patrick.net

"That corpse has been rotting for a couple decades now."

I'm not a fan of unions, they institute market inefficiencies. However, plenty of M&A destroy competition rather than enhance it, and many if not most of the jobs are not unionized jobs.

And I do think that corporations should pay stiffer penalties for pitching employees, especially long time employees out. Job loss and job search is an often traumatic and degrading process, esp. to people north of 30. There should be a penalty for destabilizing people's lives if it is done so to help the CEO hit his bonus range.

"There should be a penalty for destabilizing people’s lives if it is done so to help the CEO hit his bonus range."

preach sista preach !!

RandyH said:
There will be a number of Web 2.0 “social networking” yip yaps out looking for work, though. And that just breaks my heart. But any decent coders will get snapped up. It’s all the non-techs that will be looking for work.

Good engineers who can get things done are always okay. But there is a much larger number of also-ran engineers who hang around large projects and do nothing (or worse, get in my way :-) ). Their continued employment is mostly dependent on the health of their current host employer and their political sponsor, rather than their own ability. You can pretty much lump these Powerpoint-monkeys with the non-techs w.r.t. their job prospects in a downturn.

SP

@astrid

I lived the experience of traumatic job loss when as a teenager my father was cycled out of defense, unable to find respectable work for his skills, talents and past contributions, and forced into a series of ever degrading marginal consulting gigs. He never recovered and ultimately found his savior in a bottle (and thereby sealed the dissolution of our quaint midwestern family).

I wish there were adequate opportunity for retraining and re-insertion of guys like him into the work force. I there should be now. But "punishing" companies because they don't keep around non-productive workers just turns us into France.

Sorry to be so hard on you but this whole trendy anti-corporate fad is annoying at best, and outright terrifying at worst. If you think CEOs are overpaid then you should be rallying for greater shareholder influence over board decisions and CEO pay. But usually all I hear (not from you necessarily but from many of the sites/pubs you read) is lots of slamming of the entire shareholder-model. They want "stakeholders" to replace shareholders. Yea. That'll solve the CEO pay problem. Let's further uncouple how management enriches themselves from measurable corporate performance factors. All that'll do is turn CEO's into de facto politicians with better salaries.

plenty of M&A destroy competition rather than enhance it

astrid,
I have to agree with Randy H on this. I'm ambivalent on M+A activity - on the one hand, the head honchos and paper pushers get overpaid for what they do, but on the other hand, the corporate buy, spruce up (usually by layoffs and other means) and sell does have plusses. It's sort of like the corporate version of house flippers...

Randy H,

I think what *astrid may be objecting to is the format where the "turn-around specialist" hatchet men are comp'd directly by the head-count they reduce?

"But usually all I hear (not from you necessarily but from many of the sites/pubs you read) is lots of slamming of the entire shareholder-model."

Actually, I think totally agree with you. I think that in an ideal world, employees "stakesholders" should be shareholders and better shareholder control and many more proxy fights/shareholder lawsuits (than we have now) sounds good to me.

I was speaking more from disillusion of the current system, where the reality is that M&A are done to give head honchos golden parachutes or what amounts to monopolistic behavior in the case of News Corp and Oracle acquisitions, etc.

Also, while talking about efficiency is well and good, do they have to be so cold blooded about it? Those are real jobs being taken away and possibly real lives ruined. While that doesn't justify keeping those jobs forever, it shouldn't be treated some sort of unadulterated good (just as job trimming should not be treated as an unadulterated evil, as labor activists would like to portray them).

Can someone deconstruct the concept of "injecting liquidity" for me?

The news is full stories about French, Canadian, US, Australian central banks "injecting liquidity". From what I have seen, it amounts to having a one-day "sale" on loans at a lower interest rate than the discount rate or federal funds target rate or whatever.

Do any of the experts care to correct me or further illuminate the concept?

If my explanation is essentially correct, how does "injecting liquidity" differ from "temporarily reducing interest rates, and without giving official notice".

justme Says:
Can someone deconstruct the concept of “injecting liquidity” for me?

