Friday, June 12, 2009

Kashkari Admits Regulators Didn't See Housing Bubble

Recently, Neel Kashkari, former Goldman Sachs man and former interim head of the Treasury Department's Office of Financial Stability, spoke at Wharton's San Francisco campus. HIs speech covered his views on the causes of the recent financial crisis.

At one point, he comes out and admits that regulators missed the bubble, just like homeowners did:

"Homeowners took out ever larger mortgages with little or no down payment and little or no documentation of income. Regulators, investors and homeowners took comfort from the belief that home prices only go up.

"As we have learned, that belief was incorrect."

Which raises the question, What superior abilities are regulators, tasked with monitoring for bubbles, supposed to have? In truth, they don't have superior abilities, and will, in fact, be motivated by political agendas, which may result in ignoring some bubbles and shutting down fierece industries from real growth where no bubble exists.

Kaskari followed his comment on regulators with the observation that:

"...home prices adjust downward slowly, in part due to homeowners' reluctance to realize losses; most people would rather keep their home than sell for a loss if they can avoid it since it usually is their largest financial asset."

And then states:

"Treasury also launched a multi-part housing program to reduce borrowing costs and encourage long-term sustainable loan modifications. Finally, Treasury launched a public-private investment program to purchase illiquid assets from banks which has received strong interest from private sector participants."

Kashkari doesn't seem to get that his point about the slow adjustment in prices downward may be to some degree the result of the programs the government has announced.

Who wouldn't homeowners and bankers wait around before trying and sell an illiquid asset at a discount price, when it is clear that the government is doing everything possible to prop up the sector?

Bottom line, from regulators; clulessness to government interventions, Kashkari has all the facts, he just needs someone to help him connect the dots.

1 comment:

  1. Wenzel,

    Who is that someone and how would they get an audience with him?

    Psychologically speaking, do you really think "You F'ed up big time, Neil!" is really what these people are looking to hear?