Saturday, December 26, 2009
It's a slow start to what I hope will be a slow day! Herewith, a dumpification of the small number of morning tabs.
Via the tireless Larwyn (you either know who I am talking about or you don't), the brown side of green energy technology.
One is forced to wonder why the government allows Fannie and Freddie, who have been "bailed out" via implicit guarantee forever, to pay such sums to their executives while banks cannot. It is not a baffling, confused sort of wonder, mind you, but the sort of wonder we experience whenever we see transporting audacity right out in the open.
Is the upper atmosphere cooling because greenhouse gases are trapping heat, as the climate models predict, or because the sun is quiescent? Perhaps regular commenter Brian is getting to me, but I'm going with both reasons.
Christmas is over, and who better to bum you out than Ralph Peters?
Off to the gym. More later.
The bigger story with Fannie and Freddie is that Obama & Co just pledged unlimited financial assistance to Fannie and Freddie, presumably because the current $400 billion pledge may not be enough. WTF????
Fannie and Freddie are the 800 pound gorillas in the corner of the room that we continue to ignore. Fannie and Freddie exceeded their initial mandate many years ago, and no one stopped them. They were never supposed to each have a trillion dollar balance sheet -- they exploited a loophole to do this. As they grew, they were vehicles for the stealth de facto nationalization of most of our mortgage industry. This also led to an unholy alliance between DC and Wall Street.
Ironically, Fannie wasn't created in the 1930s to promote home ownership but was instead intended to create liquidity for small banks so they could make small business loans. The "mom and apple pie" home ownership angle was a later construct. Talk about mission creep. LBJ sold Fannie to the public in 1968 to help pay for the Vietnam war. Freddie was created in 1970 to give Fannie competitive company. Aside: back in the 1960s LBJ couldn't just print money the same way Bush did and Obama can.
As they started to mushroom in size, Fannie and Freddie were a contributing factor to the S&L failures of the 1980s. Combined with bad practices in securitization and derivatives thereto, they're a big cause of why we're in the mess we are today.
I haven't researched what follows in depth, and I've seen little written about it. So the following is based on my imperfect understanding of the facts ... please correct me if I'm wrong:
We used to have a multi-trillion dollar securitization market that was off-balance sheet to our banks. Most of this securitization market funded mortgages, but it also funded other kinds of consumer debt. Securitization put banks into the loan origination business -- others bought and held this paper.
This market has largely disappeared. Towns in Norway won't put their pension money into US financial assets ever again.
So what replaces this? Right now the Fed is using its balance sheet to buy and hold Fannie and Freddie paper. Some issues with this:
1) How long can the Fed keep doing this ... a couple of years and a couple of trillion? Does the Fed become the permanent lender that supports most of our mortgage market? Can it?
2) I suppose the answer to #1, is at least a partial yes, so long as we maintain basic credit quality. The Fed could even turn a profit. Fannie and Freddie actually made money so long as they stuck to plain vanilla conforming mortgage standards.
But there's a tension between (A) "propping up the mortgage market" and (B) only make creditworthy loans. The Fed can make money on (B), but could lose a shitload of money on (A).
Recall that our mortgage world went to hell when we deliberately gave up on requiring down payments -- it really is that simple. Obama & Co seem intent on continuing the practice of giving money to anyone with a pulse -- you know, to "spread the wealth around." Developing ....
3) A big macro issue -- if we get no new money from abroad -- and if all our money gets tied up propping up the mortgage market and funding ballooning federal deficits -- will there be any money left over to fund the true private sector? Is this a valid concern? If so, "Holy Permanent Recession With Double-Digit Unemployment, Batman!"