TOO CLEVER BY HALF

We'll get to that in a minute, but yesterday we closed with the question of what might be the result of my scenario should it come to pass. Fact is, I'm not really sure and Barney has been saying that it will never happen given the assumed fall in homeowner net worth and the "I'm poor" feeling that would produce. But think about it for a minute; if you were going to explore an idea such as this when would there be a better time to do it than right at this point in time when there has been a hugh fall of home values surpassing the collapse of all previous bubbles. The rationalization of laying the foundation for a sounder future through a reform of the tax code would be a powerful selling point. Further, it would be argued that this would reduce the possibility of further bubbles by making personal residences a place in which to live not an investment vehicle for speculators. Finally, it would be pointed out that our tax treatment of personal residences is unique in all the world and shouldn't we be like everyone else?

I am not one who believes that a change of ownership in the property up on Capitol Hill is a sure thing come November and if I am right, look out. How would you get it through? Oh, lots of ways. A one-time deduction between appraised value and purchase price could be a big seller especially for high income individuals which could prove immediately attractive which, coupled with mortgage assistance financing at subsidized rates would shut up a lot of opposition. Holders of MBSs of homes now underwater would care less as most of those would carry governmental guarantees as they do today. It would a completely unproductive exercise but like the frog in a slowly warming pot, the taxpayer would feel little pain until death. As time marches on the government would receive an increased revenue stream which of course will be immediate spent on other useless processes but this generation of pols will consider themselves wonderfully brilliant to levels at which not even they imagined. New and imaginative methods of home financing would emerge most of which would have direct government support and be priced--by federal edict--a a small margin through treasuries...as they should. There will be little profit in the conduct of this business as the conforming amount will be higher than it is today and with a great deal of the speculative upside removed a larger percentage of home ownership will be financed in this manner. The result will be that fewer and fewer lenders will be available and the packaging and sale of mortgage backed securities will become an exercise in duration only. One could go on and on. Is it a bad Brave New World? You decide. But remember; what is envisioned here is the Federal Government essentially becoming the sole provider of credit to the housing market. I think you know where I stand. NOW if this were to be PART of a comprehensive reform of our tax code...

So, I though I was really going to be clever and segue yesterday's effort into the latest twist and turn in the housing saga, to wit the attempt by some holders of mortgage to force the sellers of the same to take back the product, at, par, in legal proceedings which has already been successful in a couple of court hearings. Too clever by half. The NY Tlmes broke the story today and I must say that the Times pretty much said what I would have said: how the hell does an insurer like MBIA who charged as little as $77,000 per $100 million of guarantees have the nerve, in the face of a prospectus of 400 pages with a gazillion spelled out risk factors and who admits that they never---or hardly ever--took the time to do due diligence on the underlying loans have the nerve to claim they were duped by the arranger? Mind boggling, and yet some have been successful in claims such as this--all are being appealed by the way. Some time ago I think I said what we witnessed was the greatest misplacing of risk in the history of the world. In spades my friends. Actually the Times had a good day. Even Krugman got it somewhat right in his column. Well, at least he didn't say anything really stupid.

have a great weekend. Oh harvested my first Sicilian egg plant yesterday. it was wonderful.