Ok NYtimes and Krugman BUT...

[dumpster56]

http://www.nytimes.com/2008/03/10/opinion/10krugman.html?hp

It could be a real mess.

 

[Arc]

This too shall pass!

 

[FIRE'd@51]

I think the Fed's action on Friday might actually be helpful. In particular, it should increase the liquidity of Fannie and Freddie, allowing them to increase their participation in the mortgage crisis. The recently-passed stimulus package allows FNM and FRE to purchase jumbo mortgages. However, their capital constraints are limiting their participation since their lending is still constrained. Thus, if they purchase a jumbo mortgage, it basically means they can't purchase 2 (or more) non-jumbo mortgages. Since spreads have widened on their paper, their borrowing to raise capital has been constrained.

The recent move by the Fed allows them to raise capital at very cheap rates via repurchase agreements using mortgages they already hold in their mammoth portfolios. This should lower the cost to credit-worthy borrowers who want to refinance (or purchase) homes with jumbo mortgages, which should be helpful at the margin to higher-priced markets like California.

Yes, there is some risk to the Fed, but, as I understand it, many of the mortgages used in these repurchase agreements have already been written down, and the Fed will be loaning against this lower value. By rolling over the repo's every 28 days this should provide longer-term liquidity to the market.

 

[Independent]

I think the Fed's action on Friday might actually be helpful. In particular, it should increase the liquidity of Fannie and Freddie, allowing them to increase their participation in the mortgage crisis. The recently-passed stimulus package allows FNM and FRE to purchase jumbo mortgages. However, their capital constraints are limiting their participation since their lending is still constrained. Thus, if they purchase a jumbo mortgage, it basically means they can't purchase 2 (or more) non-jumbo mortgages. Since spreads have widened on their paper, their borrowing to raise capital has been constrained.

The recent move by the Fed allows them to raise capital at very cheap rates via repurchase agreements using mortgages they already hold in their mammoth portfolios. This should lower the cost to credit-worthy borrowers who want to refinance (or purchase) homes with jumbo mortgages, which should be helpful at the margin to higher-priced markets like California.

Yes, there is some risk to the Fed, but, as I understand it, many of the mortgages used in these repurchase agreements have already been written down, and the Fed will be loaning against this lower value. By rolling over the repo's every 28 days this should provide longer-term liquidity to the market.

This allows "Fannie and Freddie to increase their participation in the mortgage crisis". Since F&F have implicit guarantees from the taxpayers, I'm not sure that I want them participating more in the "mortgage crisis".

I don't see why falling house prices are such a bad thing. Prices fall when bubbles burst. I don't think it's a bad thing for bank's shareholders and executives to lose a bunch. When they were making money, they weren't looking for creative new ways to share it with the taxpayers.

The gross stupidity that drove the housing bubble should result in significant pain. That's our best defense against the next bubble. I'm afraid that the Fed is going to do too much to try to minimize the pain.