We have a dilemma for the Fed. On the one hand, the central bank wants to give main street a break, in order to keep the financial system from imploding.
You see, those main street buggers just keep walking away from their mortgages. It is creating all sorts of problems for the financial system, and apparently it is a lot bigger problem than first realised.
You can tell it is a pretty big problem when Jim Cramer is calling for a bottom in the housing market. That has been, in the past, a sure reason to think there is a long way to go in the decline of the housing market. The last time Cramer called for a bottom in the housing market, circa mid 2009, all hell broke loose.
So now we have the Fed, being desperate for banks to accept principal write downs, so that they can save themselves, needing to get the banks to fess up for their roll in the housing bubble. And this Fed cannot just continue to say it was everyone’s fault, if it wants sympathy for borrowers, because the Fed knows it was not everyone’s fault. The Fed knows it was the fault of Basel 2 and the banks and the fault of deregulation and the fault of risk management.
And the Fed knows that low interest rates and hot money came in to replace the little CRA subprime mini bubble around mid 2003.
Those risk management frauds had nothing to do with the borrowers, the victims. But as long as the Fed hides the truth, the Republicans will never help them achieve their goal of saving the sinking ship of world finance. Isn’t that a hoot?
If it weren’t for the credit default swaps that are held over our heads, we are in a sweet spot of slowly declining house prices. That is not bad in and of itself. And with wages declining it could continue that way. However, we do have credit default swaps, and we are not winding down unstable banks. We should be winding down banks slowly, one at a time. By not doing that we risk greater unruly defaults. and that could be bad. It could be really bad.
So, the Fed is going to have to come clean and take the blame for the housing scheme, and for the bubble and for the artificial rise in prices due to the incorrect pricing of risk. The Fed needs to state up front that Basel 2 accepted maths that was bogus as to risk and that the central banks knew was bogus as to risk.
At that point, people could start to see that the borrowers were indeed victims. The Fed cannot have it both ways. It cannot continually deflect blame of itself and off the banks, and expect dumb Republicans to think differently and figure out that the Fed is the ponzi scammer here! The Republicans have a vested interest in blaming the borrowers, and perpetuating the myth of the superior intellect.
(If the Republicans are so smart, why are their presidential candidates so stupid?)
It has been said that folks should be careful about the webs they weave. The Fed has woven one hell of a web, and now cries wolf and the Republicans say forget you!
Why are the Republicans not afraid of a further implosion of the housing market? Well, that is pretty simple. They believe that war and a new housing bubble will be the answer. If they can just get in they can attract new hot money to the real estate market. As it is, hot money is set to leave our nations banks by the bucketful in 2012. But insurance will likely be extended to keep the hot money around.
How long that money stays has to do with how fast someone can blow another bubble. Short term profits are the goal of hot money. Then it leaves the host in tatters. Hot money feeds off the host and then leaves like a parasite or a fungus. Republicans are banking on hot money working magic in the housing market. And that is why they desperately want the repeal of Volcker.
So, the truth of the matter is that the Fed is seeking a fairly humanitarian solution to the housing crisis, while the Republicans want a predatory solution. But no one will believe the Fed until it comes clean about it’s role in the last housing bubble.
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