July 23, 2008
Bam! Bam! Barney Frank’s Bailout Bill Survives As A Provision
“The U.S. Congress may vote today on a rescue plan for Fannie Mae and Freddie Mac after lawmakers reached a deal on legislation aimed at alleviating the worst housing recession in a quarter century.”
"White House spokeswoman Dana Perino today said President George W. Bush will sign the bill, removing the previous veto threat over a provision to include $3.9 billion in aid to communities hit by the housing recession."
"The housing bill would create a program aimed to help an estimated 400,000 Americans with subprime home loans refinance into 30-year, fixed-rate mortgages backed by the government."
∙ Congress May Vote Today on Fannie-Freddie Rescue Plan [Bloomberg]
∙ JustQuotes: Barney Frank’s Housing Bill Reduced To Political Rubble? [SocketSite]
∙ What’s Twenty-Five Billion Between Three Hundred Million Friends? [SocketSite]
First Published: July 23, 2008 7:45 AM
Comments from "Plugged In" Readers
Honestly, if it costs us only $2000 for every man, woman and child in the US for 7 years of fake prosperity, it was a good deal.
We all made out.
Posted by: tipster at July 23, 2008 9:58 AM
Once again the land owning class extracts the wealth of the peasant
Posted by: jhjgjhgjkgjk at July 23, 2008 10:01 AM
The AP story on this states: "It includes about $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time home buyers for people who bought homes between April 9, 2008, and July 1, 2009. It also allows people who don't itemize their taxes to claim a $500-$1,000 deduction on their 2008 property taxes. That chiefly benefits homeowners who have paid off their homes and can't claim a deduction for mortgage interest." Is this to try to get people to buy when it isn't wise? Does this not lead to keeping the prices artificially high again? Won't the fall that is inevitable happen anyhow? Is it better to take it all at once, or bleed slowly? The potential benefit of up to a $7500 credit is awfully appealing.
Posted by: majr at July 23, 2008 10:37 AM
Am I reading correctly that this bill reduces the FM/FM loan limits to $625,000 for the Bay Area?
Posted by: Mark at July 23, 2008 10:40 AM
This awful bill also authorizes an $800 billion increase in the US debt limit, to around $10.6 trillion.
The official name of the bill is H.R. 3221, "The Foreclosure Prevention Act of 2008" and its official Sponsor is Nancy Pelosi.
Say hello to skyrocketing interest rates.
Posted by: Anonymous at July 23, 2008 10:43 AM
Can someone explain why this could cause interest rates to skyrocket?
Posted by: majr at July 23, 2008 10:55 AM
"The official name of the bill is H.R. 3221, "The Foreclosure Prevention Act of 2008" and its official Sponsor is Nancy Pelosi.
Say hello to skyrocketing interest rates."
Low interest rates and war have not improved the situation. So let's try something different; instead of protecting only Bear Sterns and their ilk; let's protect the people from unregulated, unethical predatory lending guaranteed by the federal government.
Only crazy people do the same things over and over expecting different results.
Posted by: minerva figueroa at July 23, 2008 11:04 AM
Total US debt will be raised by 800 billion in one stroke. The bill authorizes the US Treasury Secretary, Henry Paulson, to buy stock in Fannie Mae and Freddie Mac if he wants, and as much of their underwater loans as he wants--up to $800 billion worth.
When the debt of the US increases, there's more Treasury paper to sell, and the increased supply produces lower prices for the debt at the auctions, and consequently, skyrocketing interest rates, especially the longer rates.
Posted by: Anonymous at July 23, 2008 11:09 AM
Yup. In layman terms:
More debt means diminished credibility means creditors want more money for the increased risk.
Either that or the USD goes down the drain.
Posted by: San FronziScheme at July 23, 2008 11:50 AM
A few points here.
Didn't CBO just estimate that the bailout would cost $25 billion? But now we get an $800 billion raise to the debt ceiling? Hmmmmmm.... (I know there are a lot of things going on here, including the phony propaganda that Treasury will recoup most of the "investment" in FM/FM, but good luck with that! Treasury is going to be the toilet bowl for all the crap that FM/FM doesn't want, just as FHA will be the dumping ground for the worst of the worst from the private sector banks that are being "absolved" of their sins by the USG).
