Way back in 2008 when we were really in a financial crisis there was no private mortgage market. The banks were all in the crapper and they were not lending a dime. Without a viable mortgage market there would have been a complete collapse. The maximum lending limits of the D.C. mortgage providers were set at levels designed to support the bottom end of the housing market. In response to the crisis the HERA legislation allowed for a very significant, but temporary, increase in the statutory lending limits. Those temporary increases were supposed to be reversed as of 12/31/2010. They weren’t reversed. They were extended.
These critically important extension of federal subsidies to the mortgage market were lumped into a number of other fixes necessary to keep the government moving for another year (Sen. Byrd’s grandchildren get $197k?). The language that “fixed” the problem can be found at this site. The specific wording is at the bottom, in sections 143-146. There was no debate on this. Washington just passed the trash.
The Bond Buyer reported on Wednesday that BABs were going to “fixed” as well. The BABs program is another child of 2008 and the HERA stimulus program. The history is not unlike the Agency debt limit issue. In 2008 there was not much of a Muni market left. States were being locked put of the credit markets. Without capital they could not fund projects. The BABs legislation created a new security to allow the states to tap a different capital market. States were permitted to issue taxable bonds. These bonds had higher yields than traditional Muni bonds as they were not tax protected. To offset the cost, the Treasury department is reimbursing the states for 35% of the interest bill. With the federal subsidy the states were again able to issue debt.
Two years later the Muni market is in much better shape. But it is still on weak legs and D.C. desperately needs the states to spend money to support the economy. So the BABs legislation will be extended for another year. The municipalities are issuing billions of long-term bonds under the program. The federal subsidy will be doled out for 20 to 30 years as a result.
I don’t think there was much choice in the extensions of the emergency steps taken back in 08. If mortgage limits were dropped in the key area on both coasts from the ~$750,000 limit back to the pre-emergency levels of ~$450,000 the real estate market would collapse. Should that have happened we would have been in a deep dark recession in just a few months.
Similarly, we would be dead if the Muni market shut down. If state borrowers were forced to pay fair market rates for debt, they would not borrow. As a result they would not spend. Deep cutbacks in key states would have followed. Unemployment would shoot up in that scenario. Absent the BABs program a number of states/cities would have been forced into insolvency.
Folks, we are on life support. We have been since 2008. Nothing will change in 2011. QE has been extended, the tax cuts will be extended, BABs and the Agency loan limits are being extended. The IV is full and inserted into the arm. The juice that is keeping us alive is still flowing. But make no mistake about this. Without the IV the lights will go out very quickly. 2011 is the last year for these extensions. When we wake up to the fact that we are alive only as a result of medicine we take on a daily basis there is going to be another “event”.
Some say that legislative gridlock is a good thing for the markets. History suggests this is correct. 2011 may prove an exception to the rule. There are too many things on the plate.
Speaking of which, enjoy that other plate that is front of you today.
bk
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We are on the plate.
ReplyDeleteIt's going to be interesting to see how all this plays out. The politics have made this process fraught with hazards. The oncoming debt- ceiling debate is another risk.
ReplyDeleteAnother is the ongoing expansion of SNAP. This program keeps millions of citizens from going hungry in this country, it also supports the food industry. There are moves to cut or limit the program.
The banks are on life support and their troubles are expanding. Where is the 'new money' going to come from to prop bank balance sheets? Not the Fed, which cannot create value.
Unlike many in the establishment I think growth has permanently stepped off and will never return. The West is physically constrained, the outcome of a consumption binge. Habit and hope prevents serious analysis, which is a grave error.
Kicking and re- kicking the various cans down the various roads has a limit and that reality must be faced and soon.
2 aspects are the essential parts of viewing our present situation. the first is the total debt load all over the world which is simply not maintainable; all what is presently done by governments to continue to blow the debt bubble until such a time when interest rates will suddenly shoot up and the game ends. the second aspect is the rule of law which has been lost; instead of the risk takers getting to face the losses, the losses are transferred to the people via increased government debt. this will end one day when people wake up and some new leaders will be elected that have enough courage to get back to the rule of law. I would not like to be a banker, once the backlash is going to happen because people will understand what was done to them and the politicians (who are actually responsible for this mess) will have to find a scape goat.
ReplyDeleteWell written and spot on! You come close to the unavoidable conclusion but you veer away from it...
ReplyDeleteA couple weeks ago a writer who posted on ZH ~ I forget the name - shame! ~ stated that any incipient sign of austerity in the U.S. would be THE END.
How perspicacious and how true.
And you wrote "...we would have been in a deep dark recession in just a few months."
...and "We kicked the can down the road (again) while no one was looking."
This approach - of extending life support yet again - seems disingenuous since it seems we all AGREE no real recovery to "normal" is possible. And now the world's governments, the lending industries and the consumer-dependent are all desperately grovelling and praying for the "usual" self-starting and self-sustaining spending-driven recovery to take hold. Do you expect this too? It won't happen.
All we're doing is selling the living standards of our children and grandchildren to support the overly-debt-dependent a short while more.
The system has to be allowed to fail before the necessary systemic re-set can take place.
It's not just finances: it's a lifestyle and lifestyle-expectancy-versus productivity discrepancy that we face.
Present-day living standards, widely applied to the middle classes, seem to me simply Un-manitainable no matter which way you look at it...
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ReplyDeletePicture is quite clear! how sad the bird is, it seems that she know that thanksgiving is near!
ReplyDelete- Tanya
Web Design Firm
@ Kreditanstalt
ReplyDelete>>All we're doing is selling the living standards of our children and grandchildren to support the overly-debt-dependent a short while more.
I live in Ireland and I can tell you that it is NOT going to be my children and grandchildren's problem. Luckily for them.
It is ALREADY our problem.
Steve from Virginia said "The West is physically constrained, the outcome of a consumption binge." I agree. Fundamental changes need to happen.
ReplyDeleteI'm no economist but it seems to me the model of an economic system largely based on consumer spending on unnecessary stuff is not sustainable. I keep hearing that our GDP is based 30% on consumer spending. I'm not sure that more Walmart spending on stuff we don't need packaged in plastic made from oil to be discarded in overfilled landfills is really the way out of this mess.