Housing bottom?

Amid all the talk of us now hitting the housing bottom, keep in mind that housing is a purchase “on time,” and that when mortgage interest rates go up to 6 percent, housing prices will fall about 20 percent, income levels remaining constant.

I view the current bottom as local, not global, and a bear trap from an investment point of view.  It’s strictly a cash-flow play at this point, which is why the big boys with unlimited access to zero percent money are piling in.

It may take ten years for rates to go up, but during that period the potential for price appreciation is limited by highly indebted and skittish Millennials, downsizing Boomers, and a generally sluggish economy.

What if we inflate?  Interest rates adjust to inflation much more quickly than housing prices.  I think the affordability would fall quickly.  Of course, if you’re betting on a strong inflation later in the decade, as some are, the time to buy is now, as a debt-deflation is probably just as likely, this isn’t the bet it was for the sixty years up to 2005.

I just can’t get excited about the talk of a housing bottom.

Am I my brother’s keeper? (reprise)

Via:  firedoglake.com

The Cainite Repubicans say no, they say the bottom 47 percent are all a bunch of victim whiners. 

But the bottom 20 percent is doing worse than I imagined, according to the BLS.  And many of us are only a job loss or two away from joining them.  There will be a need for low cost [ware-] housing for the Americans frozen out of the economy as more of them lose their houses and can’t afford market rents.  I’ve often said my retirement will probably be in a single-wide mobile home in the desert.

Expensive to Be Poor: Expenses Twice as Much as Income for Bottom 20% of US Households

By: David Dayen Thursday September 27, 2012 11:38 am

A new study from the Bureau of Labor Statistics out today probably won’t get as much notice as their other report showing the US gained 386,000 jobs more than expected. However, this one shows a persistent problem in America, that it’s actually expensive to be poor.

The average individual in the lowest 20% of the income ladder had take-home pay of $10,074 and average expenses of $22,011. That’s more than double, and it makes being poor nearly impossible to manage. The story for the second and third quintiles weren’t much better, with their expenses roughly commensurate to their income, meaning they live paycheck-to-paycheck and save next to nothing. But the expenses-versus-income report for the poorest Americans is almost unreal.

The Huffington Post puts some of these numbers in context:

This percentage of households includes many retirees, who are presumably living off savings.

Many of these households may be spending more than they earn through some combination of loans from family and friends, credit cards, savings, and payday loans. The government helps a bit with an income tax credit: The average bottom-fifth household’s after-tax income is $269 higher than its before-tax income. The income accounted for includes welfare and Social Security benefits.

Many are also taking on debt. In 2010, roughly one-quarter of the poorest fifth of households held a high debt burden, or had debt service payments exceeding 40 percent of their income, according to the Economic Policy Institute.

These households mainly are spending on necessities such as food, shelter, utilities, clothing and transportation. The average bottom-fifth household spent 87 percent of its after-tax income on housing alone last year.

Housing bottom? You’ve got to be kidding

With all the divination of the graphical tea leaves going on—are we at a bottom, or bouncing along the bottom, or will we go lower?  gasp!—it is worth remembering that houses are bought “on time,” and that most people buy all the house they can (even if they have to put down 20 percent)—and that interest rates are currently at historical lows, so that a further decline is just about baked in, especially given current price weakness.

If mortgage rates rise from 4 percent to 6 percent, the payment on a 30-year mortgage goes up 25 percent.  People aren’t going to be able to afford the same price house.  Here are empirical results for the Case-Shiller 10 City and US indices showing the inverse relationship between house prices and interest rates very clearly:

Add to this problem—and interest rates will go up again sometime, and if they go up in a galloping inflation we will see a complete collapse of the housing market, as banks and their regulators will not permit another bubble to form quickly—although one will form even with 20 percent down given enough time—and because interest rates will rise more quickly than house prices, and because people are becoming just as afraid of the housing market as they are of the stock market.

You say we’re near a housing bottom?  You’ve got to be kidding!

House prices and interest rates

The February value of the index was 153.  The 30-year mortgage rate is about 4.7 percent.  If and when long-term interest rates go up just 150 basis points, housing prices in aggregate might be expected to take a further hit in the neighborhood of one third.

