Capital Markets Update

By Louis S. Barnes Friday, March 11, 2011

For bonds and mortgages, this has been a classic bad-news-is-good-news week. All of those certain that nobody, no matter how frightened, would put money into US IOUs just got trampled by the in-rush. The 10-year T-note has traded under 3.40% resistance, and mortgages are sliding toward 4.75%, both tied with four-month lows.
Moving the mob: Middle East heebie-jeebies, of course, even though oil is flowing nicely. China is probably slowing, maybe a lot. Japan's earthquake and tsunamis.
And Europe is in magnificent, oblivious denial as the euro experiment comes apart. Ireland paid 8.1% for two-year money this week, and Greece 16.4%, versus Germany's 1.7%. Leaders say the euro will be fine because it must be, resembling British infantry in 1917 Flanders singing to the tune of Auld Lang Syne, "We're here because we're here, because we're here because we're here; we're here....”
In the US, to escape the negative-feedback loop of recession and achieve self-reinforcing recovery requires artificial stimulus. The blessed moment of entry to positive feedback has been announced for two solid years, but obviously has not arrived. The stimulus in train is greater than previously imagined anywhere: the Fed at 0% cost of money for two years; fifty cents of every Treasury dollar spent has been borrowed, and the Fed is buying those IOUs at $120 billion per month, by June $2.3 trillion overall.
Something is intercepting the stimulus. Economic physicians have intubated the patient, breathing for it, and energetically applied paddles to jump-start its heart. However, to no effect: there is some barrier between paddles and patient. Have we forgotten to take the covers off before jolting? Afraid the family will see the real condition of the patient? "CLEAR!!" Bzzzt. BZZZT. BZZZZZZTTT!!. Smoke rising from the victim, but no ticker. Dead as a hammer.
Hey! Fellas! How about housing? Might that be blocking the stimulus? 25% of mortgaged households now under water, 11 million families? Prices down another 2.5% in January (CoreLogic), and Wall Street idiots think it's progress, good news.
Does anyone in authority have a housing plan?
1. Home ownership has dropped from 69% to 67% toward the 64% prevailing before madness set in. Is that the new target? Or 60%, or 55%? Is there a target?
2. Each of those homes converting ownership requires an investor-buyer, and mortgages for investors are about as plentiful as 1932. Will we let foreclosed homes pile up and fall in price until investors come up with all-cash?
3. Speaking of prices... the total value of US homes (Fed Z-1) has fallen from $22.7 trillion in 2006 to $16.4 trillion at the end of 2010. Hey, guys! What's the target? The $12.1 trillion in 2000? Versus today's $10.5 trillion in mortgages... is America a better, sounder place with no home equity at all?
4. Prices... after they fall to wherever they are going, do we expect them to stay there? For how long -- without aid, without credit? For the fifteen years it would take for current loan balances to amortize down to wherever prices may land? Hard to tell how long, exactly, if prices fall faster than amortization.
5. You nincompoops panicked and doubled the monthly FHA mortgage insurance premium effective April 1. Perfect day. I know, you're terrified the FHA will call for cash to cover losses. But, credit is so scarce that expensive FHA provides more than half of today's mortgages, and you want to shut that down, too? If you're afraid of the FHA's losses, how much larger will they be if you drive away more buyers?
6. Speaking of which, Timmy Geithner's White Paper on Fannie and Freddie called for wind-down and closure, to be replaced with aid to low- and moderate-income renters, and a "private" mortgage market. The most recent private market gave us sub-prime loans and the Bubble, and the one before that ended in 1932. How do you suppose the average buyer feels about wrecking what's left of mortgage supply?
If rising American home values are in the national interest, would you -- Fed, White House, Treasury, Congress -- please say so? Even if you don't know what to do?