that there are a whole bunch of lessons. We’re going to be writing books about this for many years to come, much like The Great Depression we’ll be looking through this crisis. And I very much agree with what both Nouriel and John have said, that one really needs to be paying attention to bubbles, that we’re just creating another bubble that is going to be bursting. But I think that there are just a whole bunch of other lessons to be learned.

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Final risk. The increasing asset prices we’ve seen since March for everything: global equities; in US, equities; EM [emerging market] asset classes; commodity; credit; everything around the world is driven by one factor.

Doom Transcripts: Index & Guide

The penultimate risk was merely the prospect of World War III breaking out.  Fortunately Nouriel was running overtime so Alex had to cut him short just before he got to the scary bit

UPDATE (11/6): Here’s Nouriel’s Nov 4th expansion on the idea

Housing Doom is pleased to present a fourth selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

Dr. Doom was batting cleanup …

Nouriel Roubini: [0:37:03] OK. Tom spoke about housing and mortgages. What Chris spoke about — the banks. So I’ll try to speak about the economy and what’s going to happen to the economy looking ahead.

We’ve had the most severe recession and financial crisis since the Great Depression. Given the monetary and fiscal stimulus and the backstopping of the financial system now we’re close to the bottom, at least on a temporary basis.

And now the debate is, of course, on what’s going to happen — the shape of the recovery. Given what has happened in the markets I would say the markets are pricing now a V-shaped recovery with rapid return to potential growth, and that’s even what the macro forecasters’ consensus is.

There is a second view, which is the one I share, is that this recovery is going to be at best an anaemic, subpar, below trend, with growth well below trend for the next couple of years, much as in the US, but also in advanced economies. So more like a U-shaped recovery. That’s also the view of the IMF and the one of those folks at PIMCO who are talking about A New Normal.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a third selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the presentation by IRA co-founder Chris Whalen.  I see Nouriel on deck, but this one’s going to be a tough act to follow.

So this is what the commenters at Calculated Risk have been going on about …

Chris Whalen: [0:27:02] I’m going to talk a little bit about the industry because we’re in the middle of earnings season, and I apologize for not preparing something, but I’ve been reading bank earnings statements, so I will share some of my impressions of that. And then I want to talk a little bit about not only lessons, but some of the enduring trends that I see that have not been affected by the extensive bailout that the government has put together for our largest financial institutions.

In general, when you look at the industry you have to recall the words of Mr. Feinberg, and I don’t mean the guy who was in the newspaper today, I mean my friend Bob Feinberg in the back of the room, who predicted several years ago in an interview we published that the GSE would become the business model of choice for the United States.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a second selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the presentation by UBS fixed income researcher Tom Zimmerman.  Tom’s the most moderate of AEI’s Six Bears but in my opinion the scariest, because he usually brings the hardest data to the table.

Tom Zimmerman: [0:11:43] Thanks a lot, Alex, it’s great to be here again. [slide 0²] What’s amazing about coming down here every 6 months is that I’m usually viewed as one of the more bearish people in my shop, and also when I speak at conferences around the country I’m usually sort of sitting on the bearish side of these discussions. But I come down here, [laughs] and I’m not … it’s a … I feel like I’m a raving bull about what’s going to happen in the world when you listen to some of these people talk. So anyway, that hasn’t changed, in the last 6 sessions, so …

We had lunch together today, and it’s exactly the same.

I see some green shoots here and there, but I think that it’s not something the other panelists see some real major problems down the road.

What I thought I’d do today is just continue some of the things I’ve talked about before in terms of the housing market, mortgage market. And then at the end talk about some of the lessons that we’ve learned from this bubble which isn’t over with yet, but we’ve learned some lessons or at least some take-aways from it.

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Harold Brubaker of the Philadelphia Inquirer wrote this morning about the bankruptcy of Capmark Financial Group and how it tells us a lot about the future of commercial real estate:

Capmark Financial Group Inc.’s weekend bankruptcy filing surprised no one, but it was still a harsh reminder of the hard times ahead in the commercial real estate industry.

"It’s not a turning point. The problems are only starting," Dennis Yeskey, a senior adviser at AlixPartners L.L.P., a business-advisory firm in New York, said yesterday.

