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When The Bright Line Between Monetary And Regulatory Policy Fades

A weekend topic starting with the Wall Street Journal. “From “Tying Down the Anchor: The Task Gets Tougher,a paper by Kevin Warsh presented May 3 at a Hoover Institution conference: For most of the post-crisis period, the Fed grew the size and scope of its balance sheet in order to provide greater monetary accommodation. In recent months, the Fed announced another big shift in its balance sheet plans. It would maintain a large balance sheet on a seemingly permanent basis.”

“But, no longer was monetary policy the rationale. The Fed justified its new policy stance on regulatory and operational grounds: the big banks need high quality, Fed-provided reserves. But, what happens when the bright line between monetary and regulatory policy fades? And when the line between monetary policy and fiscal policy blurs? Line-crossing poses real risks.”

“This is not about party or president. If Congress does not have the votes for an extension of the debt limit, why not get emergency relief from the Fed. If the appropriations process is deadlocked, call on the Fed to fund a government agency directly. If housing prices are falling, push the Fed to buy mortgages. If Congress and the administration cannot agree on new fiscal policy, pressure the Fed to provide more stimulus.”

“If the Fed becomes a general purpose agency of economic policy, it will lose its special monetary prerogatives. And the printing press it keeps will be a temptation for mischief. Modern Monetary Theory (MMT) is the new name for an old temptation to conflate monetary and fiscal policy.”

From News Central. “Whether it was the physicist Niels Bohr or the baseball player Yogi Berra who said it – or, most likely, someone else – it is indeed hard to make predictions, especially about the future. In November 2006, Alan Greenspan, who earlier in the year had stepped down from his position at the US Federal Reserve, explained that ‘the worst is behind us’ with regard to the housing slump.”

“Let’s return to history and the historian’s tool kit, which for a variety of reasons in recent years have become a bit less déclassé in the minds of economists and other social scientists. So what accounts for the recent change of course? For starters, there was the Great Recession – or ‘Lesser Depression’, as Paul Krugman called it in 2011 – which seemed to a few influential economists such as Ben Bernanke, Carmen Rinehart, Ken Rogoff and Barry Eichengreen similar in many ways to other financial crises in the past.”

“Had they not spurned or, at best, passed lightly over history, more economists would have sensed in the run-up to the 2007-9 financial crisis that the situation, as Rinehart and Rogoff suggest, maybe wasn’t so different from earlier financial crises after all.”

“To be sure, Rinehart and Rogoff were not arguing that the 2007-9 financial crisis was exactly the same as earlier financial crises. Rather, they believe that the present is not free-floating but bounded, that the past matters, and that it can provide important lessons to those who study it in a systematic, or at least disciplined manner. In other words, economists – not to mention sociologists and political scientists – would do well to supplement their stock-in-trade, analytical rigour, by thinking more historically.”

“So, bottom line: economic forecasters would profit from thinking a bit more about history before gazing into their crystal balls, or at least before telling us what they see. If economic seers don’t want to think more historically or use empirical data more rigorously, they should at least hedge their bets.”

“As a piece in The Wall Street Journal advised last year, put the chances of something happening at 40 per cent. If that something does in fact happen, one looks good. If it doesn’t, one can always say: ‘Hey, look, all I meant was that it was a strong possibility.’”

From Bloomberg Opinion. “Trump administration officials announced last week that if Congress doesn’t come up with a plan to overhaul Fannie Mae and Freddie Mac in the next couple years, they will. Their plan is to simply privatize the two giant mortgage banks. A better one would be to liquidate them.”

“Fannie Mae and Freddie Mac have been under the control of the government ever since they were nationalized during the Great Recession a decade ago. The federal government took responsibility for Fannie and Freddie’s debts, and in exchange gets to keep all their profits. On the surface, the deal has worked out for the U.S. Treasury: The government paid out roughly $191 billion in bailout money and has earned about $280 billion in profits.”

“That gain, however, masks the enormous liability that taxpayers are carrying — and the way in which Fannie and Freddie make the mortgage markets more risky. Fannie and Freddie are middlemen. They buy loans made by banks and retail mortgage lenders, then repackage them into mortgage-backed securities that they sell to investors. These securities come with a guarantee that payments will be made on time even if the original borrowers are late or default on the mortgage.”

