Reply #78: Josh Rosner on US Housing Market

[Demeter]

http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=269


Rosner: The housing market woes in the US will not be over before 2010, regardless of what legislative initiatives come out of Washington. The fundamental reason why we are having these problems in the US is that real wages and incomes have not kept pace with home prices since the 1960s and that's what drove demand for these affordability products. Unless the Congress wakes up and let's home prices correct so that we restore some balance between wages and affordability, this problem will remain for years to come.

The IRA: That implies a 40-50% cut in home prices from peak levels and an insolvent US banking system.

Rosner: Yes, long term trends in home prices suggest that we will revert to the peak levels of the previous cycle. That implies that we are going back to the pre-1991 peak home price levels.

The IRA: Yikes. Then you agree with our view that the US government may be forced to take over some of the largest banks?

Rosner: Yes, well, we won't call it nationalization, but in economic terms that is the substance of the situation. One of the striking comments I hear in Europe is that at least with Northern Rock, the Financial Services Authority in the UK screwed up the first time, but then admitted the mistake and publicly nationalized the bank. With Bear, Stearns, the US has nationalized the bank and appointed JPMorgan as conservator, but then US regulators tell the public and the Congress that it was not nationalization.

The IRA: The Fed seems to be incapable of admitting that they screwed up, whether on structured assets or Bear Stearns. I've never heard anyone at the Fed admit, for example, that their active push to allow banks to migrate more and more business over the counter and off exchange has vastly increased systemic risk.

Rosner: The difference between Fed's prior to the Greenspan and the Bernanke Fed is that the former did not see themselves as part of the President's Cabinet

The IRA: Exactly, Bernanke seems completely co-opted by Paulson and the Goldman Sachs mafia that runs the Treasury. Both Bernanke and Geithner seem so weak and lacking in market experience that is almost sad to watch them testify next to banksters like Steel and Paulson.

Rosner: Correct and that is a very dangerous path for the United States.