Saturday, August 27, 2011

Obama's Next Stimulus

The Obama Administration needs the economy to pickup steam if they want to get reelected. A new stimulus isn't in the cards.. the House Republicans won't go for it. QE3 might happen, but all the Fed can do is loan money; it can't simply mail checks to people, and most Americans either don't qualify for loans or don't need them. The housing market is also in the dumps; housing prices continue to fall, and because of this people simply give up and mail the keys back to the mortgage company shortly before the sheriff arrives. Mortgage rates are at historic lows.. but most people won't qualify to refinance or buy because their home is under water and/or their credit score is not up to snuff.

What to do ? The NY Times gave us a hint.. it's essentially a massive government backed house refinance program. The details are still being worked out, but here's how it might work... it would allow people to refinance at the current 4% rate, which would reduce their monthly payments.. in some cases substantially. It could allow people who are under water to participate if their LTV {loan amount to value of the house} is under 125%. They could reduce the credit score needed from the low 600s to the late 500s, say 575.

In addition to this, there is another plan which is looking into a way to begin renting foreclosed homes and getting them off the market, thus helping stabilize housing price declines and letting people upgrade from apartments to houses. The NY Times suggests that such a plan would save homeowners nationwide about $85 billion a year.

There would be no addition to the deficit. Home prices would begin to stabilize; the foreclosure rate would decline, and people would have more money in their pockets. In truth.. it's far from the worst plan I've heard. It would help us working serfs out for once at the expense of the banks.

The downside ? The first would be for Freddie and Fannie, who would bear the brunt of the losses on the reduction in principle (if this is part of the plan). When word of this idea came to light on Thursday, Fannie & Freddie Bonds tanked. These are ultimately backed by the US taxpayer, so in a weird way it's really us doing ourselves a favor. But for those who invested in them there is a good risk they're going to see their investment sink, perhaps drastically. This is also a slippery slope-- giving government guaranteed loans to * those who don't really qualify for a loan, and *loans for more than the home is worth. This is how we got here in the first place.

The details of it are still being worked out; I imagine this is part of the reason Big O is vacationing and waiting to announce his plan until September. Who will administer this ? Who will service these loans ? Who will administer the foreclosed house rental program ? Here's the Times article:

I also believe that Obama will further reduce the payroll tax reduction from 2% to 4%.. another boost to the wallets of working serfs as well as employers. This will increase the deficit.. but it might well pass as Republicans always love a tax cut.

Onto my pet peeve, EUtopia. The markets have stabilized thanks to ECB purchases of debt and The Fed's USD swap lines. Still there are signs in the money and credit markets.. the LIBORs-- that all is not well and not getting better. The last time the ECB stepped in like this was in May and June of last year, when they began purchases of Greek and Irish debt in an attempt to hold off default. We all know how that story ended, and this current story of Italy and Spain will have a similar ending-- bad. The only real question is when and how it ends. My guess is that the EuroBond will not happen. But make no mistake.. the European crisis is just getting started. Two weeks ago France and it's banks in particular began to feel the markets' wrath.. and this, I believe, had a big effect on Sarkozy, who finally saw that his own nation might be taken down. My make is that it ends with either the expulsion of Greece, Ireland, Spain etc from the Euro or the ECB goes all in Bernank Style and monetizes the debt. So far the signs seem to suggest that expulsion is whats coming. Here's an article on the {very serious} problems in the EU's interbanking system:

As for our own economy, Bernanke said "not yet" to QE3-- and {finally} fired a broadside at US political leaders, in effect telling them that they need to quit bickering and make the hard decisions we all know need to be made. If we get a strong deflationary headwind and/or the job numbers begin going negative again, Big Ben will have the excuse he needs for QE3. We're not there as yet. 


  1. Have to disagree, Merkel will obey her banking masters and sell the German people out. She'll ram through Trillion funding for the stability fund and set the stage for fiscal union and Eurobonds. Germans will be as helpless in stopping this as Americans were against TARP.

    The cardinal rule is ... what the big banks want, they get. They control politicians, especially ones that have managed to rise to the top.

  2. Hi Mr K,
    Can you give me your take on the Bank Of America.

  3. BAC is insolvent thanks to swallowing both Countrywide and Merrill Lynch, both of which were loaded to the gills with toxic mortgage waste. They're low on cash; they've had to sell some of their Chinese investments to raise cash.

    Will they bite the dust ? Not a chance. Is it a buy or a sell ? If it were me, I'd find far, far better places to invest, beginning with the ETF PSLV.