The attempted bail-out of the mortgage market isn’t going to work.
Here’s why:
- The obvious reason is you’re buggering the dollar. You make dollars cheaper to borrow, they’re worth less. The Euro is now worth $1.40, and as the impact of this filters down it’s going to become worth more — a lot more. That imports inflation, and inflation will force the rate back up before long, leaving us right where we started.
- The less-obvious reason is that brokers and hedge funds were allowed to bundle a variety of mortgage fruits into seemingly-identical instruments. A $100 million "jumbo" mortgage bond will have sub-prime notes mixed in with the good stuff, and there’s no way to price the risk. In the past bonds were small pieces of a single, large, predictable risk. Now they’re sweepings of all the various risks a broker can get.
If you can’t price the bond accurately, and you don’t know what it’s
worth, it’s got to be worth less than it really is. The hope,
obviously, is that the rate cut will let brokers pick-and-choose from
among the sub-prime victims, saving those with good credit. But that
will take time to work out. Meanwhile, the whole financial world is
skittish, so home prices keep falling.
Oh, and these bonds were sold all over the world, meaning foreigners are getting screwed, and they’re going to be doubly-cautious buying any U.S. debt for years and years to come. Our bridge to the 19th century may yet give us the Panic of 1837. (It wasn’t caused by Jackson’s attack on the U.S. Bank, as claimed, but by defaulted state bonds for canals.)
That’s actually the good news. The answer to affordable housing is
cheaper homes. In my part of Atlanta I’m still seeing tear-downs and
new McMansions. A $700k home costs $350k to reproduce in this way, so
builders know even if they have to eventually take a $100k haircut,
they’re good.
What the housing market needs right now is capitulation. All sellers
need to adjust to drastically lower prices. The same thing happens in
the stock market all the time, only there it happens over the course of
minutes and here we’re talking months.
This pooch is righteously screwed. A falling dollar, rising
inflation, falling home prices, uncertainty in the bond market — they
all spell recession in the part of our economy which had been growing.
The whole "Bush recovery," in the end, was a scam. While Greenspan continues his Bart Simpson "I didn’t do it" tour. (Did he do it? No, he just enabled it.)
