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Fed monetizing Fannie and Freddie?User Forum Topic
Submitted by 4plexowner on July 8, 2007 - 9:26am
disclaimer: this post involves conjecture and conspiracy theory - the poster has been called 'whacko' by at least one blog reader - readers are advised to put on their foil hats before continuing Fannie and Freddie came up in another thread - I have read some material proposing that the Fed is using these organizations to directly monetize the failing housing industry Here are some interesting data points to consider: > in essence, Fannie and Freddie both died about three or four years ago - they suffered some undisclosed amount of losses from derivatives and have yet to bring their accounting records up to date - there was some scandal and shakeup of management - if I remember correctly, the publicly acknowledged losses so far have been several billion but less than $10B - here's Freddie reporting another $1.2B loss on derivatives in June of this year (http://www.marketwatch.com/news/story/lo...) > Fed stopped publishing M-3 monetary growth rate figures in March of 2005 - several private economists have been tracking the M-3 metric based on other publicly available data - they show M-3 growth currently around 13.7% (http://www.nowandfutures.com/images/m3b_...) > one of the ways for a central bank to stave off credit contraction and deflation is to directly monetize paper assets - in simplified terms this means using printing press money to buy worthless paper assets instead of letting those assets meet the price discovery process in an open market - it is best if this monetization process is hidden from the public because maintaining the public's CONfidence is the bank's ultimate objective - Ben Bernanke discussed some of the options the central bank has available to them in Nov of 2002 - he has since been referred to as 'Helicopter Ben' because he made the analogy of dropping $100 dollar bills from helicopters - his speech makes interesting reading inre options the Fed has for fighting credit contraction (http://www.federalreserve.gov/boarddocs/...) Here's where the conjecture comes in: we take the three pieces of information above to arrive at this POSSIBLE conclusion: the Fed is already directly monetizing failed housing-related investments via Fannie and Freddie The failure of these GSE organizations allowed their books to be removed from public view - Fannie and Freddie already existed in the market as major buyers of residential mortgages - without public over-sight they could buy any trash that came down the pike and they did so - and they continue to do so today - both of these organizations have continued to show 'growth' since their failures - their stocks are doing OK so I guess everything is just fine? ("Pay no attention to that man behind the curtain, Dorothy") We can't prove or dis-prove this theory because the relevant data isn't available to us - the idea makes sense however - there really isn't much difference between the Fed using printing press money to buy US Treasury Bonds or to use the same money buying mortgage debt - one piece of paper is as worthless as the other and they are both ultimately backed up by the US taxpayer in one way or another The financial engineers have built a mountain of paper that is at least $400 trillion in size ($700 trillion is the highest number I have seen) - this paper mountain is built upon the back of an over-valued real estate market and now the investors (idiots?) holding the paper are questioning the value of it The Fed can't stop the markets from re-valuing this paper and the Fed can't run the printing presses fast enough (in private) to buy all the paper as it de-values - buying all the paper publicly would end the CONfidence game that provides the bankers a living Some of this paper was recently brought to market via the failure of two Bear Stearns hedge funds - since the hedge funds aren't allowing redemptions, the holders have to sell their positions privately - holders were offering 11 cents on the dollar - buyers were offering 5 cents on the dollar - I haven't seen any articles indicating that positions traded hands at these prices We are certainly living in interesting times - I hope you have your eyes open! ~ Here's Ron Paul talking about the housing bubble in 2003 - he points out that the GSEs (Fannie and Freddie) contribute to the over-valuation of real estate markets [Ron Paul is one smart cookie! - Ron Paul in 2008!!!] - how is that Ron Paul could see the housing bubble in 2003 and we still have people denying the existence of the bubble in 2007? Incredible! Fannie and Freddie ~ This article talks about how the Fed can directly monetize (buy) just about any piece of paper INFLATION, DEFLATION, AND THE "DOLLAR SHORT" ~ lewrockwell.com publishes many informed articles - here they talk about the GSEs and an alternative scenario under a 100% gold standard Monetizing Envy and America’s Housing Bubble "If the truth be told, this massive