Wednesday, September 23, 2020
League of Power

The League of power


"Freedom by Friday"

Helicopter Ben’s At It Again

Was it really a surprise that the US Federal Reserve decided to pursue a course of greater easing of monetary supply at its meeting last week? The market certainly was caught by surprise, which in itself is surprising considering that nothing the Fed does these days is really a surprise to begin with.

Bernanke, the Fed Chief has been quite consistent during his reign. He believes that easy money is the way out of any crisis, following the mistakes of his predecessor. However, as a student of the Great Depression, his words hold more credence since in effect he’s been there and seen the ugliness of a depression. It’s a place he doesn’t want to revisit. Me neither, and I have only heard from people who were alive at the time and old enough to remember the hoarding that was the norm.

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But, when is enough, enough? When the country’s national debt is greater than its GDP? Is that enough? When the country’s annual deficit is greater than the GDP of all but a handful of countries? Is that enough? When your largest creditor continues to grow wealthy at your expense, and you have no choice but to bite your tongue?

It’s happening now folks, and the US Dollar is the unfortunate beneficiary of this mess. Don’t get me wrong here; I am not trying to be political. It doesn’t really matter who is/was/will be in power. We are fast approaching the point of no return. It’s a question of moral fortitude, and we just don’t have it at the top and the rest of the system is also rotting as a result. Personal responsibility? That’s so 50s.

No End to the Absurdities

There was a rumor floating around the street last week. It seemed credible enough that one company, Annaly Capital Management (NLY-NYSE) actually commented on it.

(Annaly Capital Management is real estate investment trust. Co. owns, manages, and finances a portfolio of real estate related investment securities, including mortgage pass-through certificates, collateralize mortgage obligations, agency callable debentures, and other securities representing interests in or obligations backed by pools of mortgage loans.)

Here’s what they said: Which brings us to the latest chatter in the residential mortgage space: There has been speculation that the government is planning to break this refinancing logjam by eliminating all underwriting standards such as income verification, FICO requirements and LTV restrictions and quickly refinance all GSE-owned mortgages down to current mortgage rates.

The speculation picked up speed after it was suggested as a possibility by some Street research and picked up by reputable news sources. In general the market barely blinked at the story, but the Treasury took the unusual step of refuting it.

“The administration is not considering a change in policy in this area,” said Treasury spokesman Andrew Williams. We can see the attraction of the simple outline of the rumor: Instant stimulus without needing Congressional approval, a win-win for a party facing a tough mid-term election. In any event, there are already plans like this in place under HAMP and HARP.

Leaving aside the moral hazard involved (the lender has no responsibility under a mortgage agreement to protect the downside risk of home prices falling just as the homeowner has no obligation to share any upside with the lender), the rumored plan doesn’t hold water. First, the potential savings amounts–about $46 billion per year, according to the economics team at Morgan Stanley–is not insignificant, but it is not without cost. The actual process of refinancing itself would constitute a large capital call on banks needing to refinance the mortgages. Furthermore, to the extent that Fannie Mae and Freddie Mac are taking steps to protect taxpayers–through putting back mortgages that were improperly underwritten or suing issuers of fraudulent private label securities–a refinancing program like this would completely undermine that effort. If there are no underwriting standards as part of a refi/stimulus plan under the GSE umbrella, the government would essentially be guaranteeing unknown collateral. This idea is
nothing more than an interesting hypothetical thought exercise.

It’s absolutely incredible to me that “chatter” like this was even making the rounds…unless someone intentionally put it out there as a trial balloon. This tells me loudly that we as a nation have no intention of taking the mistakes of the past seriously. Instead there is a growing portion of the population that would love to see us inflate our way to oblivion just to avoid short-term pain or austerity. We are quick to tell others to get their house(s) in order, but we loathe to clean our own.

You have two choices. You can run with the crowd, walk away from your obligations as if it didn’t matter, or you can buckle down and do something about it. If this sounds “tea partyish”, it shouldn’t. Their platform is not squeaky clean either. It’s just common sense and the polls are the best place to make your opinion known. It may take a few years, but the message will get there either when saner minds prevail, or when attrition puts the bastards six feet under.

There are countries out there that are doing it right AND enjoying a world-class lifestyle. Norway, Singapore, even our neighbors to the North, Canada. So, it can be done. I was watching with envy the other night as the Australian parliament was debating whether to raise interest rates to cool growth. As crazy as it may sound, I would love to see interest rates rise in the US, but for the right reason. That reason would be an improved outlook due to less government spending and more incentives for businesses to do business. I’m afraid though, that with the current mess the only way that interest rates will rise is because we will be forced to pay more to keep our creditors at bay.

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Best Regards,

Kevin Raymond


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