Thursday, May 6, 2010

Ilargi On House Price Support

From Ilargi's The Automatic Earth, a must-read economic blog:

It's one thing for the US government to go after Goldman Sachs. But while Goldman's actions have been obviously fishy, whether they’re outright criminally illegal or not, and whether they involve and include activities that make the firm a de facto bookmaker, or perhaps just constitute withholding information that the law requires divulging, let's not forget it was Washington that allowed Goldman to attain bank holding company status, which enabled Blankfein et al to rape and pillage the Fed discount windows and take the zero percent cash received straight down to the race track.

And we need to wonder what the government's role here is precisely. If Goldman stands accused of betting and withholding information, how, pray tell, is that different from the White House letting Fannie Mae and Freddie Mac now underwrite 96.5% (!!) of all US mortgage loans? For one thing, this presents a far larger bet than anything Goldman Sachs could ever dream of. For another, where is the information? Or the justification for, and the reasoning behind, this multi-trillion dollar wager?

Sources like Robert Shiller and others may declare that according to their data, US home prices are not sinking like so many anvils anymore, but they don't explain why that is; they don't even try. The perceived apparent idea is that the economy is recovering. Well, excuse us, but shouldn't they maybe try to figure out where the housing market would be without the government guaranteeing just about every last penny of it? And why doesn't anyone ever question this practice? No Congressmen, no journalists, nobody, far as I see. Is the kettle too scared to stir the pot?

Fannie and Freddie (and the FHA and FHLB systems) were once conceived with the alleged goal of making homes more affordable for the poorer segments of the population. And, strike me dead if they don’t, most people still believe that’s what they do. Which is easily squashed and put to rest by the fact that Congress increased the limits on the size of loans that Fannie, Freddie and the FHA can guarantee to $729,750 in high-cost housing markets. Wherever you live, you’re neither poor nor in need of taxpayer help if you buy a home that size and that price.

Let nobody try and fool nobody else anymore. Fannie and Freddie have nothing to do with the less privileged: they are the ultimate tools for Washington to keep Wall Street alive. Not only would significantly lower home values put severe strains on the major banks' balance sheets, they would also implode and destruct what Mortgage Backed Securities and various other housing related derivatives can be put on the books for.

And if Washington keeps on refusing to do so, maybe some other party can come up with some calculations on what the cost to the taxpayer would be, now that 96.5% of mortgages are provided on that taxpayer's account, of prices going down another 10%, and another set of calculations for a 20% drop, and one for 30% (or maybe 50% would be a better, more realistic view). If a government holds the view that it can spend tax revenue at will and limitless, that same government can still be put to task for doing so largely in secret. The American people have a right to know how their money is spent, on what it is spent, and above all how much.

The government needs to explain, for instance, why it has decided to prop up home prices at levels that are far higher than what they were prior to the 2002-2007 housing boom. This is vital data, because it will, or at least may, alert enough people to the fact that domestic real estate prices have zero percent chance of staying at those levels unless taxpayer money is used into perpetuity to guarantee any and all mortgages. And once you realize how this works, it gets all the more ridiculously irritating that the likes of Goldman Sachs take the derivatives written on what the taxpayer stands behind against her will, and makes multi-billion profits on them.

In a lovely case of irony, the most lucrative policy Fannie, Freddie, the FHA and the Treasury could develop is to buy credit default swaps betting that the trillions of loans for which they use a taxpayer money guarantee will fail. And for all we know, some or all of them may well have done so already. A government betting against its own citizens, that would be rich, and still only just one notch up from Goldman using zero percent discount window taxpayer money to do the exact same thing.

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