A weekend topic starting with CNBC. "'The housing sector's a disaster,' said CNBC's Jim Cramer. 'We're building about half the houses we did when the country had half the people, and we still can't sell them. KB Home does a huge amount of housing in California. They can't sell them.'"

"The U.S. housing sector is falling apart, and the Federal Reserve is all but ignoring the damage as it prepares for what many expect to be three rate hikes in 2019, Cramer warned Friday."

From MarketWatch. "Chicago Federal Reserve President Charles Evans is sticking with his projection that interest rates could comfortably run above the so-called neutral rate. That means the Fed could hike rates up to four times next year, Evans said Friday at the Fixed-Income Forum in Chicago."

"Evans said even with rising rates, there’s little on the horizon to derail the economy. Evans even offered a nod Friday to stock-market confidence: 'Business people are really smart and must know what they’re doing. If they’re giving away capital as [share] buybacks, they must feel pretty optimistic.'"

From DS News. "Natalya Vinokurova’s dissertation on mortgage-backed securities (MBS) investigates how the use of analogical reasoning facilitated both the development and the collapse of the market for these securities in the United States."

"What are the lessons that the financial services industry still hasn’t learned from the 2008 mortgage crisis?"

"The issue of systematic risks comes to mind immediately when we speak of lessons that the financial industry has still not learned from the crisis. One of the underlying causes of the 2008 crisis was the market participants’ failure to appreciate that some risks, including the interest rate risk and the credit risk, affect the economy as a whole and, thus, could not be insured by private actors. And yet, the attempts to offer private insurance for these risks, for instance, through use of self-insurance devices such as tranching continue despite the failure of tranching to protect investors from prepayment risk in the early 1990s and default risk in 2008. The failure of the private mortgage insurance companies in the aftermath of 2008 as well as the Great Depression also seems to be fading from memory."

"One of your papers looks at how MBS issuers convinced investors that they were bonds. Can you share your findings from this study?"

"In the 1970s and 1980s, MBS issuers succeeded in changing the definition of a bond to include securities that exposed investors to prepayment risk, made variable monthly payments of principal and interest, and did not constitute debt obligations of their issuers. Through my research, I found that such an expanded definition allowed MBS issuers to sell their products to a much wider range of investors than the individuals and institutions who were willing to invest in mortgages directly."

"Which factors are likely to cause the next housing bubble?"

"There are three factors that are likely to cause the next housing bubble—liquidity in the system, lack of transparency both within and across the institutions, and, finally, the governance of the institutions. The liquidity comes in part from the quantitative easing policies adopted to ease the aftermath of the 2008 crisis. These policies created a situation of too much money chasing too few assets—a key prerequisite to a housing bubble."

"There has been a failure in the aftermath of the 2008 crisis to remedy one of the fundamental causes of the crises—a lack of transparency about who owns what assets. Such lack of transparency means that instead of relying on information both regulators and financial institutions have to base their decisions on educated guesses as to who owns what. These educated guesses translate into governance problems."

"Most people frame the fact that some of these institutions are 'too big to fail' as an incentive problem. An issue that does not get enough attention is that 'too big to fail' is a governance issue—these institutions are too big to be governed effectively, not just by the external regulators but by the internal top management teams."

From The Havana Times. "Ravel’s Bolero begins with a soft melody and increases its tone until it becomes an unbearable noise. So have decisions been made in Nicaragua’s financial crisis. The bankers were rising the tone with each decision, responding to the consequences provoked by the human rights conflict."

"First, the banks cut credits by invitation, that’s to say they stopped offering them, and those who had accepted were told that conditions had changed. Afterwards, they cancelled those already approved and so on until they reached the point of practically restricting all loans. The flight of capital continued, and they tried to slow it at least with those that had certificates not yet expired. These combined decisions by bankers, investors and savers describes the first phase of the financial crisis."

"Very few are surprised that in the middle of the banking collapse a new crisis appears, the real estate bubble. By June, all properties had lost 30% of their value. The valuation chamber of Nicaragua determined that month to reduce by that percentage the value of all real estate in the country. In parallel, the Superintendence directed banks to update appraisals of thousands of mortgaged properties."

"The closing of this accounting process will quantify the explosion of the bubble. All the banks are affected, since they keep as loan guarantees granted the now devaluated real estate."

"The banks have two options, request the thousands of debtors to make deposits to compensate the new premiums or to be realistic and automatically issue complementary loans for this purpose. A credit issue of this magnitude is in line with the latest Central Bank reserves reported on September 30."

"The rescue of the financial system could be in the order of US $3.5 billion. It is unlikely that the Central Bank will lead this rescue to the financial system. It does not seem to have the same reserves that in a transparent way it published a month ago, and tends to focus more on the fiscal stability than monetary stability."

"The government cannot come to the rescue either, the risks related to financial sanctions, derived from the human rights conflict, have distanced it from access to multinational funds."

"The crisis facing the banks in Nicaragua is unprecedented in financial history. It was provoked by a conflict of human rights, aggravated by the explosion of the housing bubble, lacks national institutions that can lead the rescue and, therefore, does not have access to multinational funds either."

"It is very difficult for the external partners of each bank to calculate how much they can contribute to salvation, without being contaminated by the fallout and even more complicated is to determine how much time is left for the solution to the conflict. Without approximate amounts or expected times, any banker in the world already has their answer."

"Private banks still have access to the international financial market, a rescue bonds issue could well find investors. However, the requirement for the timely placement of these securities is the parallel issuance of some slight signal, that this conflict envisions a solution."