This is the 'buyer of last resort' function, where the Fed buys instruments that no one else was willing to buy. In this particular case, I believe the Fed bought $19B worth of MBS, so that the desperate sellers could raise some cash.

SP

Re: my previous post, I was wrong. The Fed didn't actually buy the MBS, they lent enough money for the MBS holders to continue carrying them on the books for a limited time, at the end of which the MBS-holder 'repurchases' them by paying the fed back. Maybe I should let someone else explain this better. :-)
SP

justme:

As I understand it (being in the nonexpert crowd) the US Fed was doing mostly normal repo activity, which boils down to short-term loans (think 3-days). Since it unwinds after those 3-days, the problem of creating additional money is largely avoided, but it prevents players from being forced to sell off good assets instead. One analogy is the musical chairs one; the Fed won't be able to find a chair for everyone, but it can make sure things keep going enough to fill up the chairs that are there.

The main difference this time was the focus accepting MBS as collateral, and statements about the Fed "doing it's part".

SP, requiem, justme, others,
So how does this short-term injection of cash help calm markets? I would think these current bag holders realize that this is a temporary fix. How does anyone get reassured that there is another sucker, er, buyer willing to buy these securities once the "loan" comes due? Moreover, I'd think the overall psychological effect is, "hey, things must be REALLY bad if the Fed has to take a drastic measure it hasn't done since 9/11!!!

The following explanation is not perfect but should give you the basic idea of how the Fed and Central Banks influence market liquidity:

When people are short of cash they go to the bank for a loan or a withdrawal. As a result of all their customers’ transactions banks have fluctuating cash positions. They must reconcile these positions each night.

Typically some banks will have excess cash and others will be a little short. When banks are short of cash they go to other banks for a quick loan. Essentially, they can borrow amongst each other to meet their liquidity needs. These loans are very short term – typically overnight.

As supply and demand for cash fluctuates, the interest rate for overnight money will fluctuate. When demand is significantly greater than supply a credit crunch can develop. This will push rates up until the demand and supply are in balance.

The credit markets can become very volatile at times. However, the Federal Reserve makes a practice/policy of stabilizing the market by manipulating the supply and demand for funds to force the overnight interest rate to their stated Federal Funds Target Rate (currently 5.25%).

However, the market can surprise them or move quickly, and the actual rate fluctuates during the day. In the last 24 hours the Federal Funds rate briefly traded as high as 6%. The Fed intervened to drive the rate back to their 5.25% target. They did this by lending to banks. Thus, increasing the supply of money to meet the increased borrowing demand.

Very early today they dumped extra cash into the system in anticipation of the spike in demand for funds.

They are often referred to as the lender of last resort. However, the Fed is constantly active in the credit markets – all day, every day.

Good explanations, everyone. It seems that these short term (3-day?) loans can have many uses.

SP, can you elaborate on why a mortgage issuer cannot "continue to carry them on their books"
without getting a loan? Does this have to do obligations with respect to a third party, such as a margin call that needs to be fulfilled, and otherwise could not be fulfilled without selling of the holdings (which could lead to panic selling)?

I know what a margin call is for a retail investor such as myself, but what is the margin call concept for a mortgage broker or a bank? I'm imagining something like the following:

ACME Mortgage Co. gets formed and capitalized with $100M. ACME then proceeds to borrow $900M by issuing MBS paper, and then lends out $1000M worth of mortgage money. At some point, the loans starting to go bad and the (estimated,expected) losses start to near the $100M capital of the firm. At this point, Wall Street firm XYZ that bought the MBS paper issues a margin call and say they want (some of) their money back, and pronto.

Is this roughly how it works? Then uncle sam steps in with a short term loan (injects liquidity) so that the fire sale can be postponed and be made into an "orderly" sale. Hence the mantra from the fed about "preserving orderly operations of the financial markets".

They also buy and sell securities to influence the liquidity of the market.

