Fannie the Fire Hose

I heard it was you
Talkin' about a world
Where all is free
It just couldn't be
And only a fool would say that
-Steely Dan

Fed Chairman Bernanke made a good analogy when he compared the housing bailout to a smoking neighbor who carelessly sets his home on fire which threatens yours. Would you call the fire department? Of course you would. Rick Santelli should know better.

If you missed this little exchange of words, it probably means you have a life which doesn't allow for being glued to CNBC or four-hour congressional hearings. Good for you! However, for those of us self-confessed geeks who live in the virtual world of finance, it was all the rage last week.

Returning to the discourse, you will certainly call the fire department, but you don't have to be happy about it. Rick obviously isn't. And neither
am I.

But let's define "calling the fire department." Because the mortgage market has shut down causing a freefall in housing values, consumers have lost confidence in the level and growth rate of their wealth. So, they no longer go out to eat as much, purchase that extra pair of jeans or go on that long vacation. Instead they are fearful for their future, including their employment. This puts corporate profits at risk which encourages investors to pull back.

There is an obvious solution: Call the fire department. That is, get the mortgage market working again. Sound difficult? Well, what if the government controlled two entities that account for 44 percent of the mortgage market? It seems to me that if the government truly controls Fannie and Freddie (as they surely do), then the obvious solution begins with pointing these entities in the right (or perhaps any?) direction. Yet we haven't heard much talk of this concept since they were placed in receivership six months ago.

Instead, it seems Bernanke believes a call to the fire department includes the recent political and social shenanigans going on in that three-ring circus called Washington, D.C. Bernanke, too, should know better.

Congress must "call the fire department" by determining what to do with Fannie and Freddie. Eliminating the current confusion about where these 600-pound gorillas will reside in the new world of mortgages will allow other financial institutions to pick their seats. Until then, we will have more government "Keystone Cops" and less investor and consumer confidence.

Make no mistake. Fannie and Freddie are the obvious and correct initial fire hoses to point at this blaze.

Key Developments

First quarter's gross domestic product growth rate came in at -6.2 percent versus expectations of -5.4 percent and well below the previous estimate of -3.8 percent. The primary contributors to this revision include a lower level of inventory growth, wider net exports, lower consumer spending and lower nonresidential fixed investment. The weakness last quarter most assuredly has carried over into 2009.

The Treasury distributed a closer look at the Capital Assurance Program (CAP) which is intended to stress test the banking sector and provide capital assistance where needed. The approach taken by Treasury Secretary Geithner is appealing as he communicates an overall plan rather than a piecemeal approach toward supporting the markets.

Both personal income and spending surprised on the upside in January, however the increases seem to have resulted from one-time or short-lived effects. Spending was higher due to an unexpected rise in gas prices and income jumped primarily due to items that fell into the "other" category. Consumer confidence remains at all-time lows as consumers seem to be worrying more about retaining their jobs than improving their income and wealth.