“Currently about $4.7 trillion of mortgage-backed securities are guaranteed by Fannie and Freddie. The theory is that this guarantee makes it cheaper for Americans to buy homes because it makes investors willing to purchase mortgage-backed securities and thus fund the issuance of new mortgages. In practice, however, Fannie and Freddie loans tend to be slightly more expensive than so-called ‘jumbo loans.'”

“While a small percentage of jumbo loans are sold to Wall Street, most are held by the lender. And precisely because they are holding on to the loans, lenders typically have higher standards. In 2018, the average credit score for someone with a jumbo loan was 18 points higher than for a homebuyer with a mortgage backed by Fannie or Freddie.”

“So, to review: Fannie and Freddie don’t actually lower costs, but they do lower standards.”

“By keeping the securitization market alive today, they are discouraging banks from developing expertise in evaluating individual borrowers and deciding which credit risk they are willing to hold. They are also weakening the ties between mortgage lenders and the communities they serve.”

“Economists, myself included, used to see those types of tangible links between businesses and their communities as antiquated. The financial crisis and subsequent slow recovery have changed my view. The primary responsibility for home mortgage lending belongs with private banks.”

This Post Has 49 Comments
  1. ‘If the Fed becomes a general purpose agency of economic policy, it will lose its special monetary prerogatives. And the printing press it keeps will be a temptation for mischief’

    They’ll screw that all up for sure.

  2. ‘Fannie and Freddie don’t actually lower costs, but they do lower standards’

    In other words we’d all be way better off just by shutting them down tomorrow. Of course, Larry Yun might disagree.

  3. ‘Had they not spurned or, at best, passed lightly over history, more economists would have sensed in the run-up to the 2007-9 financial crisis that the situation, as Rinehart and Rogoff suggest, maybe wasn’t so different from earlier financial crises after all’

    Like the Denver report about writing offers on the hoods of cars.

  4. I found this comment from a guy on a truck forum. This is exactly why and how auto and truck prices have hyperinflated:

    “Sticker was 75,500. I got them down to 65,700. Which is basically Invoice. $6500 down They did key protection and the 8 yr/84000 mile warranty for 990/month. Which is more than our mortgage but I dont regret it even slightly. This thing really is a freight train.”

    He put $6,500 down on a truck which, after taxes, license and titling is over $70,000. And he’s now paying $990 per MONTH for what looks like 6 years. Another debt junkie.

    My first auto loan was back in 1993. I bought a gently used 2 year old truck with a price tag of ~$16,000. I put $7,000 down on that truck. This guy put less down than I did on something which cost over 4x as much. This is why we’re in the situation we’re in.

    1. By the way, with my salary at the time I could have paid the balance off on my loan with 3 months earnings. I seriously doubt this guy could say the same, as he’d have to be earning close to $250k per year. The fact that he only put $6,500 down tells me that is likely not the case.

        1. There used to be a website called FUH2 that was a compilation of people’s pictures of themselves flipping off Hummers (the big civilian versions). Any ostentatious wanker who drove one of those self-identified as being tragically under-endowed.

          1. I had several submissions on that page circa 2002-2005. Such a great website, before there were #hashtags.

        2. Misplaced feelings of superiority based on allegiance to the Green Screw deal….need less Prius.

          1. I wish they would stay out of the passing lane driving ten miles under the speed limit.

        3. Hey – wrt your question on pigtailed wiring, yes, that’s exactly what it means, aluminum wiring with copper ends. It isn’t the most desirable situation, but not the end of the world either. Some things don’t work with aluminum wiring, like the Nest thermostat for instance.

          If the house was built in the era of aluminum wiring, then it may have a defective breaker box, Federal Pacific. They’ve been replaced for the most part but there are a few still around.

    2. LOL@ construction guys who think #MuhTruck is the pinnacle of self-actualization.

      If it’s not a company truck and you’re paying for your own gas, you’re just bleeding money.

      1. I’ve never seen a fleet rig more than $50k. 4doors, power stroke/Duramax/Cummins, 4wd. These rigs in the $60k+ range are pimped out half tons chock full of gadgets. Not sure who’s buying them but we aren’t nor are any of the trades buying them for personal use.

        1. Diesel technology these days is one of the great feats of human engineering. The torque generated relative to the emissions output is an amazing achievement. Combined with the durability of the engines makes them arguably one of the most environmentally friendly options for motorized transportation.