When they buy securities they remove securities (bonds, etc) from the market in exchange for cash - thus increasing liquidity. When they sell securities back into the market they increase the supply of securities in exchange for cash - thus pulling cash out of the market.

They can also influence the credit markets by adjusting the reserve requirements for banks.

Zephyr,

How can one watch the Federal Funds rate in real time?
(our last two posts crossed, thanks for the information)

skibum:

If a bagholder is truly screwed, liquidity will not save them.

Roubini's post here may be helpful:
http://www.rgemonitor.com/blog/roubini/209779

"An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most cases - also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over - but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced."

There are (expensive) subscription services for investors that give real time quotes on almost any market quotes. However, I do not worry about the real-time fluctuations in the Fed Funds rate because the Fed moves quickly to keep it on target.

Each day the WSJ publishes the trading values for the previous daay. It always fluctuates abit around the target rate.

Most people mistakenly think that the Federal Funds Rate is a fixed thing. Actually, it is only a target for the Federal Reserve's Open Market Desk to work toward as the day progresses. They buy or sell, lend or borrow to push the market rate to the Federal Funds target rate established by the open market committee of the Federal Reserve Board of Governors.

justme, requiem, Zephyr,

Thanks for the very enlightening comments...

RE: margin calls for the banks and funds, it seems to me this is just a modern, larger scale version of a good ole' run on the bank. Individuals (this time those with stakes in these funds) panic, and many of them ask for their money back NOW. Of course, the fund doesn't have the cash to cover that many players asking for their money back, even at a devalued level, and so they become insolvent and "can't meet margin calls."

Hence the cash injection by the Fed? It sounds like George and Mary Bailey blowing their honeymoon cash to keep the old Bailey Savings and Loan afloat...

Some hedge funds are experiencing one or both of two different pressures.

First is the pressure of declining value of assets that were purchased with borrowed funds. Thus they are experiencing an equity squeeze. They could go bankrupt by a modest decline in values. This is only possible because of the high level of leverage. When you buy a dollar of a low risk assets with 10 cents of equity and 90 cents of callable debt you turn a low risk venture into a high risk gamble. Those who have lent the money want to get it back. So the call the loans when the assets are in danger of being insufficient collateral. This forces the hedge funds to sell at a terrible time in the market. If they could ride it out they would likely be fine – most of the time.

The second risk is the “run on the bank” caused by investors in their fund getting scared and wanting their money out. Of course the hedge fund has invested that money in the assets at risk, and do not have much cash laying around. Quite the contrary, they are leveraged with debt (and cash short) to magnify their return on equity. So the hedge fund could experience a liquidity crunch while remaining otherwise healthy. This need for cash could force them to sell assets at a bad time in the market (most likely a bad time since that is what prompts the investors to pull their money).

Combine the two and you have a disaster for the fund, and anyone who has money invested or lent to the hedge fund.

However, the losses are fundamentally just wealth transfers from the fund (et al) to those who defaulted (passed through to the people they bought from), or those who buy assets from the fund on the cheap during the panic.

As Warren Buffet said: “Be fearful when others are greedy, and greedy when others are fearful.”

…

I think the discount window rate is actually 100bp higher than the target overnight rate, which as I understand it is an attempt by the Fed to divorce the negative perception that is associated with banks "having to use" the discount window, and to encourage more interbank lending.

The actions of the FOMC and its international peers are essential to the function of modern capital markets worldwide. It's the direct result of the lessons learned from the Great Depression. Every major economy has a central bank that engages in some form of similar action, even capital-restricted markets with currency manipulation like China.

To simplify what the Fed and ECB (and pretty much every other CB) did the past two days was act as lender-of-last-resort because the banks quit lending to one another, at least enough to cause segments of the credit markets to seize up.

I know a lot of people here watch CNBC. In my opinion, if you want to know what's really going on in credit markets in real-time you should ignore the NYSE dork, casually observe whoever is covering the NASDAQ for entertainment, pay closer attention to the woman who's usually at the NYMEX, and worship at the alter of the (in my opinion awesome) guy in Chicago.

skibum Says:
So how does this short-term injection of cash help calm markets? I would think these current bag holders realize that this is a temporary fix. How does anyone get reassured that there is another sucker, er, buyer willing to buy these securities once the “loan” comes due?

