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« The Investment World and Public Policy | Main | ETF Update: Alternative Energy »

August 28, 2008

Comments

shrek

Im under thirty and I constantly tell my wealthy baby boomer parents to clean up the mess they've made and stop playing the kick the tire down the road game. S$it will hit the fan sometime, if not already.

gaius marius

it's a good point, prof -- regardless of what some would like, elections are not won on policy when the franchise is widely distributed. if we want substantial policy debates to dominate election outcomes, we should take the ballot box away from 90% of the current electorate.

secondly, i sympathize with your view of the bush admin trying its hardest to do nothing that looks like a banker's bailout with the GSEs before november. but consider:

i read the citi report. it is almost entirely about the asset side and losses on assets, and i cannot disagree with what was presented.

but it said virtually nothing about the most important part -- which is the liability side. the GSEs, like many banks, are faced with a rapidly-developing funding crisis, not just a slowly-developing loss crisis. the reason GSE instrument spreads are way over trend is that foreign central banks and their agents are no longer buying agency-backed MBS, and have backed off even the debt of the agencies themselves which support their retained portfolios.

http://blogs.cfr.org/setser/2008/08/22/faltering-central-bank-demand-for-agencies/

if this change is durable it will force one of two things:

1) a continuation, even acceleration of FNM/FRE's steep dropoff in MBS issuance, compounding american mortgage liquidity and house price declines; or

2) a treasury intervention to turn GSE promises into treasury promises and maintain, perhaps even improve mortgage liquidity with taxpayer backing.

maybe treasury will intervene surreptitiously until november. but with the GSEs facing a $220bn funding roll before september 30, with the probability of having to pay punitive rates for liquidity, political will may be forced to react explicitly to an underappreciated exigency. thoughts?

RB

Change is coming.

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