Well, the deputy walks on hard nails and the preacher rides a mount
But nothing really matters much, it’s doom alone that counts
And the one-eyed undertaker, he blows a futile horn
“Come in,” she said, “I’ll give you shelter from the storm”
Housing, shelter I like to call it, accounted for 15% of economic activity last year. Roughly, 60 % of all new home loans were backed by the good intentions gone bad at Fannie and Freddie. After taking in $187.5B in “bail-ins” the latest dividend payment to Treasury Dept hit $203B. The barbarians are back at the gate waving preferred shares and common demanding their payout.
The next 10 years operation of the mortgage GSEs plays into the Fed, the Treasury and the persistence of QE. First, a brief history: The focus on the “debt” and the bond market during the Clinton Administration combined with Newt’s House grab to dramatically shift the public sector deficit and then debt situation. Someone (and something) had to replace the government borrowing and blowing up GSE balance sheets obliged. The insider profiteering, accounting frauds, and abuse into crisis is standard operating procedure from there.
Jump to the 5 year anniversary of the low tick and a complication from the other side is visible. The continued operation of the entities over the next decade and who “profits” from them is in play. The Treasury Dept. is booking transfer credits from both the GSEs and the Fed’s holdings of their securities. Perversely, it is the GSEs that hinder the Fed’s ability to raise short rates and necessitated the building of the Death Star (FAFRRRF). Their interconnection now extends well into the future and creates a “stickiness” to the size of the Fed’s balance sheet.
The concept of exit (more directly, why no CB has ever pulled it off) becomes cloudier. Like the Federal Budget of the 90s, something will have to replace the borrowing balance sheet of the Fed. The smooth exchange to “others” cannot be assumed. The worst alternative is a massive reduction in system capacity (balance sheet). I continue to advocate ways to grow into the size of the system and, by default, the Yucca Mountain of collateral that backs it. The issue that bothers me is – Why Shelter? The fit for the general public is obvious .Alternatively, infrastructure build outs could benefit all. A 10 year plan to wind down Fan and Fred while building a new infrastructure GSE might offset the system retrenchment.
Its very complicated but everyone should understand by now, when it comes to the Fed, the Treasury, the GSEs and the banks…the assets are the liabilities.