The Market Ticker

The Senate has passed the housing bill.

Absent a sudden fit of sanity, George W. Bush will sign it, as he has said he will.

This, despite the fact that 80% of America (according to a couple of polls) oppose it.

Let's deal with some of the stupidity coming from Congress on this:

"Sen. Carl Levin, D-Mich., said the legislation will "help keep struggling families in their homes" and help keep "declining property values stable." "

Really Carl?  Considering that I can buy ten houses in Detroit for $10,000, assuming I have cash, exactly how is this bill going to "stabilize" things?  You can't go below zero, you know, and you're already there in Michigan.

There are good things in this bill, never mind that I can guarantee you that not one Senator who voted on it this morning read the whole thing.  It is over 700 pages, and the "final version" was just released to them Friday.

Even more stunning, neither of the Presidential Candidates cast a vote. 

This is called "Triangulation"; if it all goes to hell you can say you didn't vote for it, and if it doesn't, you can say you were too busy on your campaign to vote for something you knew would pass anyway.

Nice, right?  No way to lose.

Among the "good things" in this bill are the ending of Down Payment "Assistance" from sellers via non-profits, which had all of those organizations screaming last week.  This has been one gigantic scam from the get-go, serving to do only one thing - pump home prices by the amount of the "assistance", typically 3%.  While 3% sounds like "just a little" it is still price inflation foisted off on the market, and has served to pump hundreds of millions of dollars into people's pockets that shouldn't have gone there.  These organizations are all officially out of business, as their funding source just got cut off.

The FHA down payment requirement going to 3.5% is good, but not enough.  10% guys, 10%.  Even 5%.  But 3.5%, up from 3%, is at least a move in the right direction.

Abolishing OFHEO, which this bill does, replacing it with a stronger regulator for Fannie and Freddie, is good.  OFHEO has been worse than useless over the last eight years; it has done much harm by allowing the leverage in the GSEs to grow radically.  However, the "teeth" part is unlikely to be real, so we'll see if there's actually anything "good" there.

The "foreclosure abatement" via write-downs to 90% of the current property value likely does nothing at all.  It is voluntary (which it must be) but will force instantaneous and monstrous capital losses to be taken by the banks and others that hold the first mortgage paper that will be paid down on these FHA refinances, and the lenders are likely to say "no", at least for a while.  In addition it basically makes the seconds worth zero - not exactly zero, but close enough.  Since the banks have all been lying about the value of this paper, this is going to be a major problem for them - if they participate then they have to take the loss (since the note will be closed out there is no longer a place to hide it) and that's not going to go over well.  Furthermore it only can be used by people in their primary residence (good), requires that your housing debt service be greater than 40% of your income (good; high net worth and high income people who in fact are ok can't abuse it) and there are some other provisions intended to prevent abuse.  But on net, the real problem with this part of the bill is that it will serve to drain the swamp if lenders go along with it, and they won't, Dodd and Frank's protests aside.

There is a provision in the bill to require licensing (and fingerprinting) of mortgage brokers.  Good, says I.  Why?  Because there are plenty of felons (who are prohibited from being in this line of work) who have been doing this job anyway.  The only way to prevent people from skipping from state to state to evade detection is hard identification of those in the business.  I know there's a privacy concern here, but we fingerprint people who want a CCW permit to insure they're not a "prohibited person", why not here?  Financial weapons are just as bad as physical ones.  Never mind that areas of the securities industry already require these sorts of background checks.  Mortgage lending IS part of the securities industry. To those in the business: get over it; you brought this on yourselves by refusing to police your own.  The only omission?  They forgot to include Realtors (and should have.)

