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From what I gather, the plan is to buy MBS that are said to be illiquid currently but really worth something. Even assuming the govn't doesn't overpay, I'm wondering
1. For fixed rate mortgages held in these securities: Won't inflation cause these securities to fall in value over time as other new mortgages are paying higher rates? Just like if you hold a 3% bond and the going rate becomes 5%, your bond is now worth less than before ( unless held to maturity. But then you're getting paid back in debased dollars)
2. For variable rate mortgages held in these securities, which I assume predominate: As inflation expectations and cause rates paid by mortgagees to be reset higher and higher, won't the rate of default rise above the current one, again making the underlying securities worth less and less? Surely you'll see more defaults as rates rise. Or do we think short term rates won't rise?
3. If mortgage rates rise won't home values continue to fall as this affects affordability? Won't this in turn cause more and more home 'owners" with both variable and fixed rate mortgages to "walk away" from loans rather than overpay for a home now worth a lot less than the mortgage? I rented a $550K place at the beach a couple years ago for $1250/mo. I would never have bought there due to this reason.
4. Won't a continued recession (which few seem to deny) result in more unemployment, stagnant wages for the employed, and hence more defaults? So again the value of the securities bought by the govn't will be headed down, not up.
5. Won't injecting this much liquidity into the market be inflationary in itself and therefore cause rates to rise? Then add to that unfunded obligations and the monetization that will require and it doesn't look like anything but more inflation over the life of these mortgages. So how will libor and other rates stay steady or drop, which is the only way you wouldn't see more defaults?
6. If these MBS are so valuable why isn't someone with a lot of dollars buying them? (SWFs, foreign central banks, etc?)
7. If they're so hard to value, how can government do it any better than the free market? Won't the government just hire private firms to look them over anyway?
8. What will force banks to use this liquidity to make loans? As they've recently learned, lending to those who can't repay you is not a great idea. Ultimately won't they refuse to lend to marginal borrowers? (which is much of the economy).
9. If we bail out now and still collapse down the line from other problems (CDS, credit card debt, etc), will it mean we are then $700B less able to solve our problems at that point? Will we have just accelerated and prolonged the depression? After all, if the govn't holds the securities it faces the same cash crunch as the banks. It can print to solve its problems, but for how long?
1. For fixed rate mortgages held in these securities: Won't inflation cause these securities to fall in value over time as other new mortgages are paying higher rates? Just like if you hold a 3% bond and the going rate becomes 5%, your bond is now worth less than before ( unless held to maturity. But then you're getting paid back in debased dollars)
2. For variable rate mortgages held in these securities, which I assume predominate: As inflation expectations and cause rates paid by mortgagees to be reset higher and higher, won't the rate of default rise above the current one, again making the underlying securities worth less and less? Surely you'll see more defaults as rates rise. Or do we think short term rates won't rise?
3. If mortgage rates rise won't home values continue to fall as this affects affordability? Won't this in turn cause more and more home 'owners" with both variable and fixed rate mortgages to "walk away" from loans rather than overpay for a home now worth a lot less than the mortgage? I rented a $550K place at the beach a couple years ago for $1250/mo. I would never have bought there due to this reason.
4. Won't a continued recession (which few seem to deny) result in more unemployment, stagnant wages for the employed, and hence more defaults? So again the value of the securities bought by the govn't will be headed down, not up.
5. Won't injecting this much liquidity into the market be inflationary in itself and therefore cause rates to rise? Then add to that unfunded obligations and the monetization that will require and it doesn't look like anything but more inflation over the life of these mortgages. So how will libor and other rates stay steady or drop, which is the only way you wouldn't see more defaults?
6. If these MBS are so valuable why isn't someone with a lot of dollars buying them? (SWFs, foreign central banks, etc?)
7. If they're so hard to value, how can government do it any better than the free market? Won't the government just hire private firms to look them over anyway?
8. What will force banks to use this liquidity to make loans? As they've recently learned, lending to those who can't repay you is not a great idea. Ultimately won't they refuse to lend to marginal borrowers? (which is much of the economy).
9. If we bail out now and still collapse down the line from other problems (CDS, credit card debt, etc), will it mean we are then $700B less able to solve our problems at that point? Will we have just accelerated and prolonged the depression? After all, if the govn't holds the securities it faces the same cash crunch as the banks. It can print to solve its problems, but for how long?
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