Commentary: 'Foreclosure plague will defy all
By Lou Barnes, Monday, January 5, 2009.
Offer "Happy New Year!" to a friend, and you'll get, "Same to you," followed by an unprintable reference to 2008. Inquire about plans for 2009 -- corporate or personal -- and replies go like this:
"Ummm ... I was thinking about adding another layer of sandbags to the bunker, maybe some wire, and ... Hey, have you seen my helmet around here, anywhere?"
2009 will not be a matter of civilians regaining confidence, as so many hope. Our national paralysis is beyond self-restoration. We need -- and will get -- truly extraordinary intervention by government.
Yes, I know that I'm the guy who insisted since the Lehman disaster that cavalry was on the way. Apologies. It did not occur to me that Henry Paulson, ex-chair of Goldman, would do for finance what Michael "Brownie" Brown did for Katrina. The weird thing: Hapless Paulson did the right stuff, but in every case was late, inadequate and stopped short.
This time, I know that intervention will be quick and massive because it has already started. For accuracy, nothing beats predicting the present. On New Year's Eve, the Fed made one of the two or three most extraordinary announcements in its history -- the bigger, the more it should be buffered by a holiday for markets to think it over.
The Fed will be buying $500 billion in agency mortgage-backed securities, the purchase to be complete by June. Not finance MBS, not sell Treasurys to raise cash and then buy, just buy -- with intent to drive mortgage rates down enough to rescue housing.
No one knows how fast or how far rates may go down. The Fed's initial announcement at Thanksgiving knocked rates down here, into the low fives, but waves of refis impede further declines. However, the Fed's style says it means business: It will buy in its own name, not through blind brokers, every purchase engraving in the market mind the strongest wisdom in finance: Don't fight the Fed.
Where will it get the $500 billion? The Fed's frequently asked questions posting: "Purchases will be financed through the creation of additional bank reserves."
Hah. Ho ho. Permission granted for discreet giggling. Stifle guffaws, please. The Fed will pay for MBS by making a credit entry on the ledger of the selling dealer, inventing the money credited. "Printing" money is so ... so yesterday. Today, we kite electrons.
This event will tip into hysteria all of the inflation worrywarts, hard-money freaks, Austrian schoolists, Ron Paul crackpots, gold bugs, dollar fidgets, and a lot of good and solid citizens in their backyard foxholes.
It will be OK. Honest. This step is the first of perhaps several the Fed will take to escape the post-September "liquidity trap" -- pushing on a monetary string -- and to end this deadly credit-default spiral, in which the fact and fear of default further diminish the supply of credit. The MBS buy will be the Fed's first-ever "quantitative easing," bypassing a broken system and injecting credit directly into the economy until the credit markets begin to function on their own. The Fed is not close to the end of its resources; in many ways it is just beginning emergency operations.
Enough certainty. From probables to maybes. Markets fear a cascade of credit defaults and bankruptcies, not deflation -- that's why Treasury yields are so low. The fear is justified. Rates will go lower as the great many "last war" inflationists give up.
The foreclosure plague will defy all solutions and persist into economic recovery; there is no way to save inherently weak households. The foreclosures will be localized, micro-regional, and do far less macroeconomic harm than feared. Outside those overbuilt zones, super-low rates will encourage some home prices to rise in 2009. Recovery in the bubble zones, and for builders? Years. Several.
Energy and commodity prices have overshot on the downside, but the rebound will be modest. The U.S. has been first into this global wreck, almost a year ahead of the world, and will enjoy a low slope but low-inflation recovery. Beginning late this year.