Thursday, July 20, 2006

Bernanke Loses Mind

Bennie, have you lost your mind? Say it ain't so, just say it ain't so. Allowing Fannie to expand it's portfolio during a housing collapse only serves to further increase the systemic risk these institutions pose.

From Marketwatch:
Bernanke open to GSE portfolio boost idea in deal context

Ben Bernanke said the idea of giving the regulator of Fannie Mae (FNM) and Freddie Mac (FRE) authority to allow them to increase their portfolios during housing market downturns might be worth considering, if it was part of an overall deal to subject the firms to strong and effective regulation.

But Bernanke, the chairman of the Federal Reserve Board, told the Senate Banking Committee that Fed research indicates such a proposal wouldn't have much market impact.

"In our research at the Federal Reserve, we have not found that to be a very important effect," Bernanke said during testimony before the Senate panel. "We found very little effect in that direction.

"And we would also point out that if you're going to do that, what you want to have in your portfolio is liquid assets, like Treasuries, not MBS (mortgage-backed securities), because you can't buy MBS with other MBS," the Fed chairman continued. "So you know, we have some concerns about that."
...
"Now having said that, I think it's worth, you know, for the purposes of trying to come to some kind of agreement on GSE (government-sponsored enterprise) legislation, I think we, you know, could perhaps discuss - consider the possibility that the director might provide some emergency ability to GSEs to make extra purchases during times in which the director judged the housing market to be in distress for some reason, but then to get rid of that extra portfolio, get rid of the extra MBS over a period of time when the emergency was eliminated.

"Again, we don't really see much evidence that this is necessary, but if that were part of an overall agreement that brought a strong and effective regulator to the GSEs, it might be worth considering," Bernanke added.

The Fed knows a full-scale housing bust is on it's way, regardless of what Ben said about an "orderly cooling" of the market this afternoon. I believe the key words in his statement were "so far".

There is only one reason to allow Fannie and Freddie to expand their portfolios during "emergency" situations, it is to keep the mortgage money flowing. The GSEs will likely be unable to sell these MBS's on the open market, thus they will have no other choice but to stockpile these loans in their own portfolios.

The GSE Bailout will make both the S&L and LTCM bailouts look like childs play.

grim

11 Comments:

Blogger grim said...

I'm starting to believe that Bernanke might very well be a hack...

Fed chief keeps his rose-colored glasses on

Don't worry about the ugly present economic situation, marked by a slowing housing market and signs of higher inflation -- this was the message that Bernanke repeated Thursday, his second day of testimony to Congress on the outlook for the U.S. economy and monetary policy.

Bernanke repeated that the future should be the focus, that the economy's only going to slow to around a 3% growth rate in terms of gross domestic product, and that inflation will turn out to be benign
...
As usual, it was left to economists to be the skunks at the garden party, grousing that the rosy scenario might just not pan out.

"Welcome to the world of Goldilocks. Everything is beautiful. I hope that is true," said Joel Naroff, president of Naroff Economic Advisors.

7/20/2006 11:39:00 AM  
Blogger Metroplexual said...

He would have had to have been out of his mind to accept the job. It will be a thankless job, and he will be blamed for everything.

7/20/2006 12:23:00 PM  
Anonymous Anonymous said...

Off the wire from yahoo:

Rates on 30-year mortgages edge up

http://news.yahoo.com/s/ap/20060720/ap_on_bi_ge/mortgage_rates

SAS

7/20/2006 12:51:00 PM  
Anonymous Anonymous said...

Helicopter Ben is just doing lip service.

SAS's prediction---hikes all the way to 6%, then a pause.

We need to look attrative to that foreign money that keeps this country afloat. To the fed, that is more important than housing bubble or stock markets.
Because, honestly, unless you bought a house with in the past few years and lived in certain locations, a popping of the RE bubble is not really going to hurt everyone. But it will hurt NJ, thats for sure.

Fed doesn't care about NJ, trust me.

I agreed with Greenspan when he described the RE bubble as froth.....just a lot of little bubbles (NJ, NYC, LA, Vegas, Miami, DC), but in my opinion, there is not a national across the board bubble.

Just drive through the rust basket of USA or go upstate ny, they will tell you, no such thing as a housing bull market there.

SAS

7/20/2006 02:56:00 PM  
Anonymous Anonymous said...

Grim,

I am not sure if you are analyzing this completely. Fannie & Freddie have been increasing their portfolios in 2006 (slowly). In fact, Fannie may already be in violation of the consent order with the OFHEO. So this Bernanke statement appears to be a little more than "a*** covering".

FCB's have been buying huge amounts of Fannie, Freddie agency bonds in 2005 (since the Fannie crisis began). This is,in effect, a subsidy of long term interest rates here.

Lately, however, FCB's have began to slacken from their purchases of agencies. I am not sure if this is a phase (or a cycle) OR if they have really become disgusted with all this "apparently overvalued collateral paper".

CNS

7/20/2006 03:21:00 PM  
Blogger chicagofinance said...

personally, I think that the flat yield curve means that even at 5.25% Fed Funds, borrowing rates are still stimulative

look at this crap!!!
3-Month 5.08%
2-Year 5.06%
10-Year 5.03%

I will say that spreads are widening on all credits, including mortgages, so that is good, but the base Treasury dominates the pricing.

7/20/2006 04:03:00 PM  
Anonymous Anonymous said...

shytown...

Mmm.....yes..good point.

How far you thinking helicopter Ben will raise the rates?

PhD,

goto Lusk, Wyoming...no RE bubble there...that is just one of many towns all across the country were RE bubbles didn't happen.
People tend do forget that most of the country is not NNJ or nyc metro...thats all I am saying...
The media and attention has just gone to some (not all keep in mind) major cities.

SAS

7/20/2006 04:12:00 PM  
Blogger chicagofinance said...

grim-ito:

About the Benny Boy hack thing.

One of his fumblings is that he is supposed to put the fear of God in people on the fence.

Let's say we have the Bednar Construction company, and they are on the fence about whether they should borrow money to start building a new office building in Clifton.

Well they should be thinking - our floating rate borrowing on the construction loans is going to go up and persist, because Benny and the Feds [those SOBs] are going to take away the punch bowl, and then we have greater risk of losing money.

Bednar is teed off and complains to his Senator about the fact that the Fed chair is an a--hole who is trying to wreck his business. The Senator grills BB on C-SPAN.

If BB does his job correctly, he basically tells Senator Manning of Kentucky [jack---] or Menendez et al. - Stuff it. I'm here for my full term, and I don't care if you all get voted out of office. I don't care if Bednar construction is angry. I don't care if I cause a recession.

Benny and the Feds have to be objective, and at the end of the day, they are doing what is, in aggregate, in the long-term interests of this country.

But the citizens, business people, and Wall Street don't care. They want things their way - NOW. The future be damned.

Benny must express his stones, whether he uses the stick or not.

7/20/2006 04:17:00 PM  
Anonymous Anonymous said...

its over

7/20/2006 06:06:00 PM  
Anonymous Anonymous said...

I got an e-mail from a friend of mine in Merritt Island, FL who works in real estate. She says the market is terrible, no one is buying, and insurance rates are quadrupling so people are looking to leave FL! That's a first. So many go down there for affordable housing - and now they're looking to leave! RML

7/20/2006 07:33:00 PM  
Anonymous Anonymous said...

RUN!!!

GO!!!!

GET TO DA CHOPPAAA!!!!!!!!!!!!

7/24/2006 03:34:00 PM  

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