I have a Son!

If my small audience of readers were wondering about the recent lack of posting, this is why:

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Me and Baby X, day 24 hrs old

Fatherhood is an amazing experience. Kid is healthy, alert, doing great. It’s been a busy and hectic few days though. Now at least I have more perspective on how bad the American healthcare system can be.  More on that later, if I have the energy. Exhausted from dealing with beaurocrats all week.

Also, I updated the Fed Transparency Act post below. I was working on it when my wife went into contractions and published by mistake. People should jump really write their reps, it’s so easy to write your congressmen and tell them to support it.

Write Congress to Support the Federal Reserve Transparency Act (HR 1207)

Two Minutes of Your Time

Writing your congressman online only takes a few minutes, and is one of the only ways we as citizens can directly encourage transparency in the Fed and Government. Just go here, then put in your zip code. Voila, you get a contact-form that directly reaches your local House Representative.

The House is the only branch of our government with any real authority over the Federal Reserve. So contact your local rep ASAP and tell them you’d like them to vote for and become a co-sponsor of the Fed Transparency Act (HR 1207).

Form letters aren’t ideal. They are often overlooked and discarded by Congressional aides. So write your own one; quick, dirty, and to the point. Something like:

Dear Congressman Smith,

I am extremely concerned about the current actions being taken by the Federal Reserve and Treasury Department using our country’s resources. Our dollars are being used to bailout the same banks and institutions who created the problem. These actions could end up eroding the value of the dollar, and having very long-lasting consequences. Please support the Federal Reserve Transparency Act. The least that we taxpayer citizens deserve is knowing how our money is being spent.

My future vote in this district will depend on how this economic crisis is handled. I want transparency, and that means accounting for everything the Fed is doing. Decisions like these will decide my votes over the coming years. I have come to realize that our current system is corrupt and needs true reform. People who know what’s happening are not happy. These moral hazards and corrupt relationships are ruining our wonderful country. Almost everyone I talk to feels this way, and the Fed printing more money is a temporary fix. I hope you consider my letter, and support HR 1207.

Make it unique. Something different will grab the attention of the aides who read this stuff, and a congressmen may actually see it. Form letters are likely discarded most of the time.

The one annoying thing that House.gov requires is your FULL zip code to find your congressman. You can get that here. Still shouldn’t take more than 5 mins max. Stop Ben from showering Wall St. with money, as he plainly plans to do.

Update: The Federal Reserve Transparency Act (HR 1207) has 207 co-sponsors in Congress. Full story from Nolanchart.com. We’re getting close. Contact your congressmen, even if they’re already on the list. Just because they’re a co-sponsor doesn’t mean they are committed to voting for a bill. Make sure they understand the importance of this vote.

Shower that money Ben!

Shower that money Ben!

Refi Boom Will Degrade MBS Quality and Indirectly Bail Out Banks

Banks have been reaping huge rewards from the refinancing boom. Everyone’s happy, financials are rallying. But there are some potentially nasty consequence from this feeding frenzy. I think one of the more serious side effects will be the degradation in quality of MBS. Default rates should rise significantly. The end result will likely be (surprise) yet another indirect bailout for Big Banks. One that will leave taxpayers holding an ever-growing bag. Follow my logic, and let me know if I’m missing something.

Anybody who can afford to refinance right now is a high-quality borrower, the kind banks love. You need a great credit score to refi these days, and cash to pay the fees. If you have an ARM, you’ll also need ~20% cash down to switch into a traditional loan.  Meanwhile, homeowners who are underwater or behind on payments aren’t refinancing. So these “bad” loans will stay in the MBS they were bundled into. The same ones that taxpayers are destined to buy.

Quality of MBS Will Plunge

When you remove (via refinancing) the higher-quality loans from an MBS, what’s left isn’t pretty. The loans will have much higher default rates. So it’s easy to see why bankers are eager to do two things:

  1. keep rates low, to encourage refinancing to those who can afford it
  2. get these horrific assets off their books ASAP

Unloading the MBS

The Fed and Treasury are determined to unload these “legacy assets” on the American public. Whether it’s through TALF, FDIC, PPIP, or some other silly acronym, taxpayers will end up holding the bag. Unless Obama changes his economic team very soon, we will continue buying ever-larger quantities of these securities at inflated prices. Defaults continue to rise, so banks want as little exposure as possible to these assets. And remember, Alt-A and Option-Adjustable loans don’t peak until 2011, as this chart shows:

Mortgage Resets (click to enlarge)

Mortgage Reset Schedule (click to enlarge)

No matter what we do, the economic results will be disastrous. But it’s important to ensure the right people are held responsible for their actions (more on solutions below). Stealthy bailouts like this paint a somewhat rosier outlook for large banks. They have unlimited support from Geithner. Their smaller competitors are rapidly dying off, which will get worse soon. Many will be absorbed on the cheap.

The majority of losses will be absorbed through a complex web of bailouts. Some of the conduits are GSEs like Freddie Mac, FDIC insurance fund, pension fund insurance corp, automakers, insurers, and more. And the healthy (and recently refinanced) loans end up at TBTF banks. The same ones who basically control the Federal Reserve and (arguably) the Treasury.

The only way to fix it

Obama needs to fire his whole economic team. Geithner and Summers need to go ASAP. Get William Black or Simon Johnson in there stat. Bernanke need to make a hasty exit as well. But that will be trickier. Only Congress has control over the Fed, and that is limited. If you want to do something, contact your congressmen and get them to support the Federal Reserve Transparency Act.

No matter what course of action we take, things are gonna be ugly. And our current plan only delays the inevitable, while shifting the burden onto the public, and away from responsible parties. It’s time to let some banks fail, take our medicine. To those who say it’s too big of a job, or too complex, I say that the alternative is much worse.

Disclosure: No positions in securities mentioned

Bernanke’s Dollar Wager

Jesse’s Cafe just did a great piece on Bernanke’s gamble with the dollar. It’s an entertaining take on the risks we face due to current economic policy. And this picture alone makes it worth the read:

bernanke

Here are two quotes from the piece that struck a chord with me:

The method is to look good by attempting to make most of the competing forms of currency and stores of wealth look equally bad.

There is enough money if the Fed can run the printing presses fast enough. That is the whole point. The bet is that people will continue to accept it in return for real goods and services, pretending that it has the same marginal value without regard to how much the Fed creates.

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