Stop the Presses Bernanke, Geithner Is Out of Control!

If only I could manufacture money in my basement and then give it to a friend to use it to buy securities in the open market.

Just think of the competitive advantage that friend would hold over other investors:

1. He could outbid anyone else who had a cost of funds higher than he did.
2. He could offer borrowers 'artificially' low interest rates.
3. He could probably corner the market for certain asset classes.
4. As long as he held the assets until maturity and retained a low funding cost, he should be able to make money.

Sound like a plan?

What I have just described, of course, is the lion's share of the US mortgage market as it exists today.

Ben Bernanke has been prining the money, and Tim Geithner has been using it to effectively nationalized the US mortgage market - and in the process, the two of them have crowded out private capital almost entirely for conforming mortgages.

Can Jumbos be far behind?

As we sit here today - Uncle Sam (and by extension commercial banks) is now the lender of first and last resort for conforming paper... because no-one else in the private markets can even touch his funding costs.

But let's consider the consequences of this dynamic on a mid-term basis.

Riddle me this?

1. Is US real estate now being valued on fundamentals or is Uncle Sam's sub-5% mortgage rate just today's latest "teaser rate" - destined to reset higher once inflation resurfaces or once funding responsibility returns to the private market?
2. Is it a good idea to artifically prop-up a long duration asset like housing with subsidized interest rates that fail to recognize the appropriate "risk premium" that should be attached to an asset class that typically experiences some level of default over time?
3. How do you ever entice private capital back into the mortgage market when your pricing decisions are now deliberately excluding it from the party? How do you get Uncle Sam out of the mortgage business if you aren't pricing the money correctly?
4. How will housing markets ever discover the fair, equilibrium price for a home based upon supply, demand, Price to Income, Price to Rent, or Replacement cost and a rational borrowing cost ex-a subsidy from Uncle Sam?

Certainly, the availablity of credit is a meaningful issue that would seem bona fide for the fed and the Treasury to tackle. For example, if a credit worthy borrower with appropriate collateral and/or income is unable to source funds....then the provision of liquidity absent some private source may indeed be justified.

However, the provision of credit should not arbitrarily be attached to a heavily discounted "money cost" that fails to adequately price the risk embedded in the loan.

The US Treasury may believe it can manipulate asset markets with Federal Reserve funded cheap funds...but ultimately, the private markets will have to determine the proper equilibrium price for money...and the assets that sit behind them.

Housing, of course, is no exception. Whether mortgage rates reset to 6% this year or 5 years from now...as the "proper" cost of money...the change of the value of the underlying asset will be inevitable.

Alternatively....Uncle Sam will have to remain the perpetual banker of first and last resort....because no-one else in the private markets will ever be able to compete with the cost of a bill run from a press.

Think about it for a second: Does it stand to reason that it should only cost 5% for a mortgage in the worst housing market of all time...?

Of course not. And yet now, US individuals are being encouraged by our government to buy houses because mortgage rates are so cheap.

Sound familiar?

The last time cheap savings and "artificially low interest rates" were tabled to consumers, real estate prices extended beyond their fundamental value by as much as 50%.

Today, Uncle Sam is simply taking the place of "Sub-prime lenders"/foreign savers by offering mortgage financing on terms that would otherwise be entirely uneconomic in any private market place.

Buyer Beware: If you buy a house today, odds are its price will decline in value if and when mortgage rates revert to their true, economic, cost in future.

Effectively, the Fed is financing the Treasury, that is now nationalizing formerly private finance in the public domain.

Unfotunately, this can only mean that the proper discovery of equilibrium pricing that would result from Adam Smith's free hand doing its job...has now been displaced/crowded out by a Marxist substitute - centrally planned by an economic agent that has no profit motive whatsoever.

One day...the bill will come due for homeowners, once and for all...but for now...the last round is on Mr. Bernanke and Mr. Geithner...

One has to wonder, however, if either of these two individuals have an exit strategy beyond printing more bills labeled "In God We Trust" !

Stock position: None.

Comments

[pacman1947:]

Let me get this straight, Matt. Are you saying, "Let capitalism do its job!"?

However you structure the arguments, some economist/policy maker/politician will find a way to counter your logic.

The Anti-capitalists control the world today. They have our money. We are told, "Trust me." God has nothing to do with it.

Mar 18 07:35 AM

[Ferdinand E...:]

This is soap-box speculation rather than economics, but it might have been nice to examine in a seminar or an up-market conference. Note, "might have been", because classifying the actions of the Fed and Treasury as "Marxist" immediately identifies it as crank.

Mar 18 08:46 AM

[Ranger:]

You're an idiot. I don't care for Geithner either, but the crooks you identify as "private lenders" can all go blow their brains out for what they've done to the mortgage market. The Sweden method would have been a better way to go, and still may be, but the Marxists (the media--of which clowns like you are part) wouldn't have it.

Ranger

Mar 18 09:15 AM

[ain't no fo...:]

Good comments Ferdinand - i am sorry i hit thumbs down by mistake - it is THUMBS UP!

Mar 18 09:27 AM

[J.Stevens:]

I sincerely believe that many of our present government leaders are impaired. It may be simply an intellectual failure but it may be something more ominous.
We have had many congressmen terribly alarmed that our athletes may be taking steroids, causing unfair performance advantage, but we hear nothing about a concern that the men making the most serious financial decisions in our history are not being tested for drugs that may be causing the bazzar judgements we now are witnessing. I hope that they will realize that the public is quite aware that narcotics are poisoning many aspects of our society and, quite frankly, many of us see a possible explanation for our nation's present economic mess.

Mar 18 01:37 PM

[henarl:]

Yeah! Surprise drug testing of the Administration and Congress - might work even better than term limits.

Mar 18 03:53 PM

[Ned S:]

Free markets no longer exist. Shut down Wall Street - Its just become a puppet responding to some Social Democrat string pullers . Why waste the time and effort on it? It would be far more efficient and honest to simply ask Messers Obama, Bernanke and Geithner what their price target is for stocks, houses, commodities and bonds today please. And what the price of a plate of beans is. And how much anyone can earn. If hearing them called Marxists offends anyone's sensibilities then the offended party should do a reality check - The hat fits and they are wearing it.

Mar 18 04:28 PM

[Blackeyebart:]

It is all too early to criticise Bernanke Geithner et al. We can't judge their performance until they have fixed the problem (or failed to fix it). And we won't know if it is fixed until the new regulation regime is in place and working. There is no sign of this yet.

The problem with judging them under the old regulations is that the problems all appeared under those regulations, and could do so again.

We can't tell if the recovery has started or if another shoe is about to drop.

What has changed?

Mar 18 09:13 PM

[User 357469:]

Much of the money that many capitalists have today was obtained from others through unreasonable business practices, misrepresentation and fraud. It is now time to fight back and force those "capitalists" to be more reasonable and more accountable in their business dealings, and if that sounds too harsh for some to absorb then consider this: If America's attitude does not change in that direction and do so very quickly, America will cease to be a significant world power within less time that many of us can even begin to imagine.

pacman1947 wrote:

>
> The Anti-capitalists control the world today. They have our money.
> We are told, "Trust me." God has nothing to do with it.

Apr 09 10:47 AM