Monday, March 17, 2008
The Fed as Little Dutch Boy
"Is a housing bailout the solution for clogged-up credit markets and a faltering economy? ... The Fed's latest move provides financial institutions another $200 billion in direct short-term lending against their unsalable housing collateral. The Dow Jones Industrials jumped 416 points. But it won't restart markets for the underlying collateral. Where are the speculators, vultures and hedge funds? Where are the big money players willing to buy the exotic but still substantial mortgage-backed securities for which the markets have ceased? The Fed's liquidity rush seems only to have convinced them the time is ripe for staying on the sidelines. ... The transfer of wealth from the overleveraged banks and hedge funds to those who kept cash handy will be shocking, ugly and cathartic--but it will also be relatively quick. [When prices of mortgage debt fall sufficiently.] ... On all sides, meanwhile, the call for a housing bailout is becoming deafening, nigh irresistible. But the seized-up credit markets won't be unseized by trying to induce debtors to cling to houses they now see as throwing good money after bed", Holman Jenkins (HJ) at the WSJ, 12 March 2008.
I agree with HJ, the Fed's bank bailout is designed to keep mortgage-backed securities trading above the market's perception of their value, and enable the banks to avoid writedowns. Hence the "vultures" won't buy them. This has been Uncle Sam's policy for months. See my 10 December 2007 post.