The idea is that this will give them breathing room to adjust their plans to cope with the unexpected crisis. IMO, right now the problem is that all kinds of assets are being liquidated to cover margin-calls and other consequences of the liquidity crunch. There was actually a quote today from some broker on one of my news-feeds that pretty much said exactly this.

So the Fed is specifically targeting the MBS market, and giving them an emergency drip of cash so they don't have to sell other assets to tide over. However, this isn't very sustainable, so it will be interesting to see what their next move is. They may cut rates, but I don't know if that will help really - it is a crisis caused by lack of confidence, so cheap money isn't likely to be put to the intended use.

SP

1- The moment of truth is fast approaching… The probability of seeing a wave of (credit- crunch-induced) massive layoffs in the next 6-12 months has increase dramatically….

2- I hope that everybody on this board has the required 9-12 months of living expenses stashed away in cold hard cash…

3- No matter where each one of us stands on the renter/owner dividing line…we should all make it like bandits in the coming recession….as long as we don’t loose our JOBS…AND THAT’S THE TRICKY PART….

Bottom line: It is all about keeping that paycheck... :-)

-----------------------------------------------------------------------

http://www.reuters.com/article/newsOne/idUSHKG3454420070810

World stock markets have shed over nearly 8 percent since they hit record highs only a month ago. As a result, investors rushed to buy safe-haven government bonds, unwind yen-financed carry trades, and moved to scale back expectations for interest rate rises by some major central banks this year…

Emergency action by central banks underlined the risk that a global liquidity crunch was more serious than anticipated.
"What we have at the moment is just an all-round sense of panic," said Marc Ostwald, bond analyst at Insinger de Beaufort in London. "Quite clearly there's a lot of deep-seated fear out there and it's going to take a while to resolve this."
Volatility across markets is hitting banks and corporations, as they have a harder time accessing the financing essential in making takeover deals.
The CBOE Volatility Index (.VIX: Quote, Profile, Research), often called Wall Street's fear gauge, shot up 10 percent to 29.84, its highest level since April 2003….

U.S. regulators are scrutinizing the books of some top Wall Street brokers and investment banks for subprime mortgage losses, according to a Wall Street Journal report….

Dollars were in especially short supply on Friday with deposit rates for tomorrow/next delivery hitting 6-1/2 year highs above 6 percent. This compared with the benchmark federal funds rate target of 5.25 percent

justme said:
SP, can you elaborate on why a mortgage issuer cannot “continue to carry them on their books” without getting a loan? Does this have to do obligations with respect to a third party, such as a margin call that needs to be fulfilled, and otherwise could not be fulfilled without selling of the holdings (which could lead to panic selling)?

I am not an expert by any means, but yes, I believe that is what it is.

Instead of panic liquidation of assets to raise cash, the issuers can make better arrangements. It also means that the liquidation can happen a little more slowly, so that things don't overshoot in the other direction.

Personally, I have mixed feelings about this direct market intervention since it robs us of an entertaining spectacle of a Gordon Gekko getting his comeuppance, but of all the things that the Fed does, this is at least a reasonable act.

SP

Thanks to all the experts for one of the most informative threads in a long time!

Another question regarding the Fed intervention. If the problem is that the banks won't lend to one another overnight and the Fed is stepping in to fix this, doesn't this imply that there are banks out there with cash, but unwilling to loan it? And if this is the case, *why* won't they make the loan? Do they fear that borrowing bank will go under and not repay?

Or is the problem that there are no banks with cash available to lend in the first place?

theotherside (TOS) is piece of shit (POS) ....

TOS is POS ...
TOS is POS ...
TOS is POS ...
.....

>> Or is the problem that there are no banks with cash available to lend in the first place?

Banks do not have same objective of FED in regards to MARKET MANIPULATION:

http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

The Fed "pawn shop" is taking agency AAA MBS as collateral, but only for the weekend. Watch out for Monday the 13th!!!

