“So comes snow after fire, and even dragons have their ending.”
Dear Readers: A quote from J.R.R. Tolkien to shake things up post New Year. The Young Prince is off to school, and I have a few moments to opine. Of most news interest today is the fact that Darrell Issa, the incoming chair of the House Oversight and Government Reform Committee, is building a list of investigations. From Politico via Hot Air:
According to an outline of the committee’s hearing topics obtained by POLITICO, the House Oversight and Government Reform is also planning to investigate how regulation impacts job creation, the role of Fannie Mae and Freddie Mac in the foreclosure crisis; recalls at the Food and Drug Administration and the failure of the Financial Crisis Inquiry Commission to agree on the causes of the market meltdown.
This leads me to Professor Athena’s essay, which I am delighted to offer as the first weekday post of 2011. It bodes as a good omen that we Tea Party activists plan to stay engaged and informed. (MUT Note: Please stay tuned; at the end of this post there will be some key programming announcements). Professor Athena discusses Freddie Mac and Fannie Mae under their formal acronyms (as she is an executive at a major financial institution). It will shed light on why Issa’s work will be so critical this year:
2011 and the Herculean Battle
A new Congress is taking shape before our eyes. All of us, especially those who voted last November 2, would like to see the federal spending deficit cut and the dollar stronger. Also on our New Year wish list is elimination of huge entitlement programs (which have and will continue to overburden U.S. taxpayers in form of ObamaCare with its expansion of Medicaid, and, of course, the behemoth Medicare). Not to run the holiday theme too far, but we have a lot of loose wrapping and glitter to clean up off the floor now that Nancy Pelosi and her elves have left the House. Talk about your Christmas bills coming due! This group added more debt than the first 100 Congresses combined.
But by far the largest and potentially most threatening item in question for 2011 and which is overhanging financial markets like the Lernean Hydra is the fate of FNMA and FHLMC (i.e., Fannie Mae and Freddie Mac). We must, like Hercules, conquer this beast and thereby redeem Agamemnon’s daughter. But in doing so, immaculate care must be taken. Just as in Homer’s “Iliad”, the Twelve Labors of Hercules were not performed in an instant. This problem cannot be solved with quick-fix sound bites in front of the microphone. However, action is imperative, as opposed to long, do-nothing committee hearings. Each time Hercules cut off the head of the serpent, another grew back. I can think of no better analogy for the conquest of FNMA and FHLMC than this. When Speaker Pelosi spoke upon the inception of her term of “draining the swamp”, one wonders if she ever read Homer, because indeed the serpent grew fiercer and more menacing under her watch, as opposed to draining the referenced swamp that kept it growing.
The U.S. housing GSE’s (Government Sponsored Enterprises) operated as on-balance-sheet agencies of the federal government for over thirty years. As a result of conversion to private entities in the early 1970’s, the agencies became the market source of liquidity of first resort for mortgage originators, at the time mostly just banks and savings and loans. If the late 1970’s and early 80’s taught us nothing else, it taught financial institutions the jeopardy of interest rate risk in form of holding low-yield (8.00%) assets on the books in a cost-of-funds environment where interest rates were around 20% (see Savings and Loan Crisis and Resolution Trust Corporation). FNMA and FHLMC only purchased the highest-quality, scrubbed-squeaky-clean loans, primarily 30-yr. fixed-rate originations, still the largest single loan market to this day. In doing so, most purchases were without recourse, meaning that the servicing of said loan was also sold to the GSE. Before your eyes cross in boredom, I am coming to a point in this. A lot changed on the way to the Federal Reserve Bank. Congress and their de-regulation of the lending industry suddenly gave incentive to attractive loans which were less-than-squeaky-clean. Legislation was passed whereby financial institutions were required to provide lower-standard non-conforming loans under the Community Reinvestment Act (thanks, Barney Frank!). Sears and GMAC and Countrywide and everybody under the sun were suddenly approving loans to anyone with a pulse.
A lot of these newly-approved loans ended up on the balance sheets of FNMA and FHLMC, both of whom issue a large amount of short-term debt used to fund their balance sheets, and which is owned by virtually every financial institution and central bank across the globe to the tune of trillions. Whispering the word “bankruptcy” would be unwise as Republicans take over this battle, in order not to unleash the phantom plague of sickness which wiped out Lernea Hydra. In short, bankruptcy is not an option. Let me expand this statement. On the balance sheet of the federal government, FNMA and FHLMC are directly visible and accountable to members of Congress and the taxpayers. Off the balance sheet they are STILL too big to fail and too essential to the infrastructure of our U.S. economy and its health, and by now we know all too well what lack of oversight as to credit quality of loans on their balance sheet can do. The agency mortgage-backed securities markets must continue to function, as they are still one of the most high-quality and liquid securities markets world-wide, and by far the highest-volume existing debt market traded. This market generates millions of dollars in income for U.S. financial institutions as well as millions of jobs. But we should keep the funding source directly responsible to the taxpayers, and a review of their balance sheet activities can and should be a requirement on a quarterly basis.
