|
With the collapse in the price
of sub-prime mortgage backed securities and credit derivatives, the credit
boom has moved into the crisis phase. This is the place in the cycle where it
becomes clear to the market the investments made possible by unfunded credit
were mal-investments and they are re-priced.
The initial response of the Fed
and mainstream media was that the sub-prime crisis was small and
would remain "contained" without spill-over into the rest of the
financial system. An Austrian would have a reason to doubt this because
the mortgage debt markets are so large, and because credit is so central to
all economic calculation. It would be difficult to have a credit expansion in
the mortgage markets that did not affect other credit markets, and economic
calculation generally, which must always balance the value of present versus
future goods.
Now as the crisis begins to
affect banks, hedge funds, and equity markets, how will the political system
respond? By allowing the corrective process to wring out the bad investments
and return to a base for sustainable growth? Or by more inflation in an
attempt to sustain current asset prices? The latter, it seems.
The
"government-sponsored" enterprises Fannie Mae and Freddie Mac were
instrumental in creating the mortgage bubble in the first place, as Doug
Noland explains in his weekly
commentary. But as they were found several years ago to have engaged in
questionable accounting practices and fraud, they have been increasingly
reigned in by regulators and forced to stop adding to their portfolios of
securities.
The Financial Times reports in Democrats Call for
Action on Mortgage Crisis that powerful senators are calling for
limitations on the GSEs be relaxed so that they may purchase a greater
quantity of mortgage-backed securities from the banks and hedge funds that
must sell them to meet margin calls. initial
reports indicate that the GSEs will not be unleashed at this time.
Their status as
"Government-Sponsored" means in effect that any profits they make
accrue to their share holders (including their executives, who are
well-compensated with stock), while losses are implicitly underwritten by the
Fed's unlimited ability to print money. They are in effect a minor branch of
the Fed.
The financial media has reported
over the past week of central banks "injecting" money into the
system to prevent liquidation of securities.
·
Financial
Times: ECB
in €95 Billion Move on Market Turmoil
·
Reuters:
Asian
Central Banks Join Bid
to Calm Money Markets
·
Financial
Times: Central
bank's aggressive move stuns European markets
·
Bloomberg:
Bank
of Japan Boosts Funds in System to Ease Credit
·
Financial
TimesCentral
Banks Extend Liquidity Provisions
Central banks face the choice of
whether to allow the crisis to unfold, which would risk taking down major
financial institutions, hedge funds, and millions of over-leveraged US home owners, as well as affecting the status of the dollar in unpredictable ways. Or
will they try, as I have argued in several articles (The Fed's Box Canyon,
Bernankeism, End Game:
Hyperinflation) to monetize their way out of it? This week's actions
suggest that the latter will be chosen.
·
Digg
it
·
Del.icio.us
·
Newsvine
·
Reddit
·
Furl
·
StumbleUpon
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
| 
