GSE concerns- This week Doug Noland of the "Credit Bubble Bulletin" writes about this subject. Here is an excerpt and a link to the whole essay. Raymond, do you read this guy weekly? Really on top of the whole credit issue. I agree that Congress will probably not dig very deep into this issue as for one, they don't understand the issues involved. And two, it is politically unpopular to rock the boat. Congress will wait for things to go to hell and then step in to blame some corporation. It's like the Enron deal, so many stories just like it in other corporation that have already happened or are about to happen, but it is more beneficial for them to go after the "big name" and try to single out a few individuals as enemies of the public like Lay and Skilling to promote extensions of their careers. Congress is doing the same thing with Social Security. It needs to be fixed but very politically harming to suggest the "tough love" approach to fix or extend it. I'm getting very unsettled about our future economy and the response in the markets. Joe
prudentbear.com
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Yesterday Nebraska Senator Chuck Hagel called for hearings to discuss the GSEs: “Recent press accounts have raised some very serous concerns and questions as to the taxpayer liability and financial soundness of these government sponsored enterprises.” That what we would expect to be a much more circumspect view of these institutions comes coincidently with the beginning of what has all the makings for a problematic Fed tightening cycle, could prove tricky. GSE use of derivatives for interest rate protection - a critical weak link for these institutions and the U.S. financial system – is certain to get especially diligent attention. It appears to us a situation where more intense market scrutiny is highly unlikely to uncover anything inspiring confidence, although there are clearly issues that could unnerve already shaken investors. There will be no more separating the GSEs from the issue of the soundness of the U.S. financial system, but perhaps this will only solidify the perceived federal government backing of these institutions.
Any move by foreigners away from agency securities would, of course, be a huge development for U.S. financial market liquidity, the dollar and the economy. But right now we have our sights on anything that could hinder continued explosive growth of GSE balance sheets. During 1994, 1998, 1999, and 2000 these institutions performed their reliquefication miracles quietly and off the radar screen. This luxury is no longer available. The day the GSEs get their blank checkbooks taken away we’ve got a much different ballgame. For now, we’ll assume their operations remain outside of market discipline and they just keep borrowing and spending like there’s no tomorrow.
Alan Greenspan made some interesting comments this week before the Independent Community Bankers of America. While addressing “encouraging signs of strengthening underlying trends,” he also focused on “emerging longer-term challenges, particularly on the need to augment our domestic savings rate to facilitate the financing of the investment that will almost certainly be required as the baby boomers retire.” We share your concerns Mr. Greenspan, but your timing is troubling. After all, non-financial business borrowings increased 50% over the past four years to almost $10 trillion, with an unprecedented $2.25 trillion borrowed during 1998/99. Regrettably, under your watch much of this finance was pilfered and wasted. Most of the liabilities remain, but there’s just not much in the way of economic wealth producing assets to show for it. And while you may believe that the system can simply create another costless blizzard of money and Credit (and resulting financial wealth) and hope for better results in the upcoming “investment” boom, it’s just not going to be possible. Under your watch a financial sector like none previous has taken command of the Credit system’s monetary processes. For too long the incentives have strongly favored the tandem of aggressive lending and leveraged speculation. The financial sector and the speculators have come to basically govern who has access to borrowings, and the game is financing consumption and speculation, not productive investment. The Fed and GSEs have nurtured a system and environment that is wondrous to the entrenched financial players, and the game will not change until the incentives change. Clearly, the Fed has no intention of making the necessary changes to commence what will be an arduous adjustment process, so we’ll wait nervously to see what type of “accident” precipitates the unavoidable crisis.
In the “Roaring Twenties,” even with all the shenanigans, at least the game was financing real business investment. JP Morgan, the dominant U.S. financial institution during that era, was financing investments in transportation infrastructure, automobile manufacturing, mining and oil exploration, and various industrial enterprises. We may today wish that investment spending would fuel sound economic growth, and economists and analysts can, if they like, continue to pretend that business capital spending drives the U.S. Bubble economy. Yet, we are dealing with a very unusual services-based economy that is supported, levitated and driven by financial Credit creation. The key “sectors” for analysis are, on the economic side, the booming “service sector” and, on the financial side, the GSEs and the leveraged speculators. The game in this most sordid cycle is consumption, mortgage, and security finance. The dominant institutions are reckless mortgage lenders, asset-based lenders, financial engineers and securities speculators. |