Here is the chart for the Composite-US series beginning in 1987.  A rise in mortgage rates to 6 percent would imply a further 20 percent fall in house prices.  And that assumes no overshooting.

As www.patrick.net says, now is not a good time to buy a house. 

***

P.S.  Having just had the opportunity to compare OSX and Windows 7 directly and to get my new computer tweaked to my liking (I deleted all Dell’s bloatware) I must say that Win7 is a pretty good imitation of OSX.  Taskbar = dock, lots of graphical niceties, and with 8 gig RAM and a quad-4 CPU, Win7 does its “ontogeny recapitulates phylogeny” schtick pretty quickly and without too many annoyances.  So convergent evolution appears to have worked okay in this instance.

Nearly 11 Percent of US Houses Empty

Via:  cnbc.com  That would be 18 million houses.  Slightly more than one per officially unemployed person.

By: Diana Olick

I usually find the quarterly homeowner vacancy and homeownership report from Census pretty lackluster, but the latest one released this morning was anything but.

America's home ownership rate, after holding steady for a while, took a pretty big plunge in Q4, from 66.9 percent to 66.5 percent. That's down from the 2004 peak of 69.2 percent and the lowest level since 1998.

Homeownership is falling at an alarming pace, despite the fact that home prices have fallen, affordability is much improved and inventories of new and existing homes are still running quite high.

Bargains abound, but few are interested or eligible to take advantage.

More concerning than the home ownership rate is the vacancy rate. The Census tables don't tell the entire story, but they tell a lot of it. Of the nearly 131 million housing units in this country, 112.5 million are occupied. 74.8 million are owned, and that's only dropped by about 30 thousand in the past year. 38 million are rented, but that's up by over a million year over year. That means more new households are choosing to rent.

Now to vacancies. There were 18.4 million vacant homes in the U.S. in Q4 '10 (11 percent of all housing units vacant all year round), which is actually an improvement of 427,000 from a year ago, but not for the reasons you'd think.

The number of vacant homes for rent fell by 493 thousand, as rental demand rose. 471,000 homes are listed as "Held off Market" about half for temporary use, but the other half are likely foreclosures. And no, the shadow inventory isn't just 200,000, it's far higher than that.

Slideshow: 10 U.S. Cities Where Renting Beats Buying

So think about it. Eleven percent of the houses in America are empty. This as builders start to get more bullish, and renting apartments becomes ever more popular. Vacancies in the apartment sector have been falling steadily and dramatically, why? Because we're still recovering emotionally from the toll of the housing crash.

Younger Americans have seen what home ownership has done to their friends and families, and many want no part of it. Credit has become very nearly elitist. Home prices, whatever your particular data provider preference might be, are still falling.

Wealth effect vs. wealth illusion

With all the talk about renting vs. buying a house, I thought it might be worthwhile to examine borrowing to own vs. owning outright or paying down principal on a mortgage.

I’ve been trying to convince my brother of the wisdom of paying down his mortgage with the piles of cash he likes to sit on.

Married filing joint the interest deduction doesn’t really kick in until one’s total deductions exceed the standard deduction, which is about $11,000.  Assume a marginal tax rate of 25 percent, which covers a household income of about $68,000 to $137,000.

If the only deductions you have are your mortgage, at a rate of 6 percent you’d have to have a principal outstanding of about $183,000 before you got the first dollar of deductibility (=11,000/.06).  If you make charitable contributions or have other deductions, you will achieve deductibility with a lower principal balance.

Now that 6 percent is paid out of after-tax dollars.  The equivalent before-tax return required to match that as an “investment” would be 6/(1-.25) = 8 percent with certainty.

You can’t get 8 percent with high risk nowadays, let alone with certainty.

So if you own a home and your deductions are below the standard deduction, paying down your mortgage is probably the best financial investment you can make.  It’s also an investment in peace of mind.  After all, your property taxes should be going down, too, so your cost of home ownership should be taking a double dip.

So when my brother tells me he has some huge amount (speaking five figures here) of cash piled up and that he’d feel poor if he paid down some of the balance on his mortgage, a balance still many times his cash balance, I tell him—

“It’s an illusion.  You don’t really have that money.”

