
Ten years after the financial crisis, GSE securities have expanded $804B - kaycebasques
http://creditbubblebulletin.blogspot.com/2018/09/weekly-commentary-approaching-10-year.html
======
revel
This is the opposite of surprising and writing scare headlines betrays an
extremely shallow understanding of the mortgage market. Simply put, the GSEs
were created to underwrite high quality mortgages, in fact they are legally
compelled to do so. That's why they exist.

There are more conforming, high quality mortgages than there were in the run
up to the financial crisis. You don't hear about zero interest or liar loans
any more because they're mostly not available any more. It's a good thing that
those products aren't available any more. The average quality of mortgages is
much, much higher. The flip side of that is that of course the GSEs have
increased the size of their balance sheets: that's exactly what they were
designed to do! This is like getting mad at a tree you planted for growing
leaves.

~~~
kaycebasques
You’re bringing your own interpretation to the headline. I intentionally used
impartial words when writing it. I just think it’s a noteworthy fact and
wanted to see what HN thought about it. Noland (the author of the article)
sees it as a bad thing, but that’s a different story.

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unknown_apostle
GSEs may be bigger but also healthier than before. Though still a huge market,
I also think the global OTC derivatives market has become smaller since 2014
(you can check some estimates at the BIS). That being said, it's 10 years
after 2008 and there are plenty of signs that we're in the 3rd bubble in 20
years time.

Nosebleed valuations in tech. Second highest Shiller PE in S&P. The median PE
of the S&P is higher than in 2001; so it's more broadly carried (can't find
source right away).

It's also the age of the ETF, which was a good thing. Except that by now the
industry may have created some real beauties. Remember XIV?

Also government bonds; as much as I love Italy, somebody bought the 10yr of
that country for a 1% yield in 2016. Somebody also bought those Mexican 100yr
bonds.

Even something as silly as Dogecoin's marketcap standing at $600 million
suggests that the entire world is in the middle of a speculative binge.

~~~
Josh379
It’s absolutely crazy bonds are being bought at negative real rates but large
sums of money must be parked somewhere by huge funds. Plus they often have
bond to equity to commodity to fixed asset mandates so they have to enter what
they know to be money losing positions.

~~~
unknown_apostle
What's also interesting this time is the relationship between bond markets and
modern ETFs.

Especially in Europe, ETFs can be synthetic. In some cases this means they're
made up of generic filler material (e.g. German bunds), with some secret hobo
spices (derivatives) to provide the ETF's specific flavouring.

Because of 10 years of central bank buying, all these bonds have been priced
to perfection for deflationary scenarios. And as the world is mostly
calibrated for small, well-announced yield changes, I wonder what an
unexpected discontinuous "jerk" in yields would do to such ETFs.

------
kaycebasques
I took the $804B figure from this quote:

> It's worth noting that total GSE (MBS and debt) Securities ended Q3 2008 at
> $8.070 TN, having about doubled from year 2000. The government agencies were
> integral to the mortgage finance Bubble - fundamental to liquidity excess,
> pricing distortions (finance and housing), general financial market
> misperceptions and the misallocation of resources. GSE Securities did
> contract post-crisis, reaching a low of $7.544 TN during Q1 2012. Since
> then, with crisis memories fading and new priorities appearing, GSE
> Securities expanded $1.341 TN to a record $8.874 TN. Of that growth, $970
> billion has come during the past three years, as financial markets boomed
> and the economy gathered momentum. A lesson not learned.

~~~
hcknwscommenter
The vast majority of bad mortgages from the "crisis" were not GSE conforming
mortgages, they were "private label" mortgages by the big banks. Moreover, a
huge number of the failed GSE mortages during that era were fraudulently
underwritten. Hence the GSE lawsuits that the big banks uniformly lost
(actually the banks settled for billions in fines). I really do not understand
what "lesson" was not learned. People buy houses. It's silly to have a cash
market for such a big asset. Home loans are a thing. Having a regulated entity
that provides liquidity into this market and sets minimum standards has
greatly reduced transaction costs.

------
zakum1
The writer correctly identifies the issue as a failure of policy, not markets,
so comments that markets are working seem to miss the point.

At a policy level, we are largely powerless to effect any change, simply
because the numbers at stake are so huge ($8T US mortgage market, $40T global
trade, $80T investment assets) and the control of these so concentrated.

But the flip side is that the Fintech opportunity is so huge, because it can
exploit the same economics. Grab the opportunity to build services that offer
simple value. Create transparency, empowerment, sharing... and you can do
good.

~~~
hcknwscommenter
failure? How so?

------
privateSFacct
The question is - if you think problems from all this are going to occur, what
is the place to be in from an investment standpoint? I see a lot of
handwringing but not a ton of action and advice.

~~~
qubax
The smart thing to do is liquidate your investments and keep a nice pile of
cash ready to reinvest when there is a bailout. And I guarantee you there will
be a bailout.

Usually you will hear news of a bailout and the president will come out and
tell people everything is okay so buy buy buy!

That's what Bush said a few weeks after the 9/11\. That's what Obama said on
the first friday of March 2009. Before the president speaks, the FED chair
will give hints as well. I'm too young to remember what happened during the
savings and loan crisis of the early 90s but I'm told something similar
happened.

Just buy and hold and hold and hold. Crashes tend to be short lived.
Recoveries take years and years.

Of course if you are greedy/ambitious, you could try to make money on the way
down as well by shorting the market. But that's for the degenerate gamblers.
Don't do it as it's nigh impossible to predict when the markets will crash and
you may go broke betting against the market.

~~~
hcknwscommenter
> The smart thing to do is liquidate your investments and keep a nice pile of
> cash ready to reinvest when there is a bailout.

Good luck with that plan

~~~
unknown_apostle
What's wrong with having a nice pile of cash at this point in time?

------
roenxi
This word "inflationism" is new to me. Interestingly there doesn't seem to be
a clear term for what the US system currently is. It doesn't look like free
market capitalism, but on the flip side, nobody can accuse the US of being
socialist or communist.

Something is happening where the government is picking winners and losers with
their inflation policies. As I enjoy repeating, new money is appearing as
measured by the M1/M2 monetary aggregates, and so logically _someone_ has a
very happy balance sheet.

~~~
unknown_apostle
Yep inflationism :-) Though I prefer Soviet Monetarism.

It's an accurate description of the mindset, up to and including the existence
of a whole army of Kremlinologists who specialise in interpreting the tones,
nuances and choice of words of the apparat's public statements.

But it's not limited to the US. The effort to increase the size and lower the
quality of central bank balance sheets was global. At various times in the
last 10 years it was even coordinated. But of course, the special role of the
US dollar in the global monetary system ensures that all capital roads still
lead to NYC.

------
HillaryBriss
> _...it seemed natural to presume that American finance might be subsequently
> humbled. Not so. American investment banks today eclipse their European
> rivals in almost every sense… and the financial centres of New York and
> Chicago continue to swell "_

If you're thrown off the horse, stand up, dust yourself off, and get back on
that horse.

~~~
mpax
I’d rather shoot the horse and get a cab.