          1. Yes, and they hardly have any harmful emissions. Especially when VW has programmed it to show this.

          2. Cng or LNG trucks are great for the environment and a good use for our cheap natural gas

          3. Every industry has fraud. Green energy is rife with fraud. That doesn’t make every innovation in rentable energy invalid. You are conflating two different issues. Today’s diesel technology is a testament to human ingenuity.

      2. I was sitting at a light last week with a pallet of joint compound (48 buckets of ProForm 61.7 lb. each) in the bed of my over a decade ago paid off F – 250, sitting next to me was one of those 990/month freight trains carrying nuttin and from the looks of the driver it never would.

        “If it’s not a company truck and you’re paying for your own gas, you’re just bleeding money.”

    3. Meanwhile on the luxury side a new Escalade has a sticker price of $95,000! Those $60000 Bro-zosers are ridiculous, but when you need “more status” with the Caddy badging and are wrapping up six figures into a depreciating vehicle you’ve reached a whole new realm.

      1. So many of these SUVs and trucks are too large to fit in a spec home’s garage, so they sit out in the elements and depreciate at an increased rate.

  5. So, bottom line: economic forecasters would profit from thinking a bit more about history before gazing into their crystal balls, or at least before telling us what they see.

    Economic forecasters need to grasp one central fact: the Fed since its furtive 1913 establishment by the robber barons of the era has had one prime directive: to serve as the oligarchy’s chief instrument of plunder against the 99%. Engineered boom-bust cycles have become the most efficacious means of transferring the wealth and assets of the proles who got suckered into the Wall Street-Federal Reserve Looting Syndicate’s pump & dump schemes to the Fed’s oligarch accomplices. Wash, rinse, repeat. The next Great Muppet Reaping is overdue, and could come at any time now.

  6. “The primary responsibility for home mortgage lending belongs with private banks.”

    Amen. Full risk for unsound lending should also lie with the banks. The policymakers who in concert with the gold collar criminals on Wall Street and at the Fed put that risk on taxpayers should be in prison along with the captured regulators and enforcers who enabled all these REIC swindles against taxpayers and the responsible.

    1. It doesn’t have to be banks either. Growing up I knew people who bought mortgages and held them.

  7. From the previous thread:

    “Boise Facebook group bans comments bashing Californians”

    Enjoy this local post:

    “You’re off to a good start going to Reddit first with every question that pops into your head.

    The second you move here you need to have a defensive, almost manic love for this state and everything in it. You’ll want to be prepared to argue endlessly if anyone says anything negative whatsoever about our large supply of basic breakfast restaurants or breweries. You’ll want to be prepared to fight to the death, literally, for the honor of Colorado as the most amazing state that ever came into existence.

    To further that point, you’ll want to get Colorado flag decor for your home, car decals, and clothing. Nothing says “I just moved here and I’m very defensive about everything” like lots of Colorado flag stuff.

    If anyone around you ever dares bring up their childhood memories about living here or mentions the toxic, xenophobic, ignorant, rage inducing word “native” be sure to ask them what tribe they’re in in the most smart ass tone possible. Walk away smirking if they stand there confused, we need to show them they’re not special because they wanted to share a childhood memory. Anyone with a closer association to Colorado than you must be destroyed for making you feel unwelcome.

    Start curating that Instagram with pictures of you holding beers and tacos and pictures of you climbing like an idiot all over shit in Garden of the Gods. In Colorado, you’re the only person who is important in any given area.

    Buy all the most expensive passes and gear for every mountain sport you can think of even if you don’t know how to do them. If you just load your car up and head up I70 and start attempting them somewhere, someone will appear and help you. And if for whatever reason they don’t, a helicopter will appear and help you.”

    1. “And if for whatever reason they don’t, a helicopter will appear and help you.”

      LOL! And hopefully while buying all that gear, you also bought a CORSAR card! 😉

      I was waiting for “selfies on 14ers” to appear on that must-do list.

  8. Looks like China’s nouveau rich are trying frantically to get their money out of China via Bitcoin before their Keynesian central planners’ financial house of cards comes tumbling down under the weight of its own fraud, malinvestment, and unpayable debt. If they start buying gold as a hedge against the sinking yuan, that’s going to overwhelm the current manipulation (suppression) in the gold and silver markets.