With this arithmetic and the mortgage debt of the American people—not to mention the volatility of the stock market the past couple of years—is it any wonder that funds are flowing out of retail mutual funds?

The ruthless rich

Via:  finance.yahoo.com

Biggest Defaulters on Mortgages Are the Rich

On Thursday July 8, 2010, 8:51 pm EDT

LOS ALTOS, Calif. — No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.

The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars is seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.

Not so long ago, said Chris Redden, the paper’s advertising services director, “it was a surprise if we had one foreclosure a month.”

The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago — like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.

In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.

“I’ve never seen the wealthy hit like this before,” Mr. Lowman said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”

The defaulting owners, he said, often remain as long as they can. “They’re in denial,” he said.

Here in Los Altos, where the median home price of $1.5 million makes it one of the most exclusive towns in the country, several houses scheduled for auction were still occupied this week. The people who answered the door were reluctant to explain their circumstances in any detail.

At one house, where the lender was owed $1.3 million, there was a couch out front wrapped in plastic. A woman said she and her husband had lost their jobs and were moving in with relatives. At another house, the family said they were renters. A third family, whose mortgage is $1.6 million, said they would be moving this weekend.

At a vacant house with a pool, where the lender was seeking $1.27 million, a raft and a water gun lay abandoned on the entryway floor.

Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.

Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.

In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.

With second homes, the delinquency rate for both types of owners was rising in concert until the stock market crashed in September 2008. That sent the percentage of troubled million-dollar loans spiraling up much faster than the smaller loans.

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”

Willingly, but not necessarily publicly. The rapper Chamillionaire is a plain-talking exception. He recently walked away from a $2 million house he bought in Houston in 2006.

“I just decided to let it go, give it back to the bank,” he told the celebrity gossip TV show “TMZ.” “I just didn’t feel like it was a good investment.”

The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.

“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” Mr. White said.

The CoreLogic data measures serious delinquencies, which means the borrower has missed at least three payments in a row. At that point, lenders traditionally file a notice of default and the house enters the official foreclosure process.

In the current environment, however, notices of default are down for all types of loans as lenders work with owners in various modification programs. Even so, owners in some of the more expensive neighborhoods in and around San Francisco are beginning to head for the exit, according to data compiled by MDA DataQuick.

In Los Altos, Los Altos Hills and the most expensive neighborhood in adjoining Mountain View, defaults in the first five months of this year edged up to 16, from 15 in the same period in 2009 and four in 2008.

The East Bay suburb of Orinda had eight notices of default for million-dollar properties, up from five in the same period last year. On Nob Hill in San Francisco, there were four, up from one. The Marina neighborhood had four, up from two.

The vast majority of owners in these upscale communities are still paying the mortgage, of course. But they appear to be cutting back in other ways. The once-thriving Los Altos downtown is pocked with more than a dozen empty storefronts in a six-block stretch.

But this is still Silicon Valley, where failure can always be considered a prelude to success.

In the middle of a workday, one troubled homeowner here leaned over his laptop at the kitchen table, trying to maneuver his way out from under his debt and figure out the next big thing.

His five-bedroom house, drained of hundreds of thousands of dollars of equity over the last 13 years, is scheduled for auction July 20. Nine months ago, after his latest business (he has had several) failed in what he called “the global meltdown,” the man, a technology entrepreneur, said he quit making his $9,000 monthly payments.

“I’m going to be downsizing,” he said.

The man spoke on the condition of anonymity because, he said, he did not want his current problems to interfere with his coming reinvention. “I’m a businessman,” he explained. “I have to be upbeat.”

Tsunami of rate resets just offshore

Via:  Real Estate News  See also continuing coverage of housing on www.patrick.net.

The housing market is far from stabilized.

The Wile E. Coyote moment for the U.S. economy

Via:  Business Wire  While there is a natural tendency for “animal spirits” to buoy the business cycle for a couple of years here, I do not see an immediate double dip (see “animal spirits” update).  However, we are only part-way through our deflationary collapse in my analysis, as evidenced by the article below (see also this). 

