What is common between banking and trading systems and how to fix housing slump

What does banking and trading systems have in common? Actually quite a bit:

First of all bank lending is defined by certain rules and regulations. For example when you submit an application for mortgage bank checks you credit score, your tax return, verify you debt to earnings ratio, verify value of property. (Obviously, I am assuming standard procedures and not what are considered "bad" practices). The procedures are collective wisdom of previous years of banking which were designed to make sure that the bank makes money. In a trading system, there are a number of rules in place which designer of the system thought would generate positive return for the system. These rules are often tested on historical data and then by real live trading.

As we have already observed, even systems that have worked well in the past can blow up. Something may have changed in the way the markets or commodities work and the system that worked well in the past no longer works. Same thing goes for banking. I believe the single most important error in banking rules was that price of real estate will go up. Therefore all these other rules that were in place may have been relatively less important as the more important assumption of rising prices. As soon as prices began falling, buyers stop buying, fearing future declines. Since most home sales are made with leverage of 5 to 1 or higher, even small decline in value of real estate creates a huge decline in invested capital. The opposite is true also: small increase in price results in large investment return.

So it seems our banking system has blew up just like any other trading system. Even a huge spread between Feds rate and what banks are now charging for mortgages which normally would result in windfall profits for the banks are not motivating banks to help resolve the situation.

In order to solve their own problems banks must be aggressive in reversing housing price declines and get customers back into their own doors. They must reduce the mortgage rates by no more than 2% over Feds rate. They must unilaterally and across the board reduce existing mortgages by !-2% so that foreclosures stop or drastically reduced. It is time to recognize that the previous system the banks have devised to make money is simply not working when the prices are falling!

Bernanke is right on

I have always thought of the recent housing bubble, which precipitated financial slump which precipitated commodities bubble is really a natural disaster such as hurricane. With a lot of very powerful economic forces getting out of control and pumeling everything in its path. In dollar terms this economic hurricane is orders of magnitude larger than physical hurricane such as Katherina. I am very happy to hear that our chief economist also uses a weather metaphor in his assessment.

"Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting (in Jackson Hole in August 2007) has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment," Mr. Bernanke said.

I think Bernake is right on. Keep on top of it Ben!

Greenspan - immigrants help getting out of housing slump

Earlier, I have wrote in my blog that it is a good thing that housing starts declined as much as they have. The reason is that supply of new homes has to drop below the demand so that unsold inventory can begin to be reduced. The demand side of equation is growth in number of households. In an interview with Wall Street Journal Alan Greenspan is basing his housing analysis on the same idea. (I guess I was not sleeping in economics class after all).

Interestingly;y, he suggests that immigrants account for 1/3 of new households and therefore liberalization of immigration laws would help significantly in depleting unsold inventory thus reversing housing slump and getting economy out of malaise. I would assume converse to be true as well.

Best Market Chances - re-subscribed

After three week pause it seems like the system did not die and I am back as subscriber as of 8/7. However, I am no longer trading IB/TradeBullet set up and using OpenECry now. What I like about it is that there is no intermediate step between C2 and OpenECry, the order goes direct. I do not have to worry about DSL line or my computer or software.

So far I like OpenECry - you can get someone to talk to before the typical "interrogation" that you get at every other broker.