Another bailout post this morning. I realize this subject is getting old folks. However, our future rides on how this plays out so it needs to be talked about.
The Treasury's plan isn't a bad one, its just too early.
Please read this piece from The Housing Time Bomb that I wrote back in early April. Sweden is a perfect example of how to dismantle a housing bubble.
We should have stolen their playbook. The biggest mistake the Treasury made is they are trying to jump in too early. Sweden waited until housing prices had bottomed until the government stepped in. Housing was down 50% and had reverted to the mean when they stepped in. Sweden's government also took stakes in the banks and made them pay an extremely high price for their greed.
The Treasury has the same idea, the problem is they are jumping in right in the middle of the housing decline. If this were a baseball game, the Treasury bailout would be same as putting in your closer during the 5th inning.
Ben Bernanke attempted to defend this idea on Bloomberg last night.
"Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.
``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''
Bernanke's remarks, an unusual departure from his prepared testimony, come as lawmakers and the Bush administration negotiate a rescue plan aimed at easing the worst financial crisis since the Great Depression. The Fed chief said paying prices higher than the bad assets would fetch in the open market would help ``unfreeze'' credit markets and aid the economy.
Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time. That is different from the mark-to-market model used by investment banks that prices assets at what they are worth on a given day.
The risk is that the model does not provide transparent pricing of the assets taxpayers are taking on, said Ann Rutledge, partner at R&R Consulting in New York, a firm that specializes in structured finance. Many of the securities ``are not going to pay at maturity,'' Rutledge said."
Bzzzzzz.......Wrong answer Ben! The best thing the Treasury could have done is allowed housing to drop all the way back to affordable levels like Sweden did and then swooped in with a bailout.
Jumping in and trying to stabilize housing prices at unaffordable levels is pure stupidity! How will prices stabilize if no one can qualify for a mortgage as lending standards tighten and interest rates rise. Its like putting a cookie jar on a 6 foot shelf and telling a 5 foot kid he can go ahead and take one. It doesn't work!
How does this stabilize housing if no one can afford to buy them? The Fed is very short sighted with their thinking here. The result of this will be the same as every other move they have made. It just delays the pain and slows down the bleeding.
We need to realize that there is no free lunch when you leverage yourself up as high as we did without thinking about the consequences. Its going to be very painful, and the Fed and Treasury to to just let it happen. We need housing to revert back to the mean.
If the financial system falls apart in the process then so be it. Its the only answer!
Let the banks limp along until housing corrects and then pull the bailout lever. You would then be able to buy the assets at full market value because the banks accounting departments will have already marked them down to mark to market values of .40 or so.
You then have room to maneuver by offering much cheaper mortgages to homeowners at affordable levels because you bought them at dirt cheap prices. Boom, housing crisis solved.
The Treasury is early folks.
Trying to buy these bad loans now at bloated prices will only lead to the the taxpayers eating huge losses. No private equity will show up at these auctions because the assets are priced too high. I can hear the crickets chirping already! The private equity guys buy "distressed assets" not "bloated pigs".
Hell, there isn't even a price on these bad loans right now. You know when the Treasury has their pockets filled with $700 billion that they are going to overpay for these bad loans. Bernanke admitted it in the article above.
How can they promise that the taxpayer will be protected if the assets they are buying that don't even have a price? The risk here is extremely high! This is insane. They need to wait!
Hank and Ben need to hop on a plane and head over the Atlantic to talk to the Swedes. Maybe they could even have some fun and learn how to ski jump while they are at it! They seem to love taking huge risks!