The Government Mortgage Business Is A HUGE Mistake

The knee-jerk reaction of politicians to the beginnings of the deflation of the housing bubble has been to yell for the limits on Fannie Mae and Freddie Mac to be raised so that they can buy more mortgages with less security. This would be a terrible mistake, and not just for Joe tax payer how implicitly foots the bill for the quasi-public entities. The downside is the only public part.

But I'd lay the entire housing bubble at the foot of Fannie and Freddie because these agencies were essentially responsible for making the mortgage origination business a business. Without the F twins, banks used to originate and hold mortgages. This gave them plenty of reason to exercise due diligence in determining whether or not to grant a mortgage, to evaluate the property realistically, and to require a down payment that would cover a sudden dip in the housing market and default. The norm for down payments used to be 20%.

But the government came along and intervened in the market with Fannie and Freddie, and the obvious business model became: originate as many loans as possible that meet the minimum requirements and pawn them off on the taxpayer backed companies. Some analysts point to the bubble in California where prices are well beyond what the agencies can take on as proof they aren't responsible, but they invented the business model!

The whole sub-prime mess isn't about the hedge funds and banks who pulled the wool over each others willing eyes, it's about the conception that mortgages can and should be resold by banks. Whether you call that a moral hazard or a conflict of interest, it's clear that the human beings involved can't hack the responsibility of getting paid up front and passing on the risk.

Weak Jobs and Inflation Fears Muddle WSJ Headlines

I opened up my online WSJ today and was amused to see the following two headlines seperated by about two inches and two hours:

"Weak Jobs Data May Spur Rate Cut"

and

"Inflation Fears May Trump Rate Cuts"

It's a pretty good summary of the bipolar approach that financial journalists and the Fed take to the economy. I'll admit that "choosing" between growth and inflation is quite a problem, especially since growth and inflation turn out to be synonyms for the same thing, ie, more dollars changing hands.

But I don't believe that either the Fed or the WSJ are really interested in jobs or inflation, unless you're talking about a few thousand bond traders who will likely lose their Wall Street jobs following the CDO fiasco. What the Fed and the WSJ are really focused on is confidence, consumer and business confidence, that undefinable financial feedstock that keeps people pouring money into dreams.

And in a year that nothing has gone right to keep the confidence men afloat, the only props for the market have been belief that the Fed will continue to cut and foreign governments will continue buying American companies with convertible bonds at double digit interest rates. The market, with its artificial flow of 401K money inflating the bubble over it's wall of worry, only has one thing left to worry about. That's the Fed not handing out cheap and easy money for companies to buy back their own stock and pay their CEO's bonuses. My own opinion is that the Fed will cave in and cut and cut and cut. They've been ignoring and hiding inflation for years, so why get excited now. But confidence in the Fed is falling, and if retiring Baby Boomers may just play it smart with their portfolios, America is in for 20 years of pain.