The bailout of the GSE this weekend was a momentous event. One we will likely remember in the history books.
The US govt is now officially the owner of half the mortgages in the US. Just like communist Russia of yesteryear, the US govt now officially sponsors living above our means by funding it by... our means. The circular logic of it is scary.
All taxpayers will be paying for the other segments that paid inflated prices during the boom days. At best this stabilizes the market. One thing I do like about this Paulson move is that ideology be damned, free markets be damned, taxpayers be damned, the financial administration lives in reality not in ideological extremes. SAVE OUR BANKS. (SOB :)
Of course the press and the blogosphere are alit with analysis. Most of it really interesting of the consequences of this momentous move. Here is what is being said.
1- On the good news, this will lower the spread on the GSE debt, meaning they will more easily raise some of it, most of it rolling debt, meaning mortgages will be available, not necessarily cheaper but at least available.
2- This will have a stabilizing effect. It most likely will not STOP the downward trend of houses but at least with taxpayer guarantee on debt, it will likely prevent the downward SPIRAL that would overshoot on prices and truly be devastating. We still need to have 1T losses recognized but it will likely stop there is the hopeful theory
3- This is addressing the symptons of the crisiss (GSE imploding) but not the root cause which is the housing market reverting to mean (price to rent ratio).
4- This will be paid by taxpayer which means either raising taxes (unlikely) or printing money by emitting treasuries, which will further depress treasuries. Short the dollar mid-term and long-term.
5- Ignore short term market reactions. Delevering is only starting, no assets are really safe. This is an ATTEMPT at controlling the rate of delevering on the largest single monetary mass (mortgages). At best M4 stays constant, at worse M4 goes down, at crazy the US govt inflates M4 in a desperate attempt to re-inflate the economy and taxpayers in 20 years be damned. The taxpayer in ON THE HOOK for the GSE and a lax administration may well want to go counter cyclical ahead of time on debt. See 1929 interventionist catastrophy (M4 skyrocketed between 29-33, transforming a market crash into the Great Depression). I do not believe we will see a great depression, just a great stagnation.
6- I still do not believe in the long-term inflation scenario. This is not monetary inflation, this is commodity cost inflation (we are all poorer, end of story). This will give some leeway for the US govt to run the monetary presses a la GSE, it may even out.
7- EURO/DOL is the one to watch for me. Great commentary by munchau in the FT. With the spread on Libor/Euribor monetary pressure is on the dollar and the FED is not likely to raise rates anytime soon while Trichet is taking a very tough stance on rates. As I have argued in a previous post, time will tell who is right, Trichet gamble seems ideological and may lose on both counts (price stability and financial stability).
8- Foreign investors are halting buying debt it seems. This move is designed for them to buy the debt. If they DON'T buy the debt, then there is no source of funding. The kindness of stranger has never been so important, will there be a vote of no confidence on the US govt like was reported massively this morning in the press? Or worse a FU given the past 8 years of unilateral foreign policy? It is urgent the US repair its standing in the world. Note that some are making noises that stopping this war in Iraq would help cover some of the losses at home. Let's invest in our homes instead on the homes of others? Hyper-inflation as argued by Munchau is another interesting scenario that should be noted as is the simplest one to repay the debt. It would be the end of the US hege-money though :)
9- On the positive this morning, the dollar is still so low and the local state incentives so high, that many manufacturers are moving to the US bringing manufacturing jobs onshore. This is a positve income move although it represents peanuts right now. But the trend is that markets will work and as the US dollar falls, local income should offset some of the housing losses.
10- Moral Hazard. Oh wait! Uncle Sam is on the hook, let's screw him! This is what has happened with the Originate to Repo market of the investment banks, abuse the tax-payer for the benefit of wall street, because the taxpayer is too dumb to know better. This is what Trichet moved to choke last week with great integrity but alas imho somewhat mistakenly. Can you imagine what this will do to jingle mail and other defaults on payments once the not-so-dumb tax-payers understand this? it is ok, at the end of the day the US govt will pay for my mortgage!!! all of the sudden the mass of US citizen is the too big to fail entity and the mass of US citizen is on the hook. Me-first is the basis of micro-economics and this move may completely distort that reality. You pay for you house and your mortgage? SUCKER! What is this saying... This is one that truly scares me as 1T losses could move to 1.5T easily shooting down the FED balance shit (pun :).
11- The last point is less numerical than it is emotional. Has the US govt signaled complete panic and that things are so out of hand and worse than we are made to believe that this was a completely FORCED move (which it was)? Already the noise coming out of foreign buyers of US debt seems to confirm a wait and see attitude and if no one is going to fund this bailout, I have a hard time seeing how it is going to work without massive inflation, strong damage to the dollar and the US reputation of defaulting on payments through inflation.
12- On the positive side, I do see an opportunity in home automation, with the housing market in the doldrums upgrading your current house to a state of the art Digital Home is well worth your time and investment, give us some time with Open Remote.
I apologize for the stream of thought writing but I am kind of working in real-time as I scan blogs and press coverage. May we live in interesting times?