Banks won't lend to one another because they're having trouble valuing their own assets. Banks aren't just borrowers but also lenders themselves. Add the MBS pollution into the mix -- which has no price because it's market is broken -- and you have credit markets seize up.

I like this analogy when people criticize the Fed:

The house is on fire. You're pretty sure the kid holding the matches standing next to you in the smoky kitchen is responsible. What do you do first? Market fundamentalists would say spank the kid and let him burn. The problem is that not only are you in the house too, but also grandma, your pregnant wife, and your new puppy. Instead, put out the fire, get everyone out... and then make sure you spank the hell out of the kid with the matches.

I think the frustration people have is we seem to never spank the kid after the fire. But letting the credit markets seize up is like letting the house burn. Maybe you'll get lucky and the fire will just stay in one room and go out on its own. Of course there's a good chance the whole thing lights up. Incidentally, this is basically the series of mistakes that caused the Great Depression to go from nasty-ass recession and market correction to global banking collapse and major political upheaval and resultant wars.

All that said, it scares me that the Fed did 3x injections today. I think Ben is a smart economist and afraid of long-run inflation, so I'm worried there's a lot more frailty to the banking system right now than they're trying to let on. My guess is that frailty has to do with international trade settlements and other big inter-country stuff. If that goes, using my analogy, the whole city is on fire.

theotherside, a woman who fancies herself too clever for the renter crowd:

1- The moment of truth is fast approaching… The probability of seeing a wave of (credit- crunch-induced) massive layoffs in the next 6-12 months has increase dramatically….

The moment has been approaching painfully slowly for as long as you've been posting here under various aliases, my dear MP.

2- I hope that everybody on this board has the required 9-12 months of living expenses stashed away in cold hard cash…

People here are far _more_ likely to have said cash than those you stuffed into $2mm Marina shitboxes with IO Option ARMs.

3- No matter where each one of us stands on the renter/owner dividing line…we should all make it like bandits in the coming recession….as long as we don’t loose our JOBS…AND THAT’S THE TRICKY PART….

How can one "stand on the renter/owner dividing line"? I only rent on odd days, the other days I own?

Anyways, it's nice to see you finally capitulate, even if you have to do it by selling more fear. How are you going to replace your real estate commissions paychecks? Just curious. I honestly hope you've lined up something else; maybe process server?

What's with housing bulls and "loose"?

PermaRenter,

I'd recommend to everyone to follow that link you posted!

There is an email subscription service that will provide
daily updates on what the NY Fed is doing.

It looks like the NY Fed gave 3-day (weekend) loans against $38B worth of MBS today!!!!

SP says:

So the Fed is specifically targeting the MBS market, and giving them an emergency drip of cash so they don’t have to sell other assets to tide over. However, this isn’t very sustainable, so it will be interesting to see what their next move is. They may cut rates, but I don’t know if that will help really - it is a crisis caused by lack of confidence, so cheap money isn’t likely to be put to the intended use.

Whether it's an emergency cash infusion into the MBS market or a rate cut, it doesn't seem like these efforts will solve the underlying problem - the lack of confidence in the value of these securities. It's becoming clear that they have been grossly overvalued, and this overvaluation has been hidden for a long time and is suddenly coming to light. Sure, a rate cut(s) may save a few holders of ARMs, but the foreclosure and housing downturn trains have already left the station, and it's going to be hard to stop them.

I don't think the Fed was targeting the Mortage market. The Fed is striving to keep the credit markets in balance, and the mortgage market is just sitting on ground zero in this fire. So any effort to maintain a balance will affect the mortgage related securities.

Their key barometer is the rate for overnight funds, which they target to 5.25%. They injected extra cash to keep that rate at or near 5.25% -- of course, it did spike to about 6% before the Fed intervened enough to push the market rate back to their target of 5.25% today.

