Filed under: Market Trends, Politics | Tags: economy, inflation, mortgage crisis, New stimulus package, recession, second stimulus pacakge
Does a second stimulus package of $50 billion make sense for the US economy? No.
A stimulus is one way that the government injects its money into the economy. Congress would approve this measure in the hopes that $50 billion additional dollars in consumers’ hands will increase consumption, throw cash at struggling manufacturers, and improve the overall economy. I have no doubt that the stimulus package would have some positive effects on the economy, but the overall effect would be negative. Let me explain:
- Increased government spending will increase inflation. By releasing cash into the system, the Treasury will essentially devalue the dollar. This will make imports (virtually everything Americans buy) seem more expensive. In other words, consumers will need more dollars to purchase the same goods they were buying one year before. This is inflation.
- Oil is denominated in dollars. Devaluing the dollar will make oil seem expensive, creating inflationary pressure on all oil related products, services, and actions. Driving to work will cost more, shipping goods will cost more, and making products will cost more. All of this drives prices up, further increasing inflation.
- The stimulus wouldn’t solve the underlying problems in the market—the market is undergoing a self-correction on the mortgage front and a self-correction on the oil front. The recent bank failures (IndyMac) makes me think that the mortgage part of the crisis is in the process of bottoming out, or is at least close to bottoming out. Once you hit the bottom, there’s no where to go but up. We will hit the bottom with or without an additional $600 dollars in stimulus money since bank failures are tied to already purchased assets (stinky loans) and not current economic performance.
- The oil correction is a little more complicated. Oil prices are sky rocketing because China, India and Russia have booming economies. Growing economies demand oil, and increased demand causes the price of oil to rise. Oil is used to produce just about everything, so the price of just about everything rises. The world is paying for the good-fortune of these emerging economies. Prices are unarguably at unsustainable levels, so the market will have to correct itself. Either demand will fall (i.e. manufacturers will have to make less goods because the cost of oil for those additional products raises the price so much that consumers are unwilling to purchase the goods) or the market will create more efficient technology/processes to compensate for the higher cost of goods. Again, an extra $600 of stimulus money will not solve the problem in the long run. It will only cause manufacturers to momentarily increase production since consumers have a one-time shot of purchasing those marginally more expensive products that we just talked about. Once the money is spent, manufacturers will have to stop making “additional units given how expensive the raw materials are getting, lowering demand and helping the market find equilibrium again.
A second stimulus package will not solve our current economic woes. Ms. Pelosi, don’t push for it.
Martin Hutchinson and Lauren Silva had the dumbest idea, ever, printed in the WSJ today. Their argument: Close Fannie Mae, gradually. “Of course,” they say, “it wouldn’t then be practical to shut Fannie and Freddie Quickly.”
The kicker: “Meanwhile, the GSEs, now in the private sector, could start cutting their salary scales toward civil-service levels. The higher fees and compensation savings combined would compensate taxpayers somewhat for any bailout costs.”
That’s a dumb idea. Fannie and Freddie are financial service companies. Paying Fannie and Freddie staff “civil-service” salaries will ensure the flight of both company’s best talent. These men and women will run to the investment banks and work there, because no one ever settles for a low salary if they can get paid much more elsewhere for the same type of work. Duh.
What happens if Fannie Mae and Freddie Mac lose their best talent? The intellectually inferior staff that stays will undoubtedly make more mistakes. Whoever (i.e. taxpayers) backs the companies’ liabilities will have to pay for these mistakes.
And, for the record, all of Wall Street is in shambles. The decision makers at Fannie and Freddie are no different from the executives at all of the other banks that have been writing down losses. It seems, for now, that the talent pool runs evenly throughout all of the finance institutions playing with mortgages these last years. Change the salary pay, and things will get better at some banks and much worse at others.
Filed under: Market Trends | Tags: Agencies, fannie mae, freddie mac, Insolvent
This guy has got to shut up. He’s a major global investor that managed to get an entire Bloomberg article written about him today. He is quoted saying that Fannie and Freddie are basically insolvent and that the recent “bailout” is an “unmitigated disaster.”
