Today’s Look at the Mess
Our friend Afferent Input has some frightening graphs up… here is one of them:
(I couldn’t find the data he used on the FDIC website to which he links, but AI has always been reliable so far so this should be accurate.)
And here’s a scary quote from the Irvine Housing blog:
We generally profile 4 or 5 properties a week, and lately the average loss has been $200,000 to $250,000. We are documenting $1,000,000 a week in lender losses. It it any wonder the banks are in trouble?
Menzie Chinn wraps it all up:
First methinks the Administration protests too much, about “not bailing out” investors. If it were indeed the case that it was against further contingent liabilities being taken on by the Federal government, it would not have allowed the increase in the maximum size of conforming loans guaranteed by the Government Sponsored Enterprises, Fannie Mae and Freddie Mac. Nor would capital requirements have been reduced at exactly the time that a higher capital cushion would be in order, given the state of the economy. In addition, it would have taken some sort of action to limit the borrowing taking place through the Federal Home Loan Banks
So to me, it seems that the Administration is engaged upon a delaying action, and hoping to unload this problem upon the next Administration (an understandable, albeit less than fully public-minded, impulse). Meanwhile, it maintains the best “optics” in terms of making it look like it’s not taking on risks to government funds in order to help out financial firms. In so doing, it’s allowing an even bigger build-up of contingent liabilities, surreptitiously. But by virtue of being less transparent, it threatens to present a bigger, and more unpleasant, surprise for future policymakers (of either party).
Second, whatever the reasons for the Administration’s actions, I think a very serious problem is that, by virtue of the Administration’s abdication of a substantive role (see Hubbard’s comment on this point), the Fed is lending to entitites it does not regulate. The Bear Stearns collapse might have been seen as a case where the Fed had to undertake unconventional actions, because of the rapidity of developments. But with the Administration providing an uncompromising stance, who will step in the next episode? If it’s the Fed again, then Blinder’s critique will take on heightened relevance.