I believe the Fed has mostly been removing liquidity during the last 12 + months in order to force the rate up to 5.25%. The natural equilibrium for the overnight rate is usually about 100 bps below the 10 year treasury. Today that would imply a natural rate of about 3.8% for the Fed Funds rate (not 5.25%). The difference has been the result of Fed market intervention to reduce liquidity, and artificially raise the overnight rate.

Press Release from The Federal Reserve Today:

Release Date: August 10, 2007

For immediate release

The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.

http://www.federalreserve.gov/boarddocs/press/monetary/2007/20070810/default.htm

Zephyr,

If the Fed has mostly been removing liquidity during the last 12 + months, doesn't this contradict the common characterization of the Bernanke Fed?

Bruce

That perception of Ben isn't so common. It's just common on this blog. Ben's "helicopter" statement is taken out of context. He was referring to preventing the Great Depression. He is a very learned student of that period. Ben isn't my first choice for Fed Governor, but we could have done much worse.

Hmm, it just occurred to me that I still don't quite "get" ALL of the details of the "injecting liquidity" business:

Requiem said:

The main difference this time was the focus accepting MBS as collateral, and statements about the Fed “doing it’s part”.

Question:

Does this mean that the fed normally does not loan out cash against MBS offered as security for the loan? In Permarenter's link (above), MBS is listed as the third tranche of collateral, whereas as treasury bills etc are defined as the first (and safest) tranche. Does injecting liquidity then simply mean that the fed is accepting lower grade collateral for its regular overnight/3day/short loans?

Requiem pretty much said this already, but I just want to make sure I understand it correctly. So normally, if I show up at the fed "discount window" with a pile of MBS, they will usually laugh you out of there, but this week they have pledged to take your weak collateral more seriously, and give you a loan at roughly the same interest rate as if you had shown up with 10-year T-bills or equivalent as collateral?

Justme:

The key phrase in Permarenter's link is "From time to time, for operational simplicity, the Desk has arranged RPs just in the third tranche, under which dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. Today's RPs were of this type."

If you look at the historical operations (not just the last 25 in the link), you can see that RPs are generally made across all three tranches, with the average rate increasing for each tranche. You can also see that of the offers made, not all are accepted.

RPs in any of the tranches count as injecting liquidity. While the open market operations are a normal event, I believe the limitation of operations to the MBS tranche and especially the concurrent issuing of a reassuring press release are less usual.

Good analysis, but as usual the conclusions are severely flawed….

1- The biggest flaw: LEVERAGE

You have to compare making 7% on you down-payment while having your rent increase at the rate of inflation (2.5%-3.5%)
versus
making 0.4% real return (after factoring out all costs) on the full value of the house

2-The second biggest flaws: RISK ADJUSTED RETURN

What’s matter is not return, but risk adjusted return. Houses, like Fixed Income bonds return less because they are less risky (“2 year of nominal housing prices drop versus 18 for the stock markets in the past 45 years” per the article posted)

3- The last flaw: DIVERSIFICATION

By diversifying your portfolio (real estate, stocks, bonds) you increase dramatically your risk adjusted return (efficient frontier). (“Since 2000, houses have outpaced inflation by 6 percentage points a year. Stocks have merely matched inflation.” per the article posted)

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http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?page=1

Why rent? To get richer
By SmartMoney

Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004.

Robert Shiller, a Yale economist and the author of "Irrational Exuberance," which predicted the stock-price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004, he says, real house returns would've been zero if not for two brief periods: one immediately after World War II and another since about 2000. Even if we include these periods, houses returned just 0.4% a year, he says.

Between World War II and 2000, house prices beat inflation by about 2 percentage points a year. (Stocks during that time beat inflation by their usual 7 percentage points a year.) Since 2000, houses have outpaced inflation by 6 percentage points a year. (Stocks have merely matched inflation.)

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Before the creation of the Federal Housing Authority (FHA) in 1934, homebuyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan. By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today, down payments for FHA loans are as low as 3%.

A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by summer 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.

I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963, they've done so in only two years versus 18 for stocks.

That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in summer 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975-to-2000 average.