I agree with the general idea put forth by San Fronzi and others that interest rates should rise given an increase in debt. However, the key is how fast private sector credit is destroyed. In Japan, governmental debt EXPLODED in the 1990s (all the way to 200% debt/gdp) on the back of massive fiscal deficits. Yet interest rates COLLAPSED (all the way down to under 1% for the 10Y JGB) on the back of risk aversion, repatriation of overseas Japanese corporate profits and money printing by BOJ ("quantitative easing" it was called) because private credit was being liquidated (or defaulted) and ALL excess funds found their way to JGBs (BOJ could not print fast enough to offset the collapse in monetary velocity). I think that is a distinct possibility in the US as well, and I am maintaining a fairly large treasuries position because of that. The Fed can cooperate here by refusing to inflate, just as Bernanke has refused to inflate the money supply so far. Who really knows, but I've placed my bet and I am going to go with it until it stops working....
Posted by: Satchel at July 23, 2008 12:28 PM
Satchel: intersting ideas. I'll have to mull them over.
however, to me there are two problems:
1) we will now have $800 billion increase in true national debt (Treasurys) AND we also have Fannie and Freddie who are now EXPLICITLY backed by the govt.
2) why invest in treasurys when you can invest in F&F bonds, that have a higher yield AND are just as safe?
Posted by: ex SF-er at July 23, 2008 3:24 PM
"...Bernanke has refused to inflate the money supply so far"
I hope that's true, but commodities prices, the gas pump,and shadow M3 & CPI tell me otherwise.
Posted by: Animo at July 23, 2008 3:47 PM
Commodities are merely rebounding from the worst bear market in the history of the world, and that is no exaggeration. Never were food and raw materials so cheap, relative to per capita income in the developed world, as they were a few years ago. And even with the recent price run-up, commodities are still very cheap in the grand scheme of things, though a little less cheap than a few years back. Furthermore, there is massive supply coming on line for everything except oil. Africa isn't going to be competing anytime soon with developed world for things like semiconductors or aircraft. But they can certainly compete with regards to raw materials, and they will pretty soon, with China's help. Oil may stay high indefinitely, but then high oil prices just opens the door to massive re-engineering for the sake of cutting oil usage. Video-conferencing versus flying around the world for meetings, etc, etc.
M3 is meaningless. Anyone can create money in a modern economy. Example: if Safeway creates gift certificates, I'd be happy to accept such private money (in moderate quantities) at par value, given that I shop there regularly. Ditto for credit card companies. My visa card works as well as cash at most stores, so the whole credit line on that card is effectively money. Etc, etc.
CPI is up, but not enormously. Anyway, price inflation doesn't matter. What matters is wage inflation. If prices go up and wages don't follow, then prices won't continue going up because people simply won't be able to pay. And there is little wage inflation currently. With unemployment up, I doubt there will be much wage inflation going forward.
The real question is whether Congress will have the political will to stop the deflationary train headed our way. Stopping deflation is easy. For example, eliminate all taxes, increase spending on a universal health care plan, free college for all, free day care for all, etc, etc. Push the deficit on up into the multi trillions. That should do the trick. The question is whether Congress will go so far, which in turn depends on voter attitudes. My gut feeling is that we are seeing a sea-change in attitudes. I sense a growing desire for downsizing, simplicity and other non-consumerist behavior. People are getting exhausted by the treadmill of constantly have to buy, buy, buy. If my sense of this sea-change in attitudes is correct, it means we are going to see a savings spree in the next few years on the part of American households, which will cause huge deflationary pressures, but at the same time, we will see a resistance to the budget deficits necessary to overcome these deflationary pressures. (Business investment could also compensate for the household savings spree, but I don't see that happening, for various reasons.) Then again, betting against American spendahohlism and consumerism has been a losing proposition for a long time, so maybe I'm just tuning in to a bunch of oddball gloom-and-doomers and have managed to get everything wrong.
Posted by: Tim at July 23, 2008 4:54 PM
It's a thorny environment and tough to know which way the USG will go. When faced with a huge debt overhang problem once before (1931), the Fed - together with the USG - chose deflation. And it definitely was a choice, as it always is when there is monopoly control over a money supply.