We are living through the “Wily Coyote moment” for the United States economy, where the economy has gone off the cliff but hasn’t realized it.  America is a basket case:  give us a livable workfare and health benefits for the unemployed before the country becomes a humanitarian disaster area.

Fitch: Delinquency Cure Rates Worsening for U.S. Prime RMBS

NEW YORK--(BUSINESS WIRE)--While the number of U.S. prime RMBS loans rolling into a delinquency status has recently slowed, this improvement is being overwhelmed by the dramatic decrease in delinquency cure rates that has occurred since 2006, according to Fitch Ratings. An increasing number of borrowers who are 'underwater' on their mortgages appear to be driving this trend, as Fitch has also observed.

Delinquency cure rates refer to the percentage of delinquent loans returning to a current payment status each month. Cure rates have declined from an average of 45% during 2000-2006 to the currently level of 6.6%. It is important not only to observe total roll rates, but delinquency cure rates as well, according to Managing Director Roelof Slump.

'Recent stability of loans becoming delinquent do not take into account the drastic decrease in delinquency cure rates experienced in the prime sector since the peak of the housing market,' said Slump. 'While prime has shown the most precipitous decline, rates have dropped in other sectors as well.'

In addition to prime cure rates dropping to 6.6%, Alt-A cure rates have dropped to 4.3%, from an average of 30.2%, and subprime is down to 5.3% from an average of 19.4%. 'Whereas prime had previously been distinct for its relatively high level of delinquency recoveries, by this measure prime is no longer significantly outperforming other sectors,' said Slump.

The general deterioration in home prices appears to be a key driver in the worsening cure rate behavior. Due to home price declines, loans that have recently become delinquent have an effective loan to value ratio that is on average approximately 23% higher than those loans that are current on their payments, and are typically over 100%. Since home price declines have been relatively more severe in certain areas such as California and Florida, these areas tend to have a higher degree of representation in the non-current category. While California and Florida represent 49% of the remaining outstanding balance of currently performing prime loans, these states make up 62% of the non-current category and are under-represented in the 'cured loan' category as well. Furthermore, up to 25% of loans counted as cures are modified loans, which have been shown to have an increased propensity to re-default.

Recent data shows prime current-to-delinquency rates at 89% of the December 2008 levels, though new rolls-to-delinquency are still elevated when compared to historical standards. Recently observed three-month average roll rates of 1.1% are nearly twice the level seen from the 2000 through current averages for prime. Additionally, the gross roll rates do not reveal some additional important information relating to prime loan performance.

Other stresses may also be playing a part in the worsening cure rates. Although current credit score information is not generally available for all borrowers, some significant differences are noted between the original credit profiles of the current and delinquent prime loans. On average, current prime loans had credit scores at origination that are seen to be 25 points higher than the delinquent loans. Also, the loans that are current have shown a higher percentage of full income documentation than those that have recently become delinquent. 'As income and employment stress has spread, weaker prime borrowers become more likely to become delinquent in their loan payments and are less likely to become current again,' said Slump.

Regardless of aggregate roll-to-delinquent behavior, it will be difficult to argue that the market has stabilized or that performance has improved, until there is a concurrent increase in cure rates. This is especially true in the prime sector, which remains performing many times worse than historic averages. Prime 60+ delinquencies have more than tripled in the past year, from $9.5 billion to $28 billion total, or roughly $1.6 billion a month.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Downdraft: stress testing “animal spirits”

Warning:  This is research, not investment advice.  You invest at your own risk.

With the coming wave of foreclosures (see Mish and T2 under Worthwhile Reading on left) and the worldwide market plunge this morning, I thought it would be worth considering what kind of unemployment increase it would take to drive confidence down.  More than is likely to occur, it turns out:

Even assuming unemployment (U3) goes to 18 percent, after a jag down confidence will crawl upward, the next outright collapse due in about 2013 or 2014. 

The Feds can be expected to panic about now and inject untold amounts of liquidity into the market.  As I pointed out in Animal spirits in the stock market, the Big Mo in the stock market is very positive.  And if you believe Tyler Durden and other close-in observers, there is ample manipulation of the market taking place, so we might expect this downdraft to be allowed to go a while to achieve verisimilitude, setting the stage for a miraculous rally.

