The
views expressed in this column are solely those of the author and do not
reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its
affiliates.
And Son I'm just sorry
They're just memories for you now
- John Mellencamp
Unfortunately, whistling past the graveyard has become "situation
normal" for many government agencies, but the Fed is not likely to be
considered one of them.
Finally getting a chance to read Henry Paulson's On the Brink over the
weekend, it's obvious both Paulson at the Treasury and Bernanke at the
Fed have been anything but inattentive to the needs of our economy.
Whether you agree with their decisions, you cannot call them lazy or
self-serving.
But last week the Fed's research staff released a report entitled "Did
the Federal Reserve's MBS Purchase Program Lower Mortgage Rates?" and I
must ask myself what motivated such a release.
While not as wasteful as a study on whether binge drinking is unhealthy,
the need for such a study seems just as useful. It could have been
titled more directly, such as "Does buying up 10 percent of all
outstanding mortgages raise aggregate demand, thereby lowering rates
available to homeowners?" The obvious answer is yes.
But this misses the point.
The implication that such dramatic government involvement in the
mortgage market (indeed, the government now owns the equivalent of four
in 10 home mortgages across the country) is confined only to available
mortgage rates in the short-term is absolutely absurd.
A better question — one that continues to be ignored inside the Beltway —
is "How do we encourage a private sector mortgage market so we can have
capital allocated based on risk and return rather than political
objectives?"
Such a study would likely move the government to conclude that job one
is reducing uncertainty about government involvement in the mortgage
sector. (This then could be applied to other sectors of government
regulation as well!)
This idea likely comes as no surprise to my regular readers as I've
argued such a stance since 2008, when the mortgage market originally
blew up. But instead of addressing the actual cause of the
liquidity/credit crisis, government continues to look for ancillary
issues to address.
Perhaps dealing with Fannie and Freddie, while deciding how the
government should interact with the mortgage sector long term is too
much to handle. The result is a continued shaky feeling about consumers'
largest financial exposure (if not their largest financial asset):
their home.
Tracking through John Mellencamp's stomping grounds last week, I came
across the following and just had to snap the photo below. Let's all
hope this represents a bottom in the housing market.
Continuing the Star Trek Method
Testing the waters of "going where no man has gone before," there are
rumblings in D.C. about allowing states to file bankruptcy and default
on their debts. Given the solid history for this asset class (default
has never occurred before), I must wonder at the effects of such a
policy.
Why would investors believe Treasuries have zero chance of default if
the same legislators that could protect their states' debtholders are
pushed to a decision on Treasury debt– as seems to be the case with
every debt-ceiling vote? Given it would take action on the part of
Congress to allow this (they would actually have to pass a law allowing
states claim bankruptcy), it would be difficult to interpret such
circumstances differently.
At some point, taking the road less traveled offers more risk than reward.
Key Developments
In December builders started to work on fewer homes than projected,
indicating that the housing industry continues to struggle. Housing
starts fell 4.3 percent, the lowest level since October 2009. While low
borrowing costs and falling prices are helping revive sales from last
year's post tax-credit slump, Federal Reserve policy makers are
concerned that the weak housing industry may undermine the economic
expansion.
Borrowers locked in low borrowing rates before the recovery pushes rates
up as existing homes sales rose 12.3 percent to 5.28M. The increase
shows that home buyers are returning even without the government credit.
The median price dropped 1 percent to $168,800 from $170,500 last year
and the share of sales represented by foreclosures increased.
Initial jobless claims fell by 37K to 404K this week. The drop was
slightly better than analysts anticipated and continues the downward
trend in unemployment claims. Observers say that the number of new
jobless claims must fall below 400,000 and stay there before there will
be much improvement in the jobs picture.
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