Posted on 03/27/2008 7:08:44 AM PDT by fightinbluhen51
The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse.
On the Richter scale of government activism, the government's recent actions don't (yet) register at FDR levels. They are shrouded in technicalities and buried in a pile of new acronyms.
But something big just happened. It happened without an explicit vote by Congress. And, though the Treasury hasn't cut any checks for housing or Wall Street rescues, billions of dollars of taxpayer money were put at risk. A Republican administration, not eager to be viewed as the second coming of the Hoover administration, showed it no longer believes the market can sort out the mess.
"The Government of Last Resort is working with the Lender of Last Resort to shore up the housing and credit markets to avoid Great Depression II," economist Ed Yardeni wrote to clients.
First, over St. Patrick's Day weekend, the Fed (aka the Lender of Last Resort) and the Treasury forced the sale of Bear Stearns, the fifth-largest U.S. investment bank, to J.P. Morgan Chase at a price so low that a shareholder rebellion prompted J.P. Morgan to raise the price. To induce J.P. Morgan to do the deal, the Fed agreed to take losses or gains, if any, on up to $29 billion of securities in Bear Stearns's portfolio. The outcome will influence the sum the Fed turns over to the Treasury, so this is taxpayer money; that's why the Fed sought Treasury Secretary Henry Paulson's OK.
(Excerpt) Read more at online.wsj.com ...
Oh goody! Price controls and more government subsidies!
Yeah, I didn’t say anyone would like the article, just that it’s a good interpretation on what’s happening and what might happen.
“If it moves regulate it, if it moves faster, tax it, if it stops moving, subsidize it.”
Ping.
Personally I am:
1: Aghast at he moves by the Fed, some of which are clearly and substantially outside their charter (a: providing 10 year loan to JPM, b: making said loan non-recourse)
2: Not at all convinced that ANY effort to “prop” housing prices at above 3x median gross incomes has the slightest chance of success in any longer term scenario.
3: Fully convinced that ALL efforts at #2 have nothing to do with anything other than preserving the collateral value(s) behind vast tranches of mortgage debt held by banks, persion funds, foreigners, etc; IOW, it’s a bank-preservation activity sold under the guise of homeowner assistance.
Exactly! Why should price controls work better for capital markets than for labor markets, markets for shoes, or for anything else? And why would they work now, when they have never worked in the past?
This massive intervention will not reduce the net pain of misinvestment that has already happened. It will, however, serve it's real and true purpose, which is to transfer that pain to the future so that current politicians and regulators can escape condemnation.
“We are all Keynesians now.”
I think the hope is that housing prices gradually relax, so that most homeowners have positive equity. Good luck with that. Sort of spreading out the pain. I don't think the Fed wants to permanently prop up real estate values.
So the government feels that a price floor will increase demand? What backwards universe have I woken up in?
I’m no Bernanke, but wouldn’t more people begin buying as prices continued to decrease? I seem to remember something about a business cycle...
The same goes for over regulation like Sarbanes-Oxley. How much money has that cost us?
Ping for later reading.
“I don’t think the Fed wants to permanently prop up real estate values.”
Oh, I do. Very seriously I do. Because RE values underlie gargantuan loans, they underlie implicit guarantees issued by FNM and FRE, their serviceability underlies tremendous amounts of foreign investment in the US. Loans underlying RE go to the very heart of worldwide investor confidence in the US. If RE values continue to weaken, many more of these loans go bad, worse than they already are. This, IMO is absolutely intolerable. The quality of these loans and the implied underwriting standards were memorialized in the Basel accords under Volcker and a widespread throwover directly leads to a complete rewrite of the current monetary regime. It further leads to a writedown of property taxes receivable by counties and defaults on municial bonds. Unless you believe far-out theories that the Fed’s secret mission is to bankrupt the US so that Bilderbergers can stealthily buy up all US real estate and enslave its’ citizens...(something I do not believe but they are doing a damn good job of it!) the decline in real estate prices has to be stanched.
I have a friend whose company is planning to IPO on foreign exchanges precisely because the cost of implementing Sarbanes-Oxely is prohibitive for a small company.
This friend is an employee of the company, and not a founder (just for clarification).
They’ll have to deal with a 63 million man standing army if that happens, which means we’ll have ChiComm tanks on our lands before then.
“So the government feels that a price floor will increase demand? What backwards universe have I woken up in?
I’m no Bernanke, but wouldn’t more people begin buying as prices continued to decrease? I seem to remember something about a business cycle...”
I believe a price floor will increase demand, and that’s not (as I see it) in disagreement with what you imply. It’s just a different phase of the biz cycle you refer to. People buy stocks when they see prices going up. Yes they do. (Not the same thing, but similar) People will get off the fence as to buying homes when they see prices STOP declining...IF they can meet newly tightened lending standards. Right now the market has to decline to where demand picks up, and I think this is as natural as you’re implying. It’s a process that can be skewed and/or delayed or stretched out but not eliminated.
Nothing to see here folks. Hey, who got dropped from American Idol last night?
Whew! We're out of the woods then. History teaches that price controls ALWAYS work as intended.
Bloomberg is reporting Fed May Emerge From Crisis With More Influence at SEC Expense.
From Bloomberg:
America’s financial system faces its biggest overhaul since the Great Depression as officials weigh lessons from the credit-market rout and the near collapse of Bear Stearns Cos.
Federal Reserve policy makers are redefining which companies are vital to the flow of credit, an area once the sole domain of commercial banks, and which institutions pose risks to the entire economy if they fail. Treasury Secretary Henry Paulson said in a speech yesterday that the Fed should broaden its oversight to include Wall Street investment firms, now regulated by the Securities and Exchange Commission.
“This is tectonic,” said Ralph Ferrara, a former general counsel at the SEC, and now a partner at Dewey & LeBoeuf LLP in Washington. “We no longer want to have a balkanized response to a national crisis.” The SEC will be so diminished that it “will be given a nice view of the Potomac from whatever floor of the comprehensive financial services regulator they are given,” said Ferrara.
“Because of financial innovation, we have lots of these financial firms that started to look like banks,” said Mark Gertler, a New York University professor and visiting scholar at the New York Fed. “Any institution that may need to go to the discount window directly or indirectly ought to be under the supervisory control of the Fed.”
Legislators are already considering a new regulatory structure. House Financial Services Chairman Barney Frank said last week Congress should consider creating an agency to monitor market risk or give that authority to the Fed. The Massachusetts Democrat also said he will seek less duplication. Currently, there are five separate regulators of banks, thrifts, and credit unions.
I see your point, but is this going to be a temporary floor? If so, look for the bottom to fall out when it is removed.
Yes, people will begin to buy again when they perceive a bottom, but an artificially-imposed price support could have devastating effects.
The gov’t should stop tinkering and let the chips fall where they may. I guess that would be bad politically in an election year.
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