Another day, another bailout proposal for banks and homeowners. Today it's economist Martin Feldstein's turn. His plan, as delineated in the Wall Street Journal, would have the federal government lend homeowners money at a low rate, allowing them to reduce their mortgage by cutting interest and principal payments by 20 percent. Whether it is this plan or some other, look for Uncle Sam to step in big time.
This bit of news should be of no surprise to regular Capital Commerce readers—or those who watched me make just this prediction the other day on CNBC's The Call. Say it proud, Reuters: "As the U.S. government edges toward a more forceful response to the housing market crisis, a senior Democrat on Wednesday said a bill being created may call for federal purchases of distressed mortgages. House of Representatives Financial Services Committee Chairman Barney Frank said the bill from House Democrats may be unveiled next week to tackle what he called the worst housing slump since the Great Depression of the 1930s."
Pressure is building on the White House to come up with a more aggressive plan for relieving the mortgage crisis. Americans are increasingly concerned that the housing troubles might undermine the overall economy. And Federal Reserve Chairman Ben Bernanke told a bankers group last week that "efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can—and should—be done." President Bush is concerned about rising delinquency and default rates, aides say, but he isn't ready to propose another big legislative package quite yet. First, he wants to assess the impact of the economic stimulus plan that he signed into law earlier this year.
So not only has Bush not ruled out a big homeowner bailout, but members of Congress are cooking up their own ideas, like giving a $15,000 tax rebate to anyone who buys a house. (Efharisto to Calculated Risk.)
Of course, the irony of today's Federal Reserve bailout of investment bank Bear Stearns is that the firm has a reputation as being among the most free-market loving on Wall Street—and that's saying something about a company located smack in the middle in America's financial capital. But just as there are no atheists in foxholes, there are no libertarians during financial crises, at least not if it's their dough at stake. And while there are plenty of economists out there who are advocating a hands-off approach to the credit crisis and housing implosion—echoing Andrew Mellon's infamous advocacy of "liquidate...liquidate...liquidate"—they will be disappointed. Uncle Sam will probably continue to intervene during this financial turmoil. And not just the Fed. More and more, it looks as though Congress, followed by a reluctant White House, will move ever more boldly to stop the hemorrhaging in housing and unfreeze the credit markets. Richard Bove, banking analyst at Punk Ziegel, says in a note this morning that it's "more certain than ever" that there will be a housing bailout to stop the increasing rate of foreclosures and the continuing drop in home prices. And political analyst Alec Phillips of Goldman Sachs says that he sees "a high likelihood that some type of housing measure is enacted this year." Most of the legislative energy seems to be swirling around a plan put forward by Democratic Rep. Barney Frank. The plan, as outlined by Bove:
In other housing news, the Wall Street Journal (subscription required) also says commercial real estate won't tank as much as the residential housing market. Basically, the industry is getting hurt by credit woes (explored in my Q&A today with ProLogis CEO Jeff Schwartz), but the sort of rampant overbuilding that equals deserted subdivisions is generally in check on the commercial side.
Every year since 1965, Gallup has asked Americans whether they view big government, big labor, or big business as posing the biggest threat to the country. And each time, big government has been the easy winner by a large margin. Yet it looks more and more as if it's big government to the rescue as the housing market continues to implode and credit markets stay frozen. And I am going to try to keep up with the twists and turns. As my guy Ed Yardeni notes this morning in a note to clients: The greatest credit bubble of all times has burst. The consequences are getting exacerbated by the greatest margin call in the credit markets of all times. The Fed and other government agencies really don't have much choice but to provide the greatest bailout of all times. Will it work? It hasn't so far. But there are still 300bps left between the federal funds rate and zero.... For the year to have a happy ending, instead of a disastrous one, here are the major developments that would mostly likely have to happen, even though they might not seem most likely right now: The Fed would continue to pump lots of liquidity into the commercial banking system and lower the federal funds rate to 2% at the March 18 meeting of the FOMC, or sooner. If that doesn't stabilize the credit crisis, then a 1% federal funds rate by mid-year should follow.... Lowering the federal funds rate to 2% or less should freeze all mortgage resets. Obviously, home prices would have to stop falling by this summer.
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