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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
August 24, 2012
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The consensus view holds that the worst of the housing crisis is fading into history.  Friday, from the Treasury Department’s Michael Stegman:  "With today's announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market.”  The plan is to push forward with the shrinking of Fannie and Freddie’s balance sheets.  This implies real reform, with reduced reliance on these troubled institutions and less exposure burdening the U.S. taxpayer (federal bailout $190bn and counting). 

Truth be told, Fannie, Freddie, and the American taxpayer and economy will remain highly exposed to mortgage Credit risks for many years to come.  While GSE mortgage holdings (and balance sheets) have been somewhat reduced, exposure to mortgages they’ve insured remains at near-record levels.  Fannie’s “Total Book of Business” (mortgages held in the portfolio and MBS insured) ended June at $3.183 TN, little changed for 2012 and down only about 2% from the March 2010 high.  Across town at Freddie Mac, total mortgage exposure remains above $2.0 TN, down only 10% from record highs.  It is also worth noting that FHA guarantees have increased dramatically since the 2008 crisis to exceed $1.0 TN.  I’ve argued that there will be “no exit” from Federal Reserve “easy money,” and there will similarly be “no exit” from federal control over mortgage Credit.

The virtual nationalization of U.S. mortgage Credit in concert with incredible monetary stimulus has ensured the ongoing availability of inexpensive mortgage Credit.  Fannie, Freddie and the FHA – key players in the Mortgage Finance Bubble – are today important participants in the Government Finance Bubble.  There will be huge future costs, but for now housing and the economy enjoy the stimulus.  And while mortgage Credit in aggregate remains stagnant, there are indications of typical problematic excesses spurred by mispriced finance. 

I have posited that today’s Bubble is the latest in a series of Fed-accommodated bouts of Credit and speculative excess.   And as each successive Bubble grows larger and more systemic, the effects actually become less conspicuous.  The technology Bubble was rather obvious, although the greatest associated excesses were more generally contained (i.e. Internet/technology stocks, telecom debt, California incomes and real estate).   The mortgage finance Bubble was much less conspicuous until the arrival of the more egregious late-cycle price and construction excesses.  Few appreciated how Trillions of new mortgage debt were inflating incomes, spending, and corporate profits, while covertly distorting the economic structure.  Today, it seems that virtually no one recognizes how Government Finance Bubble excesses inflate incomes, spending, profits, state & local government receipts, and equities and bond prices.