Like some media commentary I have heard, you might be wondering whether or not the liquidity provided in housing markets by the GSE’s is all that important. Yes, I know that other countries do not have FNMA and FHLMC. In those countries, loans take much longer for approval, secondary markets do not exist, and financial institutions must treat those assets quite differently, making for much more volatility in the private sector, and making home ownership much more expensive. You can pick your poison. Mine is to make the GSE’s again agencies of the federal government, with standardized loan documentation and types of loans allowable on their balance sheets mandated by law. Allow them to go back to doing what they do well, which is manage large portfolios of quality mortgage assets. Without them, the already-devastated housing industry never recovers. With them, we go back to a more stable tool to manage interest rate risk on part of financial institutional mortgage originators (i.e. the ones who are best-equipped to actually know their customers and have ongoing established banking relationships), and we return to what worked well for decades.
Should the Republican-controlled Congress fail to understand the serious nature of what reforms are needed, and should they play politics in order to fuel rabid media attention to the “bankruptcy story” of FNMA and FHLMC, the reaction would indeed be far-flung, to the tune of failures of most financial institutions and the housing industry as we have seen it here in the U.S., and to the tune of lack of confidence in the dollar and U.S.-denominated debt. We could also count on the losses of literally millions of jobs. If the newly-elected members of Congress understand little else, let them understand this. The current loss of jobs is a result of the meltdown in housing markets. The purpose of the 112th Congress should be first and foremost this: To restore order and reform not in the banking industry where the problems never ensued in the first place, but in the housing GSE’s which assisted private mortgage companies in creating the Hydra.
Their purpose should be to work not for the cameras, but for the American people who expect to have confidence in the homes they invest in for their families’ future. Once upon a time, we held these values of home ownership and responsibility important. They should be again, beginning with a five-year moratorium on capital gains taxes for real estate. Keep the home mortgage deduction for those individuals who are industrious enough to qualify and have a home mortgage, as opposed to “earned income credits” (aka free money) for those who don’t pay income taxes and don’t hold a mortgage. Let’s free our American economy from the monstrous plague of debt that has been openly encouraged first at the hands of the federal government by setting a new standard of conservative fiscal policy, and let’s give transparent access to the balance sheets of FNMA and FHLMC to taxpayers who are already paying their bills. Let’s do what Dodd-Frank can’t and what the 111th Congress did not. Let’s really drain the swamp and kill the monster this time.
PROFESSOR ATHENA’S 2011 PREDICTIONS:
Per my request, here is her prognostications:
1) A successful attack inside the U.S. from muslim extremists. If I were pressed to use my best guess, it will not be airlines, where the current TSA overemphasis and money has been prioritized, but instead where bombs are a higher-percentage of success, which would be a car or truck bomb used to achieve loss of life. We continue to allow “political correctness” to mis-label the problem for what the American people already know it to be, but the delay at the Homeland Security level of profiling information will eventually cost us dearly, I am afraid.
2) A very low-growth economy here in the U.S., with unemployment remaining close to 10% and the heat turned up on the White House. The WSJ has an article this morning about U.S. consumers and how much leverage (credit card debt) on the private side is still to be addressed. I look to see U.S. consumers continue their current pattern of not spending as much as in the past, which will deliver very mixed results for stocks.
3) The beginning at the very least of a meltdown in real estate in China. It is coming, the only question is when and not if. It will have ripple effects throughout the financial system.
And a set from one of the Shrine’s Mid-West Tea Party friends: American Freedom Network’s Captain Freedom –
1. The Federal Behemoth (government) is grid-locked and the two medias propagandize their viewers/believers
2. Double dip recession
3. Major foreign crisis that will over-match Oblama and Janet Incompetano
MUT’s Programming Notes:
* SCTRC’s Dawn Wildman will be on 1170KCBQ this Thursday, kicking off the “Tea Party Thursday” programming on the Rick Amado Show. I will post the time as I get it. I hope San Diego Tea Party activists listen and call in with support and suggestions for 2011 agenda items. Another exciting year of agitation, my friends.
* Per the suggestion of my blogging icon, the Anchoress, I have a site under construction and will be unveiling shortly my new blog: Flight Into Egypt. The new blog will host items related to my Catholic Faith, including a defense of the Free Market targeted to other Catholics. This site will have “MUT’s Catholic Corner”, which will blogroll a portal to the new site and other items that are of a faith-nature.