There is a very controversial provision requiring that payment processors (think "PayPal") be required to issue 1099s to anyone who does more than $10,000 worth of business with them in a year.  This generated many howls of protest over, once again, "privacy concerns."  Uh, how come?  If you have a bank account that pays interest, you get a 1099.  I get a bunch of them every year for tiny amounts of interest.  So what?  Why is this in there?  Its an attempt to stop the gross underreporting of income by various Internet Entrepreneurs, many of them "Powersellers" on eBAY, who have systematically run cash businesses and reported NOTHING in income and paid NO taxes.  You think this isn't common?  Yeah, right.  I don't think this belongs in the Housing Bill but catching people who are outright tax cheats is, in my opinion, good.  Then again I'm one of those guys who filed a book for my 1040 in April (since I trade actively) and wrote a big fat check to the Treasury, so there you have it.

But let's talk about the bad things, shall we?

The mother and father of them all, and really, the reason to stop this bill, is an $800 billion debt ceiling increase and a literal "blank check" up to that amount handed to Secretary Paulson to spend as he wishes on the GSEs, Fannie and Freddie.

Secretary Paulson claims that if he has "a bazooka in his pocket" that he won't have to draw it.  Uh huh.  Come again Hank? 

If you show up to a fight with your bare fists, the other guy is likely to actually fight you.  If you draw a knife, he'll stand back 30' and shoot you with a gun.  And if you have a Bazooka, he'll cold-cock you from behind because he knows if you get to draw it you'll blow him to Hell.

This, in fact, is the dumbest thing that Congress could have done.

So why did they?

I'll hazard a guess, and let me point out that this is all that it is.

"Someone", perhaps Bill Gross of PIMCO or some "foreign interests", told Paulson (or Bush, or both) that if they didn't backstop their "investment" in this GSE paper that they'd dump their Treasury holdings, and screw the bond market.

But can Paulson actually backstop the GSEs?

No.

And here's why.

See, the government can never really "fix" the economy.  Government, of course, gets all its money from the economy.  Therefore, whenever the government does something like this it can only rearrange where the money comes from and goes to - it can't actually add to the outcome.

Let's say there is $100 in value in the economy, for the sake of argument.  Government can "decide" who gets $75 of that $100, but what it can't do is make the $100 grow to $200, because the entirety of its money comes from the $100.

Some will say "but they'll just print more money!" to which I reply, "that's nice; you now have $200 but the value of each of those dollars has been cut in half!"

So in reality, Government can't backstop the GSEs, because government can't make bad paper good, nor can it create more value.  It can rearrange who gets screwed, but not whether the screwing is going to happen in the first place.

There is a mass delusion foisted off on The American People that The Fed, or Government generally, can prevent recessions. 

This is false; The Government, again, gets all of its money from the economy.  Since it has no exogenous (outside) means of acquiring wealth to spend, it cannot change the actual outcome.

What it can (and does) do is distort the outcome.  For instance, Government can (and did) stop the decline in the market after the 9/11 attacks, preventing the full realization of the .COM bubble explosion from occurring.  But in doing so it blew an even bigger bubble in real estate, and now, we're out of places you can find a bigger bubble to blow!

Since Government is (like all things) inefficient, to "rescue" one popped bubble you need to be able to blow a bigger one. 

There are no bigger ones available to blow.

Government, folks, causes Depressions.  It does so by gimmicking what are ordinary slowdowns in the economy and turning them into catastrophes.  The really bad ones tend to happen once all the people who went through the last one are dead, because those who were adults and went through the last one remember how badly it sucked, and they won't let it happen again.

We've enjoyed 80 years of relative prosperity.  We took bad choices in the 1970s, and paid with a nasty recession and stagflation into the early 80s.  We too bad choices in the 1990s, and paid with the 2000 tech market collapse.  We took bad choices from 2003-2007, and now are starting to pay for them in 2008.

This is not over, and this bill will not "fix it".  It will in fact make it much worse, because once the market realizes that despite spending $1.3 trillion dollars (the total blown thus far) that has not managed to stop the bleeding the bond and equity markets will suddenly "get it."

Don't be long equities when it happens.

Do not be in debt, period.

Do not have more than $100,000 in any bank.  ANY bank.

Pray for our nation, if you're the praying sort.....