The Silent Bailout
And this time, it wasn’t even done through legal channels. Read:
I have a different explanation for the Fed’s latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.
The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way.
Because of unexpectedly bad construction loans, the staid Wilmington Trust was sold to M&T Bank earlier this month in a rare “takeunder”—what Wall Street calls a deal done below a company’s stock value, in this case by 40%.
In other words, real estate is at risk again. But Mr. Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff.
Does anyone remember what TARP was supposed to do? It was the Troubled Asset Relief Program. It’s aim was to “unbundle” the bad home loans from the good ones. Not to get too technical here, but good loans and bad ones had been bundled together, to make the bad ones palatable to investors. You know, “There’s so much horse shit, there must be a pony here somewhere!”
Or, as Wikipedia has it, TARP was to allow “the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions.” So why are the banks still exposed, if the Treasury is holding the bag of horse shit while the bankers all sit on the ponies?
Well, because TARP — if it had ever been anything else — quickly turned into a slush fund, and the banks figured they didn’t have to sell their bad assets at fair prices, so long as their bottoms were covered with easy money. And besides, the Treasury wasn’t all that interested in buying them up.
So — now that we’ve exhausted our legal means for saving our financial system, the Fed is resorting to extra-legal means.
But if Bernanke has done anything other than ever-so-slightly put off Doomsday while increasing our risk of a massive inflation… Well, I can’t figure out what it is.
It’s actually worse than that, Stephen.
Not only are we playing kick the can down the road, we are breathing oxygen on a wildfire that is spreading in all directions.
The banks are not unloading their REO’s and non-performing notes in bulk as they used to do. You can’t get a deal done (unless you are the consummate insider)
TARP, according to Neil Barofsky, the Inspector General, is a car being driven off a cliff.
Darrell Issa has been screaming for an investigation and has been stonewalled.
Geithner told a group of “off the record” bloggers that the whole purpose of the HAMP was to give the banks relief, not the homeowners. It too was a kick the can program.
Where we once could have pulled the band-aid off in a quick swipe, we now have it dangling off a gangrene limb.
As usual, proper economic diet and exercise would have been the sanest and most effective solution. Instead, we keep spending billions on magic pills and potions, taxpayer liposuction, and snake oil promises of enlargement of that “certain part” of the body politic.
Hey, but Paul Krugman says we should spend even more. I just finally figured out why. Geez, he could have just bought a beret and a Corvette like the other teeny-weenies and saved the rest of us the multi-trillion dollar bill.
Had an absolutely fascinating dinner conversation with a couple of guys who manage a decently sized portfolio here in the mid-Atlantic region. At its peak it was over $1B in value. It has dropped some, but they managed to get out before the big crash, and have done well compared to others.
Anyway. They were explaining the logic behind TARP, and the reality behind its implementation, and what we should be expecting. They are not happy at all. The simple fact of the matter is that the toxic assets (remember what the “T” in TARP stood for originally?) are still on the books for most banks. And even though the auditors are telling the banks to unload, it’s not happening in any kind of rapid order. There is a whole new round of audits coming due, and mark-to-market is going to create an absolute shit storm all over again.
The simple fact of the matter is that the Fed is buying Treasuries because they’re terrified that the foreign market is about to dry up. We apparently experienced a near miss in September, which scared the living crap out of Bernanke. We tried to sell a batch of Treasuries, and nobody came to buy them. We had to “delay” the sale for “technical reasons”, or something like that.
The next six months are Big Ben’s attempt to shore up the markets so that the wheels keep turning. And the
$600B$800B$1T+ dollars is really an open-ended promise by Ben to keep buying if nobody else does.My guys say pay attention to what happens leading up to the May/June Treasury sales. If the foreign concerns are legit, then Bernanke will get mealy-mouthed about how much more he’s willing to spend.
We’ve got six months, gang. Fall of ’08 may have simply been the shot across the bow….
QE will be bad if done before structural problems are fixed first. We need to prevent the money from going into commodities (reduce constraints on supply, increase investment in supply).
We also need to create policy to reduce peoples debt levels. That means putting policy in place to facilitate, and encourage banks to institute, a Moratorium on Bubble Mortage Interest. ie, interest should be applied to principal for bubble mortgages that are in good standing and the homeowner should be able to deduct that principal on their taxes for a while. It would be nearly costless.
Effects of the Bubble Mortgage Interest Moratorium would be:
Government, losses some tax revenue in the short run due to lower bank profits.
Banks, Cash flows improve as people have greater incentive to make their payments. Balance sheets improve and less taxes are paid (lower profits during moratorium). Reduced foreclosures and short-sales. House values are less likely to fall.
Banks, lose some profit if people are able to refinance at lower rates sooner. Banks also lose at the end of mortgage, as it is payed off earlier; these losses are very small and very far in the future. Banks can also lose at sale the amount above principal, up to the amount of scheduled interest during the moratorium, that the home sells for. Again this would occur in the future so the loss would be discounted.
Homeowners balance sheets improve. Uncertainty diminishes.
Homeowners who are ultimately insolvent may be given false hope and make payments they shouldn’t.
Fed, value returns to some toxic assets, since many of the instruments were created under the assumption of prepayment of principal and non-payment of interest (the operating model was that people moved frequently and bought houses to invest in and sell). This will offset some of the lost tax revenue.
A policy to prevent over speculation in higher commodities prices might be an oil tax that is progressive, increasing as the price of oil increases. Starting at $70 a barrel it may be 10%, increasing as prices rise to 50% at $100/bbl. Or, a similar tax on transactions that don’t result in physical receipt. (The tax would be only long positions.)
Considering the huge numbers which have been thrown around the past two years, as well as our current sad state, wouldn’t it have made more sense for the Feds to just buy the bad mortgages?