bureaucracy of federal and quasi-federal agencies is nothing more than an intellectually-bankrupt monument to political pandering focused on property envy. With the Federal Reserve’s accommodation, this envy can be monetized so that even the poorest credit risk can qualify for a mortgage loan. ... The argument goes that, without government, people would be either homeless or lifetime renters with no prospects for home ownership or even basic shelter. In essence, only the wealthy would own homes. Such intervention actually serves to further mold people into high-time-preference sloths unwilling to work hard and to save in order to buy a home." Just think of it, the value of savings would increase while housing prices gradually decreased. The free market itself would bring about affordable housing. When planning for home ownership, such virtues as working hard, saving, and thrift would once again emerge in our thought processes. The mere thought of needing government intervention, to make housing affordable, would be laughable. "
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The line that separates a conspiracy theorist from a concerned, law-abiding citizen can be very blurry at times. I like some of the ideas that Ron Paul has. He seems like a true representative of the people and a strict follower of the Constitution. I saw him on a video about the legality of the income tax by Aaron Russo on YouTube:
http://youtube.com/watch?v=xuxc2rl38rg
Pension funds left vulnerable after unlikely bet on CDOs
http://www.ft.com/cms/s/e31a9f32-2b59-11...
"... But if Mr Bolton is even partly right, it begs an interesting question: namely if these instruments do end up producing losses, exactly who would be hit?
Assessing this is not easy, since there is no public data about who is holding CDOs."
~
This seems to be one of the underlying themes with the current shakeup of the paper mountain - nobody really knows who is holding all the different pieces of paper - or how the pieces of paper are inter-related - some of the pieces of paper represent derivative positions on other pieces of paper!
~
Oh what a tangled web we weave
When first we practice to deceive
Sir Walter Scott
For some reason I just remembered "The Adams Family" TV show
Does anyone remember how Gomez would crash his trains into one another when he got upset?
Gomez would storm off to his attic in some fit of rage and the family would hear him start up one of his trains ... whoo-whoo!!
The family waited and sure enough, they heard the next train starting up ... whoo-whoo!!!
The tension onscreen mounted dramatically as the family waited for the inevitable crash ...
~
Does anyone besides me feel the tension building?
4plexowner, I have to admit it has been difficult rapping my mind around this whole investment banking situation but the Adams Family analogy above gave me a much deeper understanding which could say something about me. I do think we are going to see some fireworks in the offing.
the problem with this scenario is wages. If a inflated assets stay inflated then how do people afford them? Its called pushing on a string. Japan tried that and it didn't work. The only way is to Hyperinflate wages but how does the Fed get that $ into J6packs acct??? How? With global Outsourcing I don't see tht happening. Also, H Inflation would cause Interst rates to skyrocket.
All of Helicopter drop crap is nonsense. Dollar hegemony must be protected. Otherwise, H Inflation leads to total debasement od USD and a new currency. Why is that bad? Well, because it also leada to a new political system. Proof: Weimer lead to Hitler coming into powr and the Nazi party ultimately causing a WWII which was just a natural sequal to unresolved issues in WWI.
This is not tinfoil hat stuff. This irrefutable. This is why I say that Bernanke does not give a crap about the value of someones SD condo.
JWM - I fully agree with you - I'm not saying that anything the Fed is trying currently or will try in the future will work - history and common sense say that it won't - bottom line (for me anyway) is that there is no such thing as a free lunch and the Fed's very existence (along with fiat currency) is based on free-lunch theory
As you mention, the current inflation (monetary debasement) isn't feeding into wages in America (new jobs or pay raises) - to combat this issue during the 1930s the govt created the WPA and CCC (Works Progress Administration and Civilian Conservation Corp) - these programs were part of the New Deal and essentially handed out printing press money to jobless Americans [as an aside, the Fed was supposedly created in 1913 to prevent the exact boom-bust cycle that the country experienced in the 1920s and 30s]
This time around we have our govt telling us that we are in a "Forever War" and that we face an "Historic" confrontation between good and evil - coincidently, this position allows them to hand out lots of printing press money to otherwise unemployed American defense workers and soldiers - interesting ...
