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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Sun Aug 26, 2007 2:37 am Post subject: There’s No Such Thing as a Free Bailout for the US Housing M |
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By: Paul_L_Kasriel
PIMCO's William Gross is now calling for a fiscal policy bailout for the U.S. housing market debacle rather than a monetary policy bailout (see “Where's Waldo? Where's W?”). On the surface, Gross's arguments seem to make sense – on the surface . Gross argues that even a cut in the federal funds rate of several hundred basis points might not lower reset rates on adjustable-rate mortgages enough to prevent the massive looming foreclosures. In addition, Gross argues that such an injection of Fed-created credit could be the catalyst for a run on the dollar, which, in turn, would probably prevent 15-year or 30-year fixed rate mortgage yields from falling enough, if at all, to prevent massive foreclosures.
Moreover, Gross argues that a large cut in the federal funds rate would perpetuate Greenspan's moral hazard policy and would encourage further leveraging in the global financial markets. So as an alternative, Gross recommends that some federal government agency, either an existing one such as the Federal Housing Administration (FHA) or a newly-created alphabet soup, bailout those current home“owners” who otherwise are soon-to-be renters.
I believe that Gross makes some valid points about the implications of a Greenspan-magnitude cut in the fed funds rate. But I do not believe that a fiscal policy bailout of prospective defaulting mortgagees would be “free,” economically speaking.
Let's assume that the FHA guarantees the refinancing of the approximately $683 billion of subprime and Alt-A mortgages that are scheduled to reset in the six quarters ended 2008:Q4 (dollar amount according to Merrill Lynch). An FHA guarantee is a full-faith-and-credit guarantee of the federal government. So, the market for these new FHA-guaranteed mortgages would overlap with the one for U.S. Treasury securities. That is, FHA-guaranteed mortgages and U.S .Treasury securities are close substitutes. Thus, all else the same, U.S. Treasury security interest rates would rise as investors shift out of Treasuries into FHA-guaranteed mortgages.
http://www.marketoracle.co.uk/Article1920.html |
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