Aug 06 2010
Obama’s coming counteroffensive?
Frogg called attention to this article yesterday:
“Is Obama about to forgive billions in mortgage principal?”
http://hotair.com/archives/2010/08/05/is-obama-about-to-forgive-billions-in-mortgage-principal/
The is by the inestimable Ed Morrissey, referencing a story (link below) by James Pethoukoukis. Usually there’s nothing left to add when Ed finishes with a story, but in this case I think he’s missed a very important possibility (likelihood?) that makes this action both far more likely and far more dangerous.
to recap:
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
http://blogs.reuters.com/james-pethokoukis/2010/08/05/an-august-surprise-from-obama/
Ed looked at the ways this could be financed:
A massive write-down of principal in underwater mortgages would cost us additional tens of billions of dollars, if not $100 billion or more, in order to get these mortgages to market level. That money won’t come out of thin air, either. Either it will take taxpayer dollars to make up the difference, or the sudden and arbitrary writedown will make Fannie/Freddie investors a whole lot more poor than they were before. The Obama administration can’t afford to send Wall Street reeling with that kind of shock, especially this close to an election and with the economy already sinking, so it would almost certainly require massive taxpayer subsidies to accomplish, on top of what’s already been spent on TARP bailouts.
But there’s another option that is far easier to pull off than either of these, one which can’t be blocked in any way, and which results in the creation of no (visible) debt. All it needs is the acquiescence of Ben Bernanke and Tim Geithner. (and has little Timmy ever said No to anything?)
Openly using tax dollars would require some Congressional action, and that’s not going to happen.  But taking away shareholder equity in Fannie Mae can’t happen, either, because there isn’t any left.  This story gives the reason, and also gives a good clue as to the date this announcement will take place:
“It’s not really a stock anymore — everyone knows this is going to zero,†George said.
Despite the fact that Fannie Mae and sister Freddie Mac were effectively nationalized by the U.S. government, the volume in trading is astounding to many on Wall Street and Washington. No one knows what to do with them and answers may not come until the Obama administration holds a conference on the future of housing on August 17.
http://www.benzinga.com/markets/company-news/10/08/413686/fannie-mae-is-more-dangerous-now-than-it-used-to-be
(pssst: why all the trading? because all the traders are also hearing that something big is about to happen, but no one knows exactly what)
So how can this plan be made to work? Simple – The Fed.   First Fannie Mae would vote to create $100 billion in new equities – or $200 billion, or $800 billion – the number is truly immaterial, Whatever they want.  Then the Fed steps in and transfers this equity to it’s own balance sheet and hands over whatever Fannie Mae (ie, Obama) wants to carry out this plan.  We are playing Calvinball here – there are no rules as to what the Fed can put on its balance sheet, and no effective oversight, not even from Congress. (remember how much heat the proposal to audit the Fed caused?)  The Fed can literally do whatever it wants, and the Fed can never go bankrupt because it has a license to print money. Or, as in this case, a license to add as many zeroes to the end of any digital bank account as it feels like adding. The Fed would be effectively transferring its license to print money over to Fannie Mae, freeing them up to pass out as much cash as their masters felt was politically useful. As I said previously, $100 billion, $200 billion, $800 billion, it doesn’t matter – the only limit on this plan is the wavering conscience of Ben Bernanke – the same Helicopter Ben who popularized the idea of dropping money out of Helicopters in order to fight deflation.  The same Helicopter Ben who has been publicly worrying about Deflation lately.
And where would this money go? Not evenly to the country, not by any means! It would flood those areas that have the worst real estate markets – California, Florida, NEVADA!, Arizona – all states in which the Democrats could use significant help.  What could be better than making a helicopter drop of Billion$ of $ just before the election! Don’t target it, just pass it out willy nilly to anyone who overpaid for a house! What’s to stop them?
