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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
September 10, 2009
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Doug Noland

As I have written previously, the number one policy priority these days should be to ensure the course of policymaking does not bankrupt the country. The Federal Reserve must do its part first and foremost by protecting our currency. The Fed must in a timely manner exit its crisis management regime of zero interest-rates and massive monetization – especially of MBS. To avoid “bankruptcy,” the federal government must move aggressively to exit massive deficit spending and the accumulation of systemic mortgage risk.

Regrettably, signs read No Exit on all fronts. And it is this mortgage issue that worries me the most, as few seem to appreciate the mounting risks. Conventional thinking has it that the government can step in temporarily and stabilize the housing markets. And when home prices reflate and the economy recovers, the private Credit system will take over as the federal government gracefully exits.

The more likely scenario is that federal government market intervention further distorts the marketplace – creating a dynamic whereby only government-guaranteed mortgages attract market demand. Any move by the government to retreat from its backing of the mortgage market would risk acute instability. And, at some point, the government’s accumulation of debt and mortgage obligations would begin to impact the market’s view of creditworthiness.

There is the appearance that government intervention throughout the mortgage marketplace provides a free lunch: Households, once again, enjoy access to plentiful cheap mortgage Credit, while there’s no impact to the cost of federal borrowings. Why would anyone in their right mind even contemplate an Exit – especially when things remain so fragile? Why not wait a year or two or a few…

Yet I would argue that there is a huge and festering (latent) cost to Washington’s mortgage operations. At some point along the way – and you can count on it being a rather inconvenient juncture for the markets and economy - creditworthiness will become a hot issue. The market will finally demand higher yields for Treasuries, agencies, and GSE MBS – and will surely be less than enamored with our currency. MBS backed by today’s artificially low mortgages will come back to bite. And when the market turns against “federal” debt obligations, you can count on the market really, really turning sour on mortgage risk. That will mark the point when years of government market interventions and distortions come home to roost.