I wrote an article on Business Insider a long time ago showing how the TBTF banks wanted all mortgages guaranteed going forward. Ben Bernanke has a plan to force this reality upon the American government.
In the Knights of the Round Table, the magicians could turn lead into gold. That is exactly what Ben Bernanke wants to do, and it could cause massive uncertainty going forward, or bring in a period of financial bliss.
The Fed is buying most of the Mortgage-Backed Securities [MBS]. There is no large market for securitization of mortgages but the big banks, and therefore the Fed, want that market rekindled. So does the IMF, because investors are demanding risk free mortgage backed securities this time around. There won't be any bogus AAA rated mortgages being sold to unsuspecting investors this time.
So, here is the plan to turn lead into gold. The Fed is purchasing the MBS en masse. The Fed is expanding its balance sheet into dangerous territory. If interest rates rise, the only way that the Fed will get out alive is to be able to unwind the MBS on its balance sheet. Otherwise, clearly, the U.S. government will either have to bail out the Fed or the Fed will withhold interest payments to the treasury. Or both of these could happen.
The Fed will have the U.S. government in a hostage situation. Or if taking hostages is too strong for you, then it is a simple case of blackmail.
Just as Henry Paulson held Congress hostage in September, 2008, so will Ben Bernanke hold Congress hostage one more time. The question is, will he have to crash the stock market to do so.
I have written about the squeeze in collateral that is good, pristine, perfect, you know like treasury bonds of nations that have good credit ratings. That good collateral is in short supply and the need for good collateral is increasing as banks seek to protect themselves from weakened balance sheets going forward.
That is where the alchemy comes in. Either the MBS are turned to gold or Ben Bernanke will crash the stock market in a big way in order to force the U.S. government to spend more and create more treasury bonds. It is far less messy to just turn the MBS into pristine collateral.
That point won't be lost on Congress, most likely.
So then, what will this do to main street? Well, it is already causing massive speculation in housing and prices are being driven up, first by the private equity people, and now by others who are fearing rising interest rates.
But with regard to main street, there is a major risk, a major flaw in Bernanke's plan. In order for these private equity guys to make a big return on rentals, rents will have to go up. Wages are not going up so rents will not go up without a lot more empty houses being the result.
Jobs in the construction industry and the peripheral industries will be created, and I am sure that is the goal of Magician Ben. However, the cost of living will rise as an unintended consequence, and this could have a profound negative effect on the economy.
Interest rates may rise a little now and then. But most likely they will not rise to very high levels and would likely resume a track downward, as long as we see huge demand for bonds and the Fed can manipulate this process indefinitely through interest rate swaps, crashing stocks, etc. After all, Ben Bernanke is primarily a bond salesman!
But lending could increase with a no-money-down loan being the next big thing. The average Joe could have issues paying this loan back, especially if it is issued to borrowers with low credit scores.
So, the real world economy could cause the U.S. government to be on the hook for a lot of "pristine" MBS. I am wondering, without a crystal ball, if that will undermine the quality of the treasuries of the U.S. government at some point. That seems like a big risk for the government to take on, but of course, it will seem like a smaller risk to Congress than the stock market crashing by 60 percent.
I look forward to comments on my predictions. This has to be a learning process and we are indeed entering uncharted waters where putting a ribbon on a pig is all that is needed to create a pretty pig. It seems like a big fraud to me in a nation where wages don't rise.
But when you are a magician who has the ear of the court of rulers and Knights, fraud becomes way too big to prosecute.
Unfortunately, free market price discovery does not seem to be that important to someone with a magic wand in his hand.
And for any of you who doubt what I am predicting, we have the fact that Ben Bernanke has already telegraphed a new housing bubble.
Thanks to Mike Whitney I have this quote from Ben:
"Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too-tight lending rules to racial discrimination….Bernanke said while tighter credit standards after a collapse in the subprime mortgage market were appropriate, "it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery."… Bernanke said housing-finance authorities have taken steps to "remove barriers to the flow of mortgage credit" and referred to efforts by the Federal Housing Finance Agency and by Fannie Mae and Freddie Mac to clarify rules surrounding mortgages that go into default.
The millennials (Gen Y) could be sucked into this Ponzi housing scheme, but the NAR Cheerleaders won't be able to take David Lereah's mantle and make the argument that real estate always goes up and you will be able to refinance down the road.
But we can't on the other hand, count desperate Ben out, since he is committed to buying a lot more MBS, in open-ended fashion, and will have to get rid of them someday.
Possible investment strategies based on Bernanke's goals focus around the banks and residential real estate with caution.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.