      1. “A lot has already happened.”

        If so, it’s not reflected in the PM prices!

  9. “If housing prices are falling, push the Fed to buy mortgages.”

    Unpossible! Oh wait…

    May 1, 2019,11:06 pm
    QE Was A Failure
    Brian Domitrovic

    Nostalgia for former Federal Reserve Chair Ben Bernanke’s quantitative easing, “QE,” have we now? Let’s look into where that got us.

    QE refers to massive buying by our Fed of assets beyond United States government securities. During QE 1, 2, and 3, from 2008-13, the further assets of choice were mortgage-backed securities (MBS). The idea was that MBS left over from the housing bust in 2008 were toxic assets. They were things that were meant to pay if the housing bubble went on, but it didn’t. The interest-streams of these assets were impaired or dead, while their principal had been degraded or wiped out. If you held these things, you had no collateral.

    In the words of The Big Short, MBS were “dog —- wrapped in cat —-.” The QE brainwave was that if the Fed bought them up, major players out in the economy would have good collateral again, U.S. dollars instead of the MBS éclair. Credit markets would be unlocked, and investment and profit-making enterprise would start rolling.

    There the Fed went after 2008, buying upwards of $1.75 trillion (don’t ask about the validity of that valuation) of MBS under the QE aegis. And in came the economic growth numbers to reveal one of the worst recoveries ever. Over the period 2007-17 growth was a marginally higher than 1929-39 (if better when considering ex-government GDP). To think that Chair Bernanke once lauded Anna Schwartz, the historian of Fed fecklessness in the 1930s, with the avowal that he would never let the ’30s happen again.

    QE was grandiose and weird—the largest purchase of anything ever was for dog/cat bleep, and in this it was a public service. Normal people react to such things by saying no comprendo. Given the concurrent growth numbers, QE was also a failure. It is important to confront this reality, this fact, and to ask after its meaning and significance.

    1. How were the Fed’s QE MBS purchases anything other than a decision by unelected officials to enrich HODLers of super-subprime MBS by paying top dollar for dogsh_t assets, while throwing anyone who didn’t already have a piece of the real estste investing action under the bus?

  10. It’s a rainy may in SoCal, and I’m loving it!

    Rain returns to Southern California and another storm is coming Tuesday
    By Christine Mai-Duc
    May 19, 2019 | 4:15 PM
    Rain returns to Southern California and another storm is coming Tuesday
    Storm clouds hang low over Manhattan Beach as an unusual late-season weather system brought rain and below-normal temperatures to the Los Angeles region. (John Antczak / Associated Press)

    Pay no mind to the fact that Memorial Day is around the corner — winter is here again.

    Across California, yet another May storm on Sunday brought cool temperatures and rainfall throughout Southern California, hail in the Bay Area and even snow in the Sierra.
    inRead invented by Teads

    “This is May gray on steroids,” said Bill Patzert, a local weather expert and former climatologist with Jet Propulsion Laboratory. “Usually by this time of year, we’re done, but this meandering jet stream has been persistent through the spring, and it’s given us four times our normal rainfall.”

    Much of the state is seeing two to five times more precipitation than is normal for this point in May, according to the National Weather Service’s river forecast center for California and Nevada.

    1. This is May gray on steroids

      Gonna need a credit on that sunshine tax. 😉

      1. Every time I went to visit my father in So Cal it rained. Seriously. Every single time. Guess I just have bad luck.

    2. I’m in Mojave National Preserve to do some hiking. So I’m loving the cooler temperatures. The rain is okay, but the wind is becoming tiresome.

  11. At an intrinsic value that is negative unless you are a money launderer, how can the Bitcoin price ever not be above its intrinsic level, especially given high energy costs to produce it?

    1. I guess it can’t be a problem of a flood of new supply about to hit the market, as the supply of new cryptocurrency across all varieties is virtually unlimited, uncontained, and unverifiable.

      1. You can create a new currency too Nick, but if there is no network or social construct, what value will it have?
        The Chinese love BTC.
        It’s sort of like art…people value it because other people value it. At some point it becomes part of the social fabric, and there is no longer any point in arguing “what is the value!”

        1. If they love BTC, what’s the excuse for all the other “crypto” price explosions?

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