Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

[mmr]

Re: Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

If the debt and home price reduction were in nominal terms, the government would have to print an equivalent amount of money and issue an equivalent amount of debt to recapitalize the banking system and cover losses on all of the Fannie / Freddie debt that would otherwise default. That would just represent an additional shift of debt from private to public account, with some ugly impacts depending on how / whether the Treasury could actually issue enough debt to make good on its guarantees.

A 50% decline in real terms in home prices and mortgage debt would imply a severe inflationary scenario where, for whatever reason (collapsing real wages, or limitations on mortgage lending) consumers would be limited in their ability to afford real estate as a hedge against inflation.

To your point regarding financialization, given the current incentives, I suspect that consumers would start to re-lever to take advantage of the "buying opportunity", with debt and home prices returning to near current levels fairly soon.

[jk]

Re: Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

what's needed is for the real values of homes to remain constant while their nominal values double. that would cut the debt in half.

[GRG55]

Re: Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

what's needed is for the real values of homes to remain constant while their nominal values double. that would cut the debt in half.

And if that happened in a short period of time...say 2 or 3 years...wouldn't that be, um, a housing bubble?

[jk]

Re: Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

And if that happened in a short period of time...say 2 or 3 years...wouldn't that be, um, a housing bubble?

NO. a housing bubble is when the real values of homes rise faster than inflation, i..e faster than prices in general. i want real values to remain constant while only nominal values double, i.e. to rise no faster than prices in general. the real value of the associated debt, being fixed nominally, would be cut in half.

[mmr]

Re: Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

That outcome would be helpful, but for that to happen, wouldn't you have to restrict the ability to borrow against housing? Otherwise investors will simply take on new debt (that will be depreciating in real terms during the inflation) to purchase an asset that would hold its value (in real terms).

Given that housing values are still being propped up by access to leverage, it may be challenging to maintain their real value at the current level under any circumstances - once the ability to borrow goes away, so do many of the buyers, at least at current price levels.

[jk]

Re: Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

That outcome would be helpful, but for that to happen, wouldn't you have to restrict the ability to borrow against housing? Otherwise investors will simply take on new debt (that will be depreciating in real terms during the inflation) to purchase an asset that would hold its value (in real terms).

Given that housing values are still being propped up by access to leverage, it may be challenging to maintain their real value at the current level under any circumstances - once the ability to borrow goes away, so do many of the buyers, at least at current price levels.

i guess this would depend on the stringency of lenders. certainly people who are underwater at this time wouldn't be able to use their houses as atm's.

[c1ue]

Re: Facebook Co-Founder Saverin Gives Up U.S. Citizenship Before IPO

If the debt and home price reduction were in nominal terms, the government would have to print an equivalent amount of money and issue an equivalent amount of debt to recapitalize the banking system and cover losses on all of the Fannie / Freddie debt that would otherwise default.

This is true, but it has been happening anyway. The difference would be that the 'print and spend' wouldn't be going straight into the banksters pockets via trading liquidity, bailouts, and so forth.

A 50% decline in real terms in home prices and mortgage debt would imply a severe inflationary scenario where, for whatever reason (collapsing real wages, or limitations on mortgage lending) consumers would be limited in their ability to afford real estate as a hedge against inflation.

That might be true if a stagflation scenario were pushed for - I'm talking about a fiat act like the FDR revaluation of gold.

To your point regarding financialization, given the current incentives, I suspect that consumers would start to re-lever to take advantage of the "buying opportunity", with debt and home prices returning to near current levels fairly soon.

I'd say while this certainly could happen, it would only happen with the acquiescence of government, as the government is effectively the dominating force in the real estate loan market today. Whether it is via FHA, Fannie/Freddie, or regulatory actions, or all three, ultimately the federal government is quite capable of keeping house price inflation under control via stricter loan issuance and loan purchase policies.