Preconditions by my lights for a double-dip recession (as opposed to simply a severe “underemployment equilibrium” in slow-or-no growth mode) are (1) an inversion of the 1/10 Treasury yield curve (that could be accomplished by a currency crisis in short order with collapse to follow a year later) and (2) some level of perceived unemployment that would push the U – UMEAN spread wider; this could happen if people start considering U6 to be the “true” unemployment rate (reference); or (3) the overall level of macroeconomic and world volatility and instability overwhelms people’s ability to adapt and feel at all confident. 

Break up the Fed (then abolish it)

An op-ed in the WSJ of all places is saying pretty much what I wrote to my elected representatives in Fire Bernanke, Audit and Abolish the Fed.  Take actual banking regulation away from the eggheads and away from New York City.  Set up a bank examination agency somewhere in fly-over land and staff it with people who actually know banking.  The loans that were booked during the real estate bubble were laughable.   “Purchase money seconds”?  “Zero down”?  “Negative am”?  Please!  Any responsible banker of a generation or two ago would—and many did—gag on this crap.  It is encouraging that the article below appeared in the Wall Street Journal. 

The next step is to demolish B of A, Citi, JP Morgan, HSBC and Wells, all of whose balance sheets are probably jokes.  See Regulatory reports show 5 big banks face huge loss risk.  The “fortress balance sheet” of JPM is riddled with worthless derivatives, probably.  Time for a new sheriff who will take on the oligarchs and knock down their houses of cards.  These banks have been run like hedge funds and deserve to be dismantled and put under new leadership.  This is the kind of banking that Glass-Steagall and the other reform legislation of the early thirties sought to abolish, and that Larry Summers et al. brought back because “markets are self-regulating.”   

The sooner the President understands that the pitchforks aren’t just for the bankers, and gets rid of the Wall Street players who have ripped off the American public (Summers, Geithner, Bernanke for starters)—and embraces really radical financial reform and some pay-back of the banking bailouts, the better the President’s chances of political survival are.  Because asset values probably haven’t hit bottom, and the public won’t stomach any more bailouts, so more big losses are probably coming for the banks with lots of derivatives.

Via:  WSJ

Let’s Break up the Fed

The Federal Reserve has done a terrible job at financial regulation. Why give it more power?

By AMAR BHIDé

The Obama administration’s plan to increase the powers of the Federal Reserve, says one critic, is like giving a teenager “a bigger, faster car right after he crashed the family station wagon.” Treasury Secretary Timothy Geithner disagrees. He argues that the Fed is “best positioned” to oversee key financial companies, and that the Obama plan would give the Fed only “modest additional authority.”

Mr. Geithner is right about one thing: The Fed’s power is already vast.But it wasn’t even well-positioned to supervise the likes of Citicorp. Broadening the Fed’s responsibilities won’t help. Instead, we should think of how best to dismantle an overextended Fed.

Though advanced economies like ours require organizations capable of taking on a wide range of activities, there are limits. As Frank Knight, the great Chicago economist, pointed out in his 1921 classic “Risk, Uncertainty, and Profit,” individuals who control large organizations have to delegate many decisions to subordinates. Entities like hedge funds, where individuals such as George Soros make most of the consequential choices, are exceptions.

Therefore, good judgments about people—picking the right subordinates, refereeing staff conflicts, evaluating performance, and so on—are crucial.

Good judgment requires experience, not just exceptional intelligence or raw ability. Although many lessons about managing people can be applied to different fields, good judgment also requires some specific expertise. You can’t manage plumbers without knowing something about plumbing.

Unfortunately no one can learn everything about everything. Yes, Lou Gerstner turned around IBM without any prior experience in the computer business. But he had decades of general management experience, was an exceptionally quick study, and had to come up to speed in just one industry. Individuals who can learn how to effectively lead conglomerates, especially during periods of transition, are exceedingly rare.

This mismatch between what even the most talented minds can learn and the challenges of controlling widely disparate businesses has helped bring our financial system to the brink of collapse. The great names in finance once had distinctive identities and capabilities: Salomon Brothers was the champion in bond trading; Merrill Lynch’s thundering herd was tops in retail brokerage; Morgan Stanley and J.P. Morgan’s white-shoe bankers built formidable blue-chip client lists; and Bear Stearns’s PSDs—poor, smart and driven staff—cultivated scrappy entrepreneurs. Willy-nilly diversification turned these focused outfits into highly leveraged, unwieldy agglomerations of unrelated fiefdoms.

