Daniel Amerman - on fed exit strategy

[charliebrown]

Daniel seems to be saying that the fed has gambled that housing
will stabalize, or start going up. If it doesn't we're toast.
I found this to be a good summary of fed policy.
Unfortunately this is a two part article with the second half coming on
another day. I will watch for it and post it too when it arrives.

http://www.safehaven.com/article-15707.htm

I assume the bomb hits when a large percentage of the home loans the fed now holds default. Then the money will never come back out of the economy. Except maybe via the treasury backstop of fannie and freddie.
Will the treasury make the fed whole?

[GRG55]

Re: Daniel Amerman - on fed exit strategy

...Will the treasury make the fed whole?

Yes.

This has been posted before, but may be worth repeating...from Dr. John Hussman:

...How to spend $1.5 trillion without Congressional approval

Step 1: Federal Reserve purchases $1.5 trillion in Fannie Mae and Freddie Mac securities, creating $1.5 trillion of monetary base to pay for these purchases.

Step 2: U.S. Treasury quietly announces unlimited 3-year support for Fannie Mae and Freddie Mac on December 24, 2009, exploiting a loophole in a 2008 law that was originally written to insure a maximum of $300 billion in total mortgage principal (not losses, but principal).

Step 3: Within that 3-year period, we can expect the U.S. Treasury to issue $1.5 trillion in new Treasury debt to the public, taking in the $1.5 trillion in base money created by the Fed in Step 1.

Step 4: U.S. Treasury then hands that $1.5 trillion in proceeds from the new debt issuance to Fannie Mae and Freddie Mac.

Step 5: Fannie Mae and Freddie Mac use the proceeds to redeem the $1.5 trillion in mortgage securities held by the Fed, thus reversing the Fed's transactions in Step 1, without the need for any other "unwinding" transactions (watch). The base money created by the Fed comes back to the Fed, and the mortgage securities purchased by the Fed disappear, by burdening the American public with a new, equivalent obligation in the form of U.S. government debt.

Outcome: The Federal Reserve closes its positions in Fannie Mae and Freddie Mac securities, the quantity of outstanding Fannie Mae and Freddie Mac liabilities declines by $1.5 trillion, thus allowing their remaining assets repay the remaining liabilities without a $1.5 trillion hole of insolvency, and the outstanding quantity of U.S. Treasury debt expands by $1.5 trillion in order to protect the lenders, while ordinary Americans continue to lose their homes and jobs.

Throughout this crisis, the ultimate objective of Bernanke and Geithner has consistently been to protect the bondholders.

This objective will not change unless the leadership changes.

[mmr]

Re: Daniel Amerman - on fed exit strategy

There is no question that, if they choose to, the Fed / Treasury / GSE / FDIC complex can guarantee all U.S. dollar-denominated debts and pay back every creditor at par.

(Of course, that's in nominal terms. Good luck buying anything with those dollars at that point.)

[phirang]

Re: Daniel Amerman - on fed exit strategy

The amateurs and pros will already differentiated now:

the amateurs THOUGHT massive debts would kill the dollar.

WRONG

The Fed tightened, the Treasury expanded, and the dollar ripped.

It's going to last a few more months. When the Fed panics again, THEN we get another loosening cycle. Until then - fogettabouit!

[GRG55]

Re: Daniel Amerman - on fed exit strategy

Yes.

This has been posted before, but may be worth repeating...from Dr. John Hussman:

...How to spend $1.5 trillion without Congressional approval

Step 1: Federal Reserve purchases $1.5 trillion in Fannie Mae and Freddie Mac securities, creating $1.5 trillion of monetary base to pay for these purchases.

Step 2: U.S. Treasury quietly announces unlimited 3-year support for Fannie Mae and Freddie Mac on December 24, 2009, exploiting a loophole in a 2008 law that was originally written to insure a maximum of $300 billion in total mortgage principal (not losses, but principal).

Step 3: Within that 3-year period, we can expect the U.S. Treasury to issue $1.5 trillion in new Treasury debt to the public, taking in the $1.5 trillion in base money created by the Fed in Step 1.

Step 4: U.S. Treasury then hands that $1.5 trillion in proceeds from the new debt issuance to Fannie Mae and Freddie Mac.

Step 5: Fannie Mae and Freddie Mac use the proceeds to redeem the $1.5 trillion in mortgage securities held by the Fed, thus reversing the Fed's transactions in Step 1, without the need for any other "unwinding" transactions (watch). The base money created by the Fed comes back to the Fed, and the mortgage securities purchased by the Fed disappear, by burdening the American public with a new, equivalent obligation in the form of U.S. government debt.

Outcome: The Federal Reserve closes its positions in Fannie Mae and Freddie Mac securities, the quantity of outstanding Fannie Mae and Freddie Mac liabilities declines by $1.5 trillion, thus allowing their remaining assets repay the remaining liabilities without a $1.5 trillion hole of insolvency, and the outstanding quantity of U.S. Treasury debt expands by $1.5 trillion in order to protect the lenders, while ordinary Americans continue to lose their homes and jobs.

Throughout this crisis, the ultimate objective of Bernanke and Geithner has consistently been to protect the bondholders.

This objective will not change unless the leadership changes.

An update from Dr. Hussman...