If it’s so easy, why hasn’t this happened before?  Simple – because everyone, and especially the Fed, knows that a move like this would begin the unstoppable slide into Argentinian style inflation and eventual destruction of the economic fabric of the nation.  Hyperinflation has never “just happened”, it is always a conscience choice by a government in trouble which is desperate to stay in power.  The Fed is the last bulwark standing between this country and that end, and if this bulwark fails – as it may be about to fail on August 17 – then our fate may be sealed. Things will probably pick up for a few months, as gold soars to $1500/oz and oil goes over $100; pumping that much cash directly into the economy is bound to have an effect. But as soon as the immediate effect fades we will be faced with the age old reality that you can’t create wealth with a government printing press, and the long, bitter slide downward will start.
What’s probably the most troubling is that politically, this actually has a chance of keeping the dems in power if applied quickly enough. After all, something like this has worked before:
And the money kept rolling out in all directions
To the poor, to the weak, to the destitute of all complexions
Now cynics claim a little of the cash has gone astray
But that’s not the point my friends
When the money keeps rolling out you don’t keep books
You can tell you’ve done well by the happy grateful looks
Accountants only slow things down, figures get in the way
Never been a lady loved as much as Eva Peron!!!
[…] This post was mentioned on Twitter by Free To Prosper, AJ Strata. AJ Strata said: new: Obama's coming counteroffensive? http://strata-sphere.com/blog/index.php/archives/13872 […]
If Obama wants to redistribute wealth. He has a few weeks left of unfettered action remaining. The global design of the Communist is to destroy the middle class. He is succeeding here in the US.
If China starts making moves in the Pacific do not be suprised. They have theri new weapons systems coming on line.
Jobs jobs jobs … it’s all that matters.
The real unemployment/underemployment went up to 18.4% in the BLS report. Forget what the media says.
This is how he is going to make good on 40 Acres and a Mule….
Fannie/Freddie will hand out the 40 Acres…
GM will later hand out the mules….
This would be an act born of desperation and it would fail for the same reason all the other dumb acts of this administration have failed. Even the dumb know when they have been outdumbed.
The damage that this will do to market values is unpredictable in its details, but predictable in the large scale. Let’s take CA as an example. A local market with a significant number of foreclosures is already stressed. Much fewer dollars are spent on entertainment and vacations, there is less dispossable income for durable goods, home rennovations are depressed, and the service industries are stressed to the point of collapse.
Reducing the remaining risky mortages by 1/3 will automatically create a new market value for all similar property. Overnight, more or less, your property becomes worth 1/3 less. If you own it and have savings, this is quite an uptick. You can buy rental property.
However, large numbers of people have consumed their current equity second morgtages and they will find themselves undewater in a flash, but with no out. You cannot walk away from a second. The following year property taxes drop at least 1/3. Woa! local governments are already broke.
With the population’s unfailing belief in free lunches, this move will provide short-term relief to the Democrats in November, but intensify the finacial collapse that is inevitable.
Maybe this is how the lyin Pinnochio convinced the Dims to go along with all the rammin and after midnight jammin of unread bills!
Maybe he told them (the Dims) he had the stimulus cash to buy votes and the fed to give away houses to buy votes and the people would love them for makin other people pay for the stuff that the voters bein bought didn’t want to actually pay for themselves.
Dang I knew I should have bought a Mercedes, a Cadillac for the wife, a bigger house and not paid for my kids college.
I could have joined the party and had the 52% taxpayers pay it all off for me whilst I lived large like the worst President in history (Dear Reader) and his wife do, on someone elses dime!
Of course I have to live with myself and I take some pride in the fact I buy and pay for my own stuff.
Maybe there were a handful of principled Dims (dang few) who could not go along with this rippoff of the people who are responsible and make the country work and they are the ones who resigned rather than face their neighbors and friends after stealing the rewards of those folks labor.
Tea Party indeed!
I HOPE WE ALL REMEMBER TOGETHER IN NOV!
Don’t go to the polls alone. Take a Dim switchover or previously non-voter with you. Get grandma and granpa in the nursing home an absentee ballot and throw these crooks out NOW!
If it were to be done it would have to be stealth; yet still allow them to take credit. Your article might explain how to do just that.