STFU.
He has shorted Fannie Mae stock, so he stands to win a lot of money if investors get skittish and bring the price of Fannie/Freddie stock down. He’s trying to manipulate the markets against the agencies. That’s self-serving and I don’t like it one bit. That’s why I’m telling this guy to STFU.
I should also add that Bloomberg should get its wrists slapped for airing the views of a clearly biased (he shorted the stock!!) “expert.”
Obama wants to offer tax rebates to small businesses that offer health insurance to its employees. My father’s small company falls into this category. I’ve gone over his financials, and health insurance is his largest fixed expense. It cripples their profitability, but health insurance is necessary so he pays for it anyway.
Under the Obama plan (ripped from Hillary Clinton):
“Small businesses would get a refundable credit of as much as 50% on the premiums they pay on behalf of employees.”
The plan would cost about $6 billion a year. That’s not bad. I love the plan because it would make a positive, tangible impact on my father’s bottom line.
A few months ago, early May 2008, Warren Buffet said that the worst of the ongoing economic crisis had passed for Wall Street. Consumers would still feel the heat, he said, but at least Wall Street had gone over the hump.
IndyMac failed, Fannie Mae and Freddie Mac are (supposedly) on the brink as well.
What happened to my favorite oracle???
UPDATE: The Treasury had to step in to help Fannie and Freddie out. Also, IndyMac was taken over by the FDIC. Three major market players stumbled, and one (IndyMac) is down for sure. I still think Mr. Buffet is Da Bomb but maybe he is getting a little rusty.
This was quoted on dealbreaker and the NY Times:
Conservatorship, which could wipe out existing shareholders and humiliate past and present executives, is appealing because of the signal it would send to the market. Some key members of the Bush administration’s economic team believe putting Fannie into conservatorship would create stability in the housing market without sapping discipline from financial markets.
Recall my post on 7/7/08, well a conservatorship would effectively remove the charter as stated in my blog. I don’t know how I feel about this yet
Update (1:00pm) Secretary of the Treasury says:
“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said in a statement in Washington. President George W. Bush told reporters separately that the two firms are “very important institutions” and that he discussed market “concerns” with Paulson earlier today.
They’re trying to calm Fannie/Freddie shareholders from selling their stock out of fear that the conservatorship would wipe them out. Secretary Paulson is trying to calm the markets and since his job effectiveness depends on his credibility, the guy can’t lie.
Filed under: Market Trends | Tags: a history, charter, fannie mae, freddie mac, insolvency, mortgage crisis
Fannie Mae and Freddie Mac were created shortly after the Great Depression to bolster a financial system that was 100% in shambles. The companies were created to buy crap mortgages, because only then would banks be able to offer reasonable rates that allowed Americans to put their lives back together (i.e. Buy a home) after the markets crashed in 1929.
If these companies were created for the explicit purpose of stabilizing the housing market during tough times, then why are people shocked that Fannie and Freddie are at the brink of insolvency today?
Things people need to know:
- Despite assertions by the press, Fannie and Freddie are infinitely more risk averse than any bank on Wall Street that stuck its head in the mortgage muck these last years.
- This aversion to risk was only magnified when Fannie and Freddie were caught under massive accounting scandals in 2004—Regulators woke up, realized that Fannie/Freddie were under their jurisdiction, wanted to save face and began watching those companies 24/7.
- The markets punished Fannie and Freddie after the accounting scandals—their stocks tumbled down. This instability plus the invigorated watchfulness of their regulators literally forced the companies into paranoid-schizophrenic levels of risk aversion.
- 2004: Subprime was beginning to heat up, but neither Fannie nor Freddie felt it was proven to purchase a lot of these untested loans given the scrutiny they were under.
- 2005: Freddie/Fannie still avoided these loans. It is possible that they purchased a few portfolios of seasoned subprime loans just to run risk models on them. Nothing major—a few million dollars worth of risk cannot contaminate a trillion dollar portfolio.
