Just a few thoughts on the past week.
Fannie And Strategic Defaulters
Fannie Mae managed somehow to make itself even more unliked in just about every circle with its announcement that it would attempt to bring back debtors’ prisons or at least make life very difficult for anyone walking away from their home. It’s becoming the standard question with regard to many of the actions undertaken by the Obama administration, “What were they thinking?”
I don’t want to get into a debate about the morality of abandoning one’s home and attendant mortgage, nor am I interested in all of the talk about solving this via the bankruptcy courts or rent-to-own schemes that has been resurrected by Fannie’s pronouncements. I just want it to go away and the sooner the better. We’ve been trying to fix this for several years now with disastrous results despite spending what we once would have considered a king’s ransom. The last thing we need is one more program, or one more months long debate in Congress. Let’s just gather up and recycle all the houses by whatever means necessary, lick our wounds and get on with life.
I thought Diana Olick had the best take on the whole subject. She pointed out that every time she had brought up the subject of strategic defaults with Fannie, Freddie and FHA she had been told it wasn’t that big a deal. Why then, she asked, are they making a big deal out of it? Probably because they’re getting lots of keys in the mail. Refer to the paragraph above. It’s a disaster, face it finally and move on.
I tuned out pretty early on this one. I figured we would end up with something like this after all the speeches, posturing and payoffs. After all, if you don’t throw Fannie and Freddie into this mix you’re really just engaging in political posturing, not real reform.
Nevertheless, the banks took more of a hit than I thought they would. Let me rephrase that sentence to read that they took what looks like a fairly good body blow but those dependent on their cash left plenty of time for them to buy their way out. A lot will depend on a final reading of the thousands of pages that make up this bill. There is much room for mischief within the details just as there are loopholes for the banks to escape the more onerous strictures.
In the end we’ll end up with more rules, more disclosures and probably no real fundamental change in the manner in which the financial sector conducts its business. Though it’s not obvious yet, I suspect that the smaller banks will find that the new law works more to their disadvantage and thus will be further marginalized. To the extent that the big banks are limited in any manner, hedge funds and other types of financial entities not yet on the radar are likely to step in assume that business, which of course will lead to the need for regulation to capture that which has escaped this particular net. And around and around we will go.
There were two good articles this week that discussed the crisis within Euroland. Michael Pettis does a wonderful job of outlining the reasons that Greece will default. He provides some great historical perspective on the likely manner in which that crisis is likely to be played out. Ed Harrison defends Germany’s move towards austerity in a well thought out post.
Interestingly, Pettis is of the opinion that the Euro will not survive, at least in its present form. Harrison on the other hand seems to feel that austerity, not just for the Germans but for the entire union, is a prerequisite to its survival.
I personally tend to favor Pettis’ position. The Germans seem to me to be following a path that most of the other European countries will eventually go down. Basically it’s damn the Euro and the Union if they threaten my country. If in the process of putting their economies right – whatever that might mean – the larger interests of the EU are served then fine. If not then I see most of the members as willing move on autonomously.
It seems as if the forces of the Dark Side (austerity to Paul Krugman etal.) might be winning in Toronto. Reports this morning indicate some sort of agreement to halve deficits by 2013. Given that were half way through 2010, that’s not much time to eliminate trillions of dollars of debt.
If Obama signs on to this, look for tax talk to really begin in earnest. This is the cover that the politicians need for something big. When you think big, think VAT.
Now there is a niggling little problem with unemployment in this country, and a pretty weak economy to boot. So if you see the political class piling taxes on this pathetically weak base then you might well expect more than a few lean years. You might also expect to see a whole new crew going to Washington, including a new President in a couple of years.