I personally believe the US Dollar and the Canadian Dollar are about to be converted into the Amero - this will be done as part of the SPP (Security and Protection Plan) where once again our government is watching out for our best interests (and if you believe that ...) - Google on 'North American Union' if you don't know what I'm referring to
The rollout of the Amero could be used to hide the collapse of the US Dollar - I'm not sure what will distract the American consumer from the collapsing housing market - perhaps a terror event (UK this time?) or a war with Iran? - my take on the history of fiat currency systems is that war is a very common part of the end-game strategy - the war distracts the populace from the fleecing that they just took from the bankers - the destruction caused by the war creates lots of opportunity for new building and the financing that goes along with new building (let me say it one more time, read "The Creature from Jekyll Island" and get some insight into the banking system)
Note that the Canadian dollar is approaching par with the US Dollar which will make the introduction of the Amero that much easier (the EU countries struggled with conversion rates before the Euro was rolled out - in general, business people used the conversion as an opportunity to inflate prices because they could blame the inflation on the currency conversion - the consumer got screwed twice - once by the govt playing fiat currency games and destroying the original currency and then again by the inflation created when business people were given the opportunity to inflate prices and hide it behind the currency conversion)
I don't buy into theories that say the economic world is coming to an end, or that a there's a small cabal directing the world's affairs. I hesitate to respond to this thread because it seems designed to attract those who have faith in some of these theories. But the point about the GSEs (Fannie etc) being a useful potential tool for our political leaders to minimize a downturn in house prices, and socialize the cost, is valid. Oh, well, here goes...
If housing prices drop enough, regular people will feel that their future plans to spend a lot but save a little are endangered. They will not accept that easily.
Most baby boomers and some in earlier generations have seen fantastic returns for 25 years now from their strategy of buying assets, even while they were still in debt. It's become expected as part of the culture that you can buy an asset today for $1 worth of goods and services, and expect the rest of the world to supply you with $5 worth of goods and services in return for that asset when you're older and crankier. It's also expected that you can borrow that $1 today and repay it with much less than $5 in real value, so it's always better to borrow over the long haul. There are even articles in respected outlets that say that the national savings rate is much higher than it appears, because the net gains from asset price inflation are not included in the savings amounts.
That's the political pressure behind keeping home prices high. It's probably stronger than the pressure to keep inflation low, because a lot of inflation damage is done behind the scenes and to foreigners (investing in US bonds). Inflation at 5-7% for 10-15 years wouldn't be considered earth-shattering by voters compared to home prices dropping 50% in the next 2-5 years.
So how could house prices be supported using the GSEs? Let's start with new loans:
1. Increase the qualifying maximum amounts of loan. Let's throw out $850,000, for argument's sake.
2. Permit less of a down payment, probably using complicated rules involving higher rates for less downpayment, and distinguishing between various sources of downpayment money. But let's keep it simple: Allow 2% down, say.
3. Permit lower payments in the early years. Because of the bad smell coming from huge increases in early payments in the very early years on existing ARMs, this would probably be limited to loans with gradual annual increases, let's say 3-7%, in the annual payments over the life of the loan, with the higher values allowed only in the earliest years.
Would this increase GSE risk? Absolutely. Would stockholders stand for it? Sure, if they got a few % extra dividends today, which would add way less than 10bp to the loan interest rate. if the market tanked, they would get wiped out, but the GSEs' equity is tiny. Almost all the shortfall would then be picked up by future generations of taxpayers.
How about existing loans?
Offer re-fi rescue loans to homeowners in trouble. Existing lenders have to accept some haircut in their pay-off, and the borrower has to accept continued, though lower payments, and Treasury has to forgo taxes on the debt forgiveness. These loans would have options to pay low amounts today in return for higher payments later. These higher payments could be fixed, or they could be a portion of any future increase in the home equity.
There are lots more ideas out there and I'm sure many more are possible.
