Research Zeitgeist: 25 billion Bottles of Beer on the Wall…
If Wall Street got drunk on “fancy financial instruments” as President George Bush said this week, Washington cemented its role as barkeep with its approval of the potentially massive backstop program for Fannie Mae, Freddie Mac and the rest of the cirrhotic housing sector.
Washington’s move is akin to giving an alcoholic a giant vat of liquor, but telling them to drink from it only if they really need to. What are the odds of them not taking at least a sip or two? The Congressional Budget Office thinks the most likely outcome is for a $25-billion dollar swig, but the possibilities range from total abstinence to a $100-billion binge.
Once again the nation puts its faith in the government perfecting the markets like a parent making good when a child runs up a massive credit card balance – but with somebody else’s money, in this case the anonymous but very real “taxpayer.”
Financial drunkards of all stripes love the new plan, as do politicians who can take credit for doing something to stem the housing and mortgage-related ebb tide. Economists and “hazard moralists” hate it.
Nobel laureate economist Joseph Stiglitz, writing in the Financial Times says “the bail-out of Fannie Mae and Freddie Mac makes that of Bear Stearns look like a model of good governance. It sets an example for other countries of what not to do. The same administration that failed to regulate, then seemed enthusiastic about the Bear Stearns bail-out, is now asking the American people to write a blank cheque. They say: “Trust us.” Yes, we can trust the administration – to give the taxpayers another raw deal.”
A basic law of economics holds that there is no such thing as a free lunch. Those in the financial market have had a sumptuous feast and the administration is now asking the taxpayer to pick up a part of the tab. We should simply say No. – Joseph Stiglitz.
PIMCO’s Bill Gross takes a more welcoming tone in his latest Investment Outlook. Estimating that “nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble,” he writes that “lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy.”
It may be the case that at this late stage the government had little choice but to take action to avoid a greater calamity, but let’s hope they follow up with the reform needed to wean Freddie and Fannie from the public still. Then, and only then, will the bail-out be more like administering methodone to a heroin addict as part of their recovery program.
Visitors to Research Recap this week continued to be drawn to the nitty-gritty of the housing hangover, making Fitch Ratings’ prediction that US Mortgage Insurers’ Troubles May Worsen the top post of the week. Other related popoular posts were US Commercial Real Estate Prices Down 8.8% from Peak and Weak Liquidity Junk Bond Issuers Reach Record High Level, both from Moody’s. The latter post appears to have sparked renewed interest in a June Moody’s report Global Junk Bond Default Rate Doubled in First Five Months.
Preventing a clean sweep was our number two post, Greentech Expected to Lead Resurgence of IPOs in 2010, based on a survey carried out by KPMG.
Research Recap Quote of The Week:
Wall Street got drunk. The question is, how long will it sober up and not try to do all these fancy financial instruments? President George W. Bush.
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