Likewise, the Fed has been incapacitated by its transformation into an omnibus enterprise with responsibilities ranging from boots-on-the-ground regulation to high-level monetary policy. The Federal Reserve Act of 1913, which created the Federal Reserve System, did so to forestall financial panics rather than pursue macroeconomic policies. The gold standard defined monetary policy. The Fed was merely meant to “provide an elastic currency” by serving as lender of last resort in times of crisis. The Act also assigned the Fed routine responsibilities for maintaining and improving the financial system—examining banks, issuing currency notes, and helping clear checks.

The adoption of Keynesian and monetarist ideas by central bankers and elected officials subsequently cast the Fed in a proactive macroeconomic role. William McChesney Martin, who served as chairman from 1951 to 1970, said that the job of the Fed was “to take away the punch bowl just as the party gets going.” This might have been wise in theory, but it wasn’t mandated by the law. In 1977, an amendment to the 1913 Act explicitly charged the Fed with promoting “maximum” employment and “stable” prices. The Humphrey-Hawkins Full Employment Act that followed in 1978 mandated the Fed to promote “full” employment and while maintaining “reasonable” price stability.

Legislation also has increased the Fed’s responsibilities for overseeing the mechanics of the financial system. The Bank Holding Company Act of 1956 gave the Fed responsibility over holding companies designed to circumvent restrictions placed on individual banks. It was tasked with regulating the formation and acquisition of such companies.

Congress further tasked the Fed with enforcing consumer-protection and fair-lending rules. The Fed was made the primary regulator of the 1968 Truth in Lending Act that required proper disclosure of interest rates and terms. Similarly, the Community Reinvestment Act of 1977 forced the Fed to address discrimination against borrowers from poor neighborhoods.

The expansion of bank holding companies into activities such as investment banking and off-balance-sheet exposures to complex instruments such as credit-default swaps also required the Fed to increase the scope of its supervisory capabilities.

In principle, an exceptionally talented theorist might capably run a Fed focused just on monetary policy. Setting the discount rate and regulating the money supply are centralized, top-down activities that do not require much administrative capacity. But without deep managerial experience and considerable industry knowledge, effective chairmanship of a Fed that relies on far-flung staff to regulate financial institutions and practices is almost unimaginable. The vast territory the Fed covers would challenge the most exceptional and experienced executives.

As it happens, the Fed has been led for more than 20 years by chairmen who had no senior management experience. Prior to running the Fed, Alan Greenspan started a small consulting firm and Ben Bernanke was head of Princeton’s economics department. Given their understandable preoccupation with monetary and macroeconomic matters, how much attention could they be expected to devote to mastering and managing the plumbing side of the Fed? While the record of the Fed’s monetary policy has been mixed, its supervision of financial institutions has been a predictable and comprehensive failure.

The Fed’s excessively broad mandate also has thwarted accountability. The CEOs of Citibank, AIG, Bear Stearns, Lehman and Countrywide are all gone—albeit with too much delay and with no clawback of unmerited compensation. At the Fed, no high-level heads have rolled. Mr. Geithner was promoted to treasury secretary. Mr. Bernanke is treated with great deference as he solemnly testifies that if it weren’t for the Fed, the crisis would have been much worse. But then, how can anyone be held responsible for failing at a job no human could do?

At the very least we should split the monetary policy and regulatory functions of the Fed, as was done through the Maastricht Treaty that established the European Central Bank. What we need now is a debate about how to break up the Fed—and some of the sprawling financial institutions it supervises—in order to make both the regulator and the regulated more manageable and accountable.

Mr. Bhidé, a visiting scholar at Harvard, is the author of “The Venturesome Economy” (Princeton University Press, 2008). He is currently writing a book about the financial crisis.

Debt fueled Wall Street’s gilded age

Via:  T2 Partners   Great set of charts on debt and housing h/t Mish  Who got stuck holding the bag?