Of course, the GSEs are only one policy tool, and many policy tools would be brought to bear at once. Obviously, lowering short-term rates would help keep home prices high, so that'll happen if the prices drop too much for too many people. The resulting drop in the dollar will have a muted impact, because so many of our costs of production are in yuan, and it's unlikely the $/yuan rate will be allowed to move much. I'd expect the degree of action to be calibrated to keep inflation less than 5-7% for any one year.
Patient renter in OC
I'm sorry PR, but my patience for your posts is running pretty thin right now. All of your little schemes seem to center around shifting principal to out years and other taxpayers. In my opinion, that ignores certain fundamental issues. One is pure affordability. At 10 times income in SoCal, how is that sustainable unless there is wage inflation? Second, the boomers are retiring and they are a much bigger population base than GenX and GenY combined. You are talking about taxing a smaller population even more and expecting them to pay ten times income for housing??? Unless you are advocating inter-generational loans, which was attempted in Japan and didn't help, then I don't how your ideas could work.
I know you claim to be playing devil's advocate here, but the nature of your posts indicate otherwise. Good Luck, I won't be responding to your posts anymore until you begin to acknowledge some sort of fundamental reality in them.
patientrenter - I thought I was providing some information in response to your idea about the GSEs - I thought you were actually interested in learning - now, I'm not sure what to think of you and your posts
your posts are displaying very little knowledge and even less thought - I can't tell whether you are being intentionally dense or whether you really just don't get it
the housing market and economy are in their current state because of free-lunch schemes from the government and you are talking about more free-lunch
maybe someday I can visit you on whatever planet you live on?
I'm quite sure the "whacko" comment was mine, and I meant in the most complementary manner.
Really.
somebody just posted this stuff in a new thread but it is relevant here also:
S&P may downgrade $12 bln of subprime securities
Changes by rating agency could increase rates on subprime mortgages
http://www.marketwatch.com/News/Story/sp...
S&P finally says subprime is mostly junk
Commentary: New methodology is death knell for the troubled industry
http://www.marketwatch.com/news/story/sp...
“S&P, one of the three main credit-rating agencies that served as enablers of the subprime mortgage boom, announced Tuesday that it would lower its ratings on 612 bonds, a small portion of the mortgage-backed securities it had given its seal of approval to.
But the bigger news is that S&P isn't going along with the charade any more. S&P said it would change its methodology for ratings hundreds of billions of dollars in residential mortgage-backed securities.
And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.
A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.
S&P's announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.
"We do not foresee the poor performance abating," S&P said. Prices will fall, and foreclosures will rise. More mortgage fraud will be uncovered as the tide goes out.”
If you don't understand money ...
some people wonder why I focus so much on the fiat monetary system in this country - as the author of this article states, if you don't understand money you can't understand prices (or the economy)
The Commodity "Super Cycle"
http://www.321gold.com/editorials/savill...
"Well, someone who believes that inflation is minimal at a time when the supplies of 18 of the world's top 20 currencies are expanding at double-digit rates does not understand inflation; and someone who doesn't understand what's happening to money cannot possibly have a thorough understanding of what's happening to prices."
I have learned much about the fiat monetary system in this country from this board, and I understand the problem, though not the solution.
That is - I am left asking the question "Now that I understand this, what do I do with the knowledge?" i.e. How can I profit from it? What do I do with the $50,000 sitting in the bank, etc. ?
The answer eludes me.
Any help ?
buy real estate. it never goes down...