- 2006: Fannie Mae and Freddie Mac start clearing the accounting hurdles. Shareholders are sick of the mea culpas and start demanding growth. During their 2-year hiatus Countrywide and other private label securities stole a significant amount of market share by originating billions (trillions?) worht of subprime, ALT-A and other “new age” transactions. These products allow people that have never owned homes to purchase homes—they effective caused the market to grow, and Fannie/Freddie were not invited to the party.
- Late 2006-2007: Fannie Mae and Freddie Mac start inaugurating new products. Their affordable loans (allowed lower FICO scores, higher LTVs and DSCR) were made even “more affordable” by slackening credit standards (lower FICO scores) or permitting interest-only periods. EVEN IF Fannie/Freddie started purchasing these “new age” loans, they were so late to the game that there is no chance in hell that they were able to purchase a significant amount of these securities. It is not possible. 2006-Early 2007 happens to coincide with the peak of the subprime origination madness. Private label securities were convinced that the profits were good and that the business would keep on coming—like greedy hyennas, private label participation cut Fannie/Freddie out of the market. They could not compete. Fannie/Freddie lacked both the infrastructure and pricing ability to attract these loans into their portfolio. THIS ALONE prevents the companies from a significant amount of exposure.
- 2007: Freddie Mac announces that it will no longer purchase subprime loans. Fannie Mae continues to purchase the loans, but their subprime department is in its infant stages and large scale purchases are not structurally possible.
- 2007 August: The markets crash. Subprime originations fall, but are still viable…SOMEONE has to buy these loans or else banks will lose liquidity and all hell will break lose. Do Fannie/Freddie start getting pressure from their regulators to help support the markets, provide liquidity, and buy these unwanted mortgages? I would think so, but I cannot say for sure.
- 2008: The largest private label security engines start crashing (Countrywide, Bear Sterns) yet someone has to purchase these loans—There is no way that Fannie/Freddie would want to purchase these loans now that they’re proven to be money-losing assets with unsustainable levels of default and loss severity. Any new age loans that Fannie/Freddie purchased in 2008 were purchased out of public/regulatory pressure to stabilize the market.
- 2008 July: The loans start to stink, accounting rules require higher levels of capital, and Fannie/Freddie need to raise capital in a market that makes raising capital insanely expensive.
AGAIN, why are people surprised that this happened? AND, why do people demonize the agencies when they are doing exactly what they were built to do—Provide liquidity to a crappy market.
I’m not sure what the markets/government can do to fix the situation—but I really hope that the freaking pundits that wag their fingers at the agencies would stick those fingers up their butts. Things would be MUCH much worse if Fannie/Freddie did not exist. Who would absorb the crap loans then? At least there is a system in place, at least there are institutions that already have an implicit backing of the government and can therefore start absorbing market losses efficiently from day one.
That’s their job. That’s why they have these admittedly stinky assets on their balance sheet in the first place—I mean, really—-Do you think that Fannie/Freddie would have purchased large amounts of New Age loans post 2007 for any reason other than regulatory pressure since they knew buying the loans would generate losses at some point in the future? Remember that their exposure to these assets were minimal in comparison to the rest of the market given their risk aversion post-accounting scandal.
The fact that the Fannie/Freddie portfolios are hurting means that they did their job—they provided liquidity to an unstable market like their charter says they should. Why hate on them?
Filed under: Uncategorized
Fox News funds terrorism. Just kidding, what I meant to write is that Fox News alleges that Michelle Obama funds terrorists because she uses a fist bump—-aka terrorist fist jab. In general, Fox News tends to portray the Obama camp in a light that comes off as more than raist.
Racism is racism, so it’s always wrong. There is no gradient when it comes to racism, especially when you consider that Fox news uses public air waves. Anything that uses public air waves should be respectful of the American people, all of them
I think that the clips below prove that Fox News has gone too far:
Racism is racism. There is no room for gray spots. Think about it—At what point did German news cross the line to anti-semitic Nazi propaganda? At what point did Southern newspapers appear to condone racist sentiments? At what point does Fox News go too far?