Not sure how these two article now fit in:
Treasury Denies Talk Of Massive Homeowner Bailout
http://www.businessinsider.com/treasury-denies-talk-of-massive-homeowner-bailout-2010-8
Fannie Mae reports loss, wants more federal aid
http://www.bizjournals.com/washington/stories/2010/08/02/daily63.html
I just hope if they something like tht they get busted! We, the people, are tired of this crap.
If they really wanted to do this and create a temporary increase in employment around the country, there is a simple way that both solves the problem and does not cost the government any money if done correctly.
All that would need to be done is for the Federal Government to use the power of eminent domain to take all properties currently underwater where the current homeowner can afford to make payments if their loan was valued at the current value.
The Takings Clause, the last clause of the Fifth Amendment, limits the power of eminent domain by requiring that “just compensation” be paid if private property is taken for public use.
In this situation the public use is to protect the economy and the just compensation would be the current fair market value of the property and nothing more. Once all of the qualified homes are established, then every appraiser in the country will need to be employed to establish the current market value.
Then the process continues to qualify those who can afford their homes at the current value which will create jobs for the banks who will need to switch from foreclosure and loss mitigation back to loan officers, etc.
Those that can support the loans will be automatically sent to Fannie and Freddie and stay in their homes thus requiring millions of new home loans to be created and processed, and recorded. Those that can not will instead of being condemned will be allowed to be foreclosed upon.
The result will be new jobs, new home values that will not continue to get lowered by rampant foreclosure and loans valued at the current market price. Banks can make new loans again and fannie and freddie are back in business.
Problem solved?? What do you think?
Also see paper Solving the Foreclosure Crisis Through the Exercise of Eminent Domain for the legal basis for such an action.
SBD
T.S. Eliot had it right. All one has to do is substitute America for world…
This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.
The way that Treasury jumped out and denied the story is fascinating because you don’t have to read much between the lines to figure out that this denial raises more questions than it gives answers! First of all is, why did they feel the need to make an official statement? Not because some bloggers were speculating about it, certainly. Read through this story on the denial and a couple things jump out:
http://www.moneynews.com/StreetTalk/Treasury-Denies-Big-Fannie-Freddie-refinance/2010/08/05/id/366736
“The comment followed speculation in recent days from analysts at Wall Street firms including Morgan Stanley…”
in other words this is not coming from out of left (or right) field, this speculation is coming from the very top ranks of Wall Street.
and consider this: “Wall Street banks, such as Goldman Sachs Mizuho Securities, are alerting their clients privately to the possibility, he said.”
Who knows better than Goldman Sachs the plans of this administration? Remember that both Tim Geithner and Rahm Emmanual have been on their payroll in the past, and no one ever truly leaves “The Family”. And of course when they say “alerting their clients privately” they mean “making contingency plans to protect the wealthiest people in the country.”
Goldman Sachs doesn’t make moves like that unless they’ve got a pretty good idea something’s up. The country’s only hope is that, having been forced to deny this Treasury will feel somewhat constrained to go back on their word as quickly as they need to for this to work.
Oh my god, I can’t believe I just wrote that. Our only hope depends on this administration having some sense of shame and honesty, and not flip flopping on a dime.
and actually, that was just Treasury denying any plans to do this, but not the Fed, wasn’t it? I suppose, just like always with this crowd, it depends on what the meaning of “is” is.
[…] The Strata-Sphere: Obama’s coming counteroffensive? […]
Obama would be a fool to take this step. It would guarantee that he not be elected in 2012. If the country is hampered with inflation there is not much he could do to bribe, coerce or anything else. He could print money all day long every day but could not print enough to re-elect him.
I have been getting in the mail flyers telling me I can reduce my credit card balances through the government. What the heck is that all about? I think that is a more likely scenario than housing and more immediate. Who wouldn’t want to have their credit card balances eliminated? Especially the holders who are drowning in debt. Mortgage forgiveness is long term and most of the country would not see any results for years and maybe decades. Dims want to see immediate results in time for the election. Eliminating credit card balances would free up money at once.
Also, that freed up money would be pumped into the economy at once too. Compulsive spenders do not ever learn a lesson. They want stuff and will go into debt again. So that would be a win win situation for Obama. Reduce credit card balances and win voters and also, the economy will ick up with all the new spending.