The Federal Reserve's Exit Strategy: Unlegislated Bailout of Fannie and Freddie

...Let's put two and two together here. Fannie Mae and Freddie Mac are already insolvent, and face "significant negative impact" on their net worth resulting from the required consolidation of "off balance sheet" loans into their financial reporting, which will take effect in financial statements for periods beginning January 1, 2010. Over 60% of the U.S. foreclosure market now falls under the umbrella of these two entities.

Under the Housing and Economic Recovery Act of 2008 (HERA), Congress authorized the Treasury to provide sufficient funding to insure up to $300 billion dollars of original principal. Yet in a move that was clearly no part of Congressional intent, the Treasury has announced that it will allow this commitment to "increase as necessary to accommodate any cumulative reduction in net worth over the next three years." Coincident with this, the Federal Reserve has accumulated nearly $1.5 trillion of Fannie Mae and Freddie Mac securities (MBS and agency debt), which is has no plan to liquidate other than lip service. Rather, it is allowing these securities to run off through maturity and pre-payment. Of course, the funds to pay off those maturing securities will largely come from the Treasury. Meanwhile, Bernanke has made it clear that the most important tool of the Fed during the interim will not be liquidation of these securities, but instead the payment of interest on bank reserves.

If one is alert, it is evident that the Federal Reserve and the U.S. Treasury have disposed of the need for Congressional approval, and have engineered a de facto bailout of Fannie Mae and Freddie Mac, at public expense...

...This would all be really clever if it weren't so insidious.

On Bloomberg television last week, James B. Lockhart III, the former head of the Federal Housing Finance Agency (Fannie and Freddie's regulator) commented on the bailout funds already provided to Fannie and Freddie, saying "Most of that money will never be seen again. They were just allowed to leverage themselves so dramatically."...

[bill]

Re: Daniel Amerman - on fed exit strategy

What is happening.
http://www.fanniemae.com/homepath/in...P2SLJ2FQSISFGI

Special Offers

Closing Cost Assistance and Appliance Incentive for Fannie Mae Homes


Fannie Mae is offering a 3.5% incentive* for buyers who purchase and close on a Fannie Mae-owned home between January 28 and April 30, 2010. Buyers purchasing properties listed on this site that are closed within this period may receive up to 3.5% of the final sales price for:

• Closing costs;
• The purchase of new Whirlpool® appliances by Fannie Mae; or
• A mix of closing costs and appliances, at the buyer’s discretion, up to the maximum 3.5%

New legislation was approved which extends the First-Time Homebuyer Credit for homeowners through April 30, 2010 with a 60-day cushion beyond that date to complete closing. The program broadens benefits to existing homeowners and now includes:

• $8,000 tax credit for first-time homebuyers
• $6,500 tax credit for existing homebuyers who have lived in their current residence for at least five years but want to relocate to a new primary residence
• Increased income limits for individuals and couples

The benefits include:

• Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only)
• You may qualify even if your credit is less than perfect
• Available to both owner occupiers and investors

What should happen, but won’t.


Gov. needs real and enforced regulation on banks holding nonperforming assets forcing liquidation, cleaning the system. Mark to market pricing selling assets would bring down housing pricing to average annual income affordability. Government backed program intervention has only delayed price decreases and will take years for debts to be paid down. . Government is protecting banks and bond holders guaranteeing mortgage collections using taxpayers funds. Note modifications are only a short term fix. As home pricing devalues home owners will soon find themselves in the same situation before the note modification. Delaying the debt deflation using programs with government backing will only delay affordable pricing and keep homeowners in debt they cannot service. Homes need to be sold for cash or terms on an open market bidding system. Pricing would drop fast allowing existing in debt home owners to walk away from their existing home and repurchase, lowering their debt payments. Thus, lowering debt payments would allow for more savings or spending giving the economy a little breathing room.

[bill]

Re: Daniel Amerman - on fed exit strategy

What is happening.
http://www.fanniemae.com/homepath/in...P2SLJ2FQSISFGI
What should happen, but won’t.


Gov. needs real and enforced regulation on banks holding nonperforming assets forcing liquidation, cleaning the system. Mark to market pricing selling assets would bring down housing pricing to average annual income affordability. Government backed program intervention has only delayed price decreases and will take years for debts to be paid down. . Government is protecting banks and bond holders guaranteeing mortgage collections using taxpayers funds. Note modifications are only a short term fix. As home pricing devalues home owners will soon find themselves in the same situation before the note modification. Delaying the debt deflation using programs with government backing will only delay affordable pricing and keep homeowners in debt they cannot service. Homes need to be sold for cash or terms on an open market bidding system. Pricing would drop fast allowing existing in debt home owners to walk away from their existing home and repurchase, lowering their debt payments. Thus, lowering debt payments would allow for more savings or spending giving the economy a little breathing room.

Bill Black
http://www.pbs.org/newshour/bb/busin...man_02-17.html

[icm63]

Re: Daniel Amerman - on fed exit strategy

Step 3: Within that 3-year period, we can expect the U.S. Treasury to issue $1.5 trillion in new Treasury debt to the public, taking in the $1.5 trillion in base money created by the Fed in Step 1.

And thats upwards interest rate pressure...

Of course they only time you want to BUY LONG TERM govt bonds paying 4.5% is when you correctly predict rates to be negative(yes that can be so) or zero for a very long time ( ak Deflation).

Otherwise rates are going up !