Housing bailout bill

[solarbird]

Okay, so there's this "housing bailout" bill (HR 3221) that's pretty much a Freddie Mac/Fannie Mae bailout bill. It gives Treasury Secretary Paulson only very loosely limited access to US debt instruments to bail out these two government-chartered but privately-held housing-finance corporations. I've linked to articles talking about why this is a bad idea before. The House passed it last night; it goes now to the Senate.

One of the reasons this is bad is that the stated ideas about how much value loss the housing credit crisis includes still do not reflect reality. They still assume that housing prices can be stabilised at historically high levels, which is not going to happen. I'm sorry; it's just not. The real losses are now starting to be acknowledged as being around US$1.5T. This bill essentially allows Mr. Paulson to cover these losses with government money, which is to say, taxpayer funds.

Now, the US government debt ceiling will limit that (unless raised again) to US$800B or so. But no matter how you cut it, that's an absolute assload of new government debt - which means new government borrowing, or created money - and in a pretty short period of time.

Here are the questions you need to ask:

What's that going to do to the US dollar? And what's that going to do to the cost of US government borrowing? And what's that going to do to the cost of financing the current very large government debt? And what's that going to do to the size of that debt, once you add in the new, higher interest rates generated?

I suppose you could also ask, "Do I want to pay to bail out these bondholders?"

The bond market already appears not to like this discussion. The 10 year bond has added 359 basis points to bond interest rates since Mr. Paulson said it should happen a week ago. (C.f. chart here.) This could be real. Or... might not be. I suspect that if it passes, we'll get another short-term stock rally, which will make everyone feel better - at first.

Look, I understand the urge to Do Something. I have my own ideas about what should be done. (I was arguing for the Short Sharp Shock some, what, 18 months ago?) And I'm not at all as confident about this as I am most things I go public about, but the time factor makes taking my best guess and hoping it's the right one kinda mandatory. I could be wrong about what should be done; I could be wrong about the fallout from this. I would say the odds of being wrong are higher than usual, because there are simply too many unknowns.

Or, on the other hand, the Senate could be passing Smoot-Hawley for a New Generation later this afternoon or tomorrow.

Do what you think you need to.

Comments

[krellan.livejournal.com]

Interesting. I have been reading Market Ticker for a while, and mostly agree with what it says.

We're in for some rough economic times, if what everybody has been saying is true....

[solarbird]

A lot of the Ticker people are mad at Dr. Roubini's support for Fannie Mae/Freddie Mac nationanlisation; he thinks it's survivable and necessary to avert nationalisation of the banking system. Dr. Roubini has a real good track record on this matter, too, so - keep that in mind.

[mhaolain.livejournal.com]

I'd never heard of Smoot-Hawley until your post. You learn something new everyday!

Fannie and Freddie were on the government balance sheet at one time, so maybe this agreement is a way to put it back on without disrupting the budget on paper.

Gore Vidal predicted the empire would go broke and put an end to U.S. shenanigans abroad. The only way that makes sense is if there's some sort of major default on the part of the treasury.

You add the Fannie and Freddie debt into the mix, that increases the national debt, sure. It's bailing out the Chinese investors, and keeps the show going. Hrm, but the dollar, and what that does? I'm scratching my head here.

[solarbird]

US$1.5 trillion more on the national debt in two years is a lot, by which I mean a lot. The dollar's already taken it in the teeth over the last few years; this will hurt. Dr. Roubini may be right in his thoughts that it's a necessary evil to prevent nationalisation of the banking system and a larger collapse; he wants to prevent the CDS implosion, but honestly, I'm not convinced this does that. If it passes, I'll just hope he's right.