IMO, our best hope and highest priority is to get Ron Paul elected in 2008 - Ron Paul is the only true statesman that is running for president - the rest of the wannabe's are just preening politicians playing the political game
Mr. Paul has already introduced legislation to do away with the Federal Reserve
~
Second priority is education - knowledge is power
"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -- Henry Ford
"The few who understand the system, will either be so interested from it's profits or so dependant on it's favors, that there will be no opposition from that class." -- Rothschild Brothers of London, 1863
"Give me control of a nation's money and I care not who makes it's laws" -- Mayer Amschel Bauer Rothschild
"A great industrial nation is controlled by it's system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world--no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men." --President Woodrow Wilson
"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it's issuance". -- James Madison
~
debate against the Fed in 1913:
"These 12 corporations together cover the whole country and monopolize and use for private gain every dollar of the public currency..." -- Mr. Crozier of Cincinnati, before Senate Banking and
Currency Committee - 1913
"The [Federal Reserve Act] as it stands seems to me to open the way to a vast inflation of the currency... I do not like to think that any law can be passed that will make it possible to submerge the gold standard in a flood of irredeemable paper currency." -- Henry Cabot Lodge Sr., 1913
[the US dollar has lost almost 97% of its value since Mr. Lodge voiced his concern about inflation]
I hear 4Plex, but I don't think Ron Paul is electable unfortunately. And if he did somehow become Pres then I would not be suprised if something bad happened to him inside of a year.
" ... get Ron Paul elected in 2008 "
Not exactly the investment advice I was hoping for.
The subprime mess sure hit the press again this week - lots of negative news about the economy
I'm sure it's just a coincidence that we are getting a flurry of terror warnings this week
~
Secretary Chertoff Discusses Threat Situation
http://www.dhs.gov/index.shtm
July 11, 2007 – Secretary Chertoff spoke Tuesday, July 10 to the editorial board of the Chicago Tribune: "I believe we're entering a period this summer of increased risk. “
~
US loses sleep over summer terror threat
http://www.indianexpress.com/story/20464...
WASHINGTON, July 11: US counter-terror officials are warning of an increased risk of an attack this summer,
~
Arizona Congressman shares concerns over increased terrorist threat
http://www.bizjournals.com/phoenix/stori...
July 11, 2007
A key Arizona lawmaker shares U.S. Homeland Security Michael Chertoff's concern that there is a substantially increased threat of a terrorist attack inside the U.S. this summer.
~
White House, FBI Agents Race to Disrupt 'Summer of '07' Threat
July 11, 2007 2:18 PM
Senior law enforcement officials said today that the growing signs of a "Summer of '07" terror attack on the U.S. have led the FBI to dispatch dozens of agents to track down new leads across the country.
~
Praying for a Terrorist Strike: The GOP's Newest Political Strategy
http://www.lewrockwell.com/grigg/grigg-w...
July 7 interview of senator Rick Santorum
“[C]onfronting Iran in the Middle East as an absolute linchpin for our success in that region.... And while it may not be a popular thing to talk about right now, and I know public sentiment is against it [namely, the war in Iraq and expanding the conflict to Iran] ... between now and November, a lot of things are going to happen, and I believe that by this time next year, the American public’s going to have a very different view of this war, and it will be because, I think, of some unfortunate events, that like we’re seeing unfold in the UK. But I think the American public’s going to have a very different view....”
[is Santorum praying for a nuclear strike or does he know something that we don't?]
Since this thread talks about monetizing the coming real-estate mess and bailing out reckless borrowers and lenders...
I agree that Ron Paul is the only guy in Congress who has some backbone, and he is one of the few who would always stand up against such nonsensical ideas. He is always asking critical questions when Bernanke speaks, and without him I suspect the Fed would get away with even more deception.
Just look at the issue of inflation. Ron Paul correctly points out that only the continuous creation of money and credit leads to inflation, and which is way higher than 2-3%. That quotes rate is however what many retirees' and other people's pay is tied to, so they are continuously getting squeezed. Talk about disgust, at the same time members of Congress vote themselves a much higher pay raise for their own retirement. A program Ron Paul abstains from.
Like him or not for president (which obviously he has hardly a chance of winning), I appreciate his honesty so much that I gave him the maximum contribution for his campaign. I seriously hope he will stick around, or that more politicians like him emerge.
They incidentally called me back and invited me to a small dinner group where he will show up. So I can ask him what he thinks about housing bailouts etc.
He might also show up in Irvine if we can keep a high standing in his competition.
I really think this guy deserves support for everything he taught me and what he has stood up for.