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In the Q-and-A after his
testimony to congress, CNBC reports that Bernanke suggested raising the
conforming loan limit to $1
million.
The conforming limit is the
maximum size of individual mortgage that can be pooled into a mortgage-backed
security to be eligible for purchase by one of the housing
GSEs (Fannie and Freddie). The GSEs were originally chartered to create a
more liquid secondary market in mortgages for lower-to-middle-income home
buyers. See Econbrowser
on how the GSEs work. See also, The
Economist on the unfolding crisis.
As the CNBC reporter points out,
we haven't yet had quite enough inflation for a million-dollars to be in the
price range of lower to middle class buyers (though I have read stories about
people with very little income being given mortgages of almost this amount
during the peak of the lending bubble).
As happens predictably in a
government-generated crisis, original intentions are ignored and
organizations are used for whatever purpose appears to provide a solution to
the crisis at the time, setting up another crisis when the unseen future
consequences of the first "solution" start to come into play.
If this were to happen, this and
the super-SIV
conform to my general belief that we are headed toward a
hyperinflationary collapse of the dollar.
The transmission mechanism for
this crisis will be the monetization of assets by the central bank. As
financial institutions threaten to become insolvent when their
mal-investments are marked to market (which may well be zero for many of
them), the central bank faces a serious dilemma: let the institutions fail,
which would surely lead to a cascading debt-defaulting-deflationary domino
chain as debt defaults shrink the balance sheets of banks -- and therefore
the quantity of money -- putting further pressure on asset markets; or,
implement a stopgap solution of monetizing the assets. The central bank
instead would purchase the assets, writing a check out of nothing to fund
them.
This solution has the virtue of
preventing the imminent deflationary meltdown, but does nothing to change the
fact that, retroactively the underlying investments were not economically
rational and are not worth the sale price that would required to keep the
institution solvent. Eventually with enough money created, the nominal prices
of the assets will match their market values, but at a much lower level for
the purchasing power of each monetary unit.
Raising the conforming limit
enables the GSEs to accumulate more of the otherwise worthless paper assets
containing ever larger defaulted mortgages. The larger the GSEs become, the
more credible becomes the inevitable realization that they are "too big
to fail". Since these institutions are already quasi-underwritten by the
Fed, the proposal for a government bailout will be more obvious than a direct
bailout of the large Wall Street banks.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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