I haven't seen *anywhere* that the USG is explicitly guaranteeing FNM/FRE debt. Have you (yet)? I do se a LOT of commentators putting this out, and everyone sort of saying that it is a done deal. Isn't this what the Fed and USG would want? A way to continue the implicit backing without having to go so far as to explicitly guarantee? The numbers so far don't work. FNM/FRE debt = approx $6T, of which something like 25% is retained by the GSEs themselves, and 25% is held overseas by FCBs (mostly). The debt ceiling increase in the bill is $0.8T. Doesn't that say that Paulson et al are NOT seeking to make explicit the debt? Wouldn't the debt ceiling have to go up $6T at least? Call me cynical, but it looks like smoke and mirrors to me, another wink and a nod to keep the "implicit" game going without having to assume the debt. I sense a "haircut" is coming down the road on all this GSE debt, once the worst of the crisis has past..... Against this backdrop, I'd rather hold the real thing (Treasurys) rather than treasurys-lite!
Still, undoubtedly it's a risky position. USG debt levels will rise, especially under an Obama administration. In theory, rates should rise. But let's not overlook the secular fall in USG interest rates almost uninterrupted since the early 1980s. As the debt (nominal) went from $1T under Reagan (I was in college and remember that number) to (I think) about $5T at the end of the Clinton administration to just about $10T at the end of the Bush administration, interest rates on USG debt went nowhere but DOWN! Pretty remarkable. Reserve currency status has its benefits, and I am guessing that the Fed and USG will not jettison this advantage just to salve the wounds of a bunch of poor little homedebtors. Again, call me cynical, but wouldnt it be better (and even more "noble" - look, I'm getting into the spirit of Obama!) to do everything possible to keep USG rates low, so that the USG can continue to borrow and dispense goodies to the struggling population?
The real risk IMO is China, Middle East, Russia and other "recyclers" of capital. These countries are printing currency like crazy! Dollars come in from exports (oil in Russia and M.E., manufactured goods in China), and the respective central banks "buy" these dollars, and simply print the local currency with which to do it. That is why inflation and money supply growth in these exporters are off the charts (of course, they could sterilize all this by issuing local bonds to sop up all that liquidity, but that would raise equilibrium rates in those countries, putting the squeeze on credit systems that are perhaps even more dysfunctional than ours). Then those FCBs take those dollars and put it in the only place they can: US treasuries (and agency debt, etc.). What happens when domestic inflation causes the FCBs to stop inflating? Tough to know of course, but that's the risk.
Posted by: Satchel at July 23, 2008 5:16 PM
Mark, I may be missing something too, but as I read it, the bill does put in place a $625,000 conforming loan limit. This is being touted as an increase, but it appears to lower the present limit for our area by a little over $100,000.
Editor's Note: Will San Francisco Suffer From Premature Loan Limit Reduction?]
Posted by: Trip at July 23, 2008 5:24 PM
your points are true. I agree with much of what you say, save one point. There is no way on God's Green Earth that the USG will allow the debtholders of F&F to take a haircut. no way. not even 1 penny.
$1T to $1.5T of that is held by FCB's, minimum. another huge amount held by US Municipalities. Another large chunk is spread around the banking sector. Allow F&F bonds to take a haircut, and you could wipe out a huge chunk of the banking sector, AND disenfranchise FCB's in one stroke, not to mention grandma's pension. You would see rates on US Treasurys skyrocket if that were allowed to happen.
Make no mistake, the USG is EXPLICITLY backing F&F now, and it's the bonds they are backing... although they're using some weird and ill-advised Treasury stock purchasing program to do so.
The govt did what it did only to keep the $5T in F&F's bonds off it's books. That's all. It was an accounting gimmick. but they're backing the bonds. what else would they be backing? the stockholders? every infusion by Treasury will be dilutive to the stock. it's still a gift to the stockholders (who don't deserve it, they should be wiped out)... but Treasury wants a blank check so they can keep F&F "private" which keeps F&F debt off USG books. That's all.
as for your other point: yes the risk is the dollar recyclers. And this is why future Treasury rates may become an issue. we continue to increase supply of Treasurys at an alarming rate. now we have F&F which have bonds which are just a hair shy of being explicitly backed. Not to mention the FHA garbage that just happened hidden in the bill (which will require more appropriations by the way since they're banned from risk-based pricing).
Posted by: ex SF-er at July 24, 2008 5:19 AM
"What happens when domestic inflation causes the FCBs to stop inflating?"
Ah yup. At some point they will decide that they want cheap raw materials to consume themselves more than they want to export to us. When that day of decoupling comes I suspect we will see a dollar crash and a surge in interest rates.
Posted by: diemos at July 24, 2008 7:55 AM