Yeskey and other experts warned that as long as the economy keeps shedding jobs, the commercial real estate market will be plagued by declining demand and falling property prices.

In its Chapter 11 bankruptcy filing Sunday, the commercial-property lender listed assets of $20.1 billion and debts of $21 billion.

What happened to Capmark?

[It] relied heavily on selling loans it had made into the secondary market. When that froze and property values fell, the company got stuck owing more to its own lenders than its loans were worth.

"It’s a template that you will see multiply itself many times over over the next three years," said Matthew McManus, chairman of NAI BlueStone Real Estate Capital, a real estate investment bank in Philadelphia.

Why will we be seeing more problems?

The problem for the industry is that between now and 2013, more than $2 trillion in commercial mortgages, which typically have a five- to 10-year term, will need to be refinanced, according to a July report by Richard Parkus, head of commercial mortgage-backed securities at Deutsche Bank AG. It is not turmoil in the capital markets that is causing the bottleneck, but rather the fact that properties are not worth enough to retire the old debt in a refinancing, Parkus said.

The value of commercial properties has fallen 40 percent from their peak in October 2007 through August, according the Moodys/REAL Commercial Property Price Index.

But we’ve been told that the smaller banks that did the commercial loans were in better shape than the big guys, right?

Regulators expect closures to ripple through hundreds of small banks over the next couple of years, especially in the Midwest and Southeast, where lenders have been hard hit by the recession.

These banks loaded their balance sheets with loans to home builders and other property developers to make up for lost business in credit card and mortgage lending that bigger competitors wrested away. They eased their lending standards during the boom years and made big bets on new housing developments, strip malls and office projects. Now, many of those deals are falling apart, and the lenders are scrambling to raise capital to cushion the losses.

“These banks were big enough that they could do loans that were fairly sizable,” said John R. Chrin, a former investment banker who is now an executive in residence at Lehigh University. “If they go bad, they are toast.”

Burned toast.

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a fourth selection from our under-construction transcript of the American Enterprise Institute’s October 9, 2009 event "No Way Out: Government Response to the Financial Crisis".¹ The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the Panel I  response to Vince Reinhart by Tudor Investment Corporation’s Angel Ubide.

Angel Ubide: [1:02:45] I think Vincent forgot to mention at the beginning of his presentation of something he says in his introduction. That is, the narrative of this crisis will be the most permanent impact over the global economy, above and beyond the very sharp recession we have suffered, and the increasing unemployment, and everything else. Because it is those narratives that then will define the policy reaction to it and the way the markets and the economies will operate over the next — probably decades.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a second selection from our under-construction transcript of the American Enterprise Institute’s October 9, 2009 event "No Way Out: Government Response to the Financial Crisis".¹ The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the Panel I  response to Vince Reinhart by Economist US economics editor Greg Ip.

Greg Ip: [0:31:42] … and thank-you Chris, [slide 1²] for turning on my microphone. [laughter]

Vincent’s paper that he asked me to comment on covers an amazing amount of ground, and so I can’t possibly comment with any intelligence on all of it. I’m not sure I can comment intelligently on any of it, but I’m going to try and tackle point number 4 in Vincent’s original list of factors, which was the role of international linkages in this crisis. [slide 2] Because, as he says in his own paper, most of the research so far has been narrow and focused inward to the United States, whereas one of the central mysteries or puzzles of this whole affair is how an initiating economic shock, which was essentially a decline in values of particular mortgages and real estate in the United States could wreak so much havoc around the world.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a first selection from our under-construction transcript of the American Enterprise Institute’s October⁴ 9, 2009 event "No Way Out: Government Response to the Financial Crisis".¹ The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the Panel I  presentation by AEI’s  Vincent Reinhart.

Vincent Reinhart: [0:03:50] So I’d like to set the stage [slide 1²] for these guys’ conversation about what just happened to us, and what’s the way forward by asking 5 questions relevant to where we go from here. And those are [slide 2] …

1. Why are US households so undiversified?
2. How should we manage the crisis?
3. How should we deal with troubled financial institutions?
4. What has been the role of the international sector? and,
5. How should the Federal Reserve respond to asset prices?

And I’ll take those in turn.

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