Sunday, March 30, 2008

Inflation Express

"Last Sunday, during a frantic weekend in which the housing crisis pushed a venerable Wall Street firm toward bankruptcy, Treasury Secretary Henry Paulson decided it was time to twist arms at mortgage giants Fannie Mae and Freddie Mac. ... 'We've got an opportunity to ... do a good thing for the markets,' Mr. Paulson told the housing executives, according to a person on the call. ... The Fannie/Freddie move was one of a series from the Treasury, the [Fed] and other U.S. authorities to stabilize markets and reassure homeowners, as many as two million of whom are expected to enter foreclosure this year. ... The government's actions this past week marked a noted uptick in federal activism. The also solidified Mr. Paulson's position within the administration as the crisis's point man. ... Treasury officials also privately encouraged the Federal Housing Finance Board to allow the nation's 12 Federal Home Loan Banks to buy as much as $160 billion in mortgage-backed securities, creating even more liquidity for markets", WSJ, 22 March 2008.

"While everybody else is running headlong from the burning building of debt, Uncle Sam looks like he is rushing in the other direction. As the credit crisis deepened, there's every reason to expect old-fashioned Keynesianism to become de rigeur, with the government blowing out the budget to make the downturn less painful. ... The government is also building massive backstops for the financial system and the housing market, agreeing to hold or guarantee trillions of dollars in mortgage and other private loans through the [Fed], and, less directly, through federal home loan banks, Fannie Mae and Freddie Mac. The next steps could be more stimulus, direct bank bailouts and government purchases of mortgage securities, easily dwarfing the $125 billion or so the government spent to fix the savings and loan debacle. ... Meanwhile, presidential candidates of both parties are making promises that will cost trillions of dollars more if they keep them, either in expanded health-care coverage or in making the 2001 and 2003 tax cuts permanent", WSJ, 24 March 2008.

"The agency that regulates the Federal Home Loan Banks has given them more scope to acquire mortgage-backed securities, marking the latest attempt by the U.S. government to restore confidence in the country's housing market. Under rules announced Monday, by regulators at the Federal Housing Finance Board, the 12 regional banks will be able to increase their holdings of mortgage securities issued by Fannie Mae and Freddie Mac by more than $100 billion. ... Officials at the U.S. Treasury ecouraged the finance board to allow the home-loan banks to increase their holdings of mortgage securities, according to people familiar with the discussions. ... 'The whole [mortgage] system was at risk of grinding to a halt,' said Allan Mendelowitz, one of five directors of the finance board. 'If there ever was a time for us to act, this is it.' ... The home-loan banks previously could have holdings of mortgage securities of no more than three times their capital. Effective immediately, the regulator is raising that to six times capital for the next two years. At the end of 2007, the banks had combined capital of about $54 billion, and they held $136 billion of mortgage-backed securities as of Sept. 30., the latest data available", WSJ, 25 March 2008.

Are the WSJ's writers this gullible? Hank Paulson (HP), "formerly" of Goldman Sachs is at it again. His interest is to protect Wall Street houses from failure no matter what cost to the public. If HP must talk of "protecting the markets" or the "economy", whatever that means, so be it. $200 billion, $160 billion, TAF, whatever. The details don't matter. As Will Rogers once said, "invest in inflation. It's the only thing that's going up". Hop on the inflation train. Get gold.

"Less painful" for whom?

The budget will never be balanced except through inflation. Sell bonds. Now!

Mortgage-backed securities are like dust. Even swept under the carpet, it eventually piles up. Somewhere. The Feds are desperate to hide the losses on this paper somewhere where the taxpayers will bear them and not realize what happened for years.

9 comments:

DiverCity said...

"Get gold." At any price? Wait until the current consolidation/corrective phase is complete? If so, when will that be?

DiverCity said...

Further to the above, the CNBC pundits and the like talk about the resiliency of our economy and that it can (easily) absorb the mortgage-backed securities losses and the machinations of the Fed. Is it nonetheless the Skeptical CPA's opinion that we're headed toward hyperinflation? Or does he concur with Gary North and others that we're headed toward deflation, except, of course, (and apparently unlike North) for gold and silver because they're not really commodities but rather "money?"

Independent Accountant said...

I am not smart enough to offer trading advice. I only know that as long as Helicopter Ben continues on his current path, commodities will go up. Gold, more than the rest, possibly excepting silver. I have never seen a trader who made money over the long run. Seriously. Now is as good a time to buy gold as any other. The markets I see as hopelessly overvalued are: US dollar bonds and real estate in Florida, California and Nevada. The US Treasury bond market is one of the biggest bubbles on Earth today.

Independent Accountant said...

I don't know what the phrase "our economy ... can (easily) absorb the mortgage-backed securities losses and machinations of the Fed" means. This is empty talk. I only know prices change. That is what you should concern yourself with.
I part company with Gary North, who I was first exposed to about 28 years ago and Mish concerning deflation. We had a deflationary depression in the 1930s, unlike Germany which had a hyperinflationary depression in the 1920s. Now we and Germany will switch places. I can't see "deflation" period! The Fed will not let the banks fail, it will let the dollar fail. As to how high can gold go, see my 24 December 2007 post. Much higher than you think.
I doubt the US will reach the inflation rates of Zimbabwe, 100000% per year, much less those of 1922-23 Germany. However, a decade of 10-15% annual inflation would not surprise me at all.

DiverCity said...

I tend toward the hyperinflation bet as well, but it's awfully dang confusing when M1 apparently isn't affected by the Fed's money creation policies. Something is seriously out of whack.

Independent Accountant said...

You have not yet arrived at the point where you accept all government statistics as part of Uncle Sam's continuing propaganda war against the American public. Go to www.shadowstats.com for a different read on the economy. Many things are out of whack. What is the inflation rate? What are Americans real earnings compared say to 1973?

Buzz Saw said...

I agree with your basic premise, except for T-Bills. I do not feel that they are in a bubble. In fact, I believe prices will go higher on the long end, if anything. I expect that over the next twenty years we will see bond yields range from 1/2 - 1% yield across the entire spectrum, all the way out to the thirty year. I could be wrong, but I doubt if a gubbermint that is trying to inflate its way out of a jam would be willing to give much in the way of a (mostly) risk free harbor.

Buzz Saw said...

[/tinfoil]

Independent Accountant said...

Tinfoil?