Posts Tagged ‘Mortgage Securities’

Fed Feeds Distortion

by Thomas E. Brewton on Thursday, January 26th, 2012

This is article 28 of 56 in the topic Federal Reserve

Bernanke’s press conference announcement again booted the stock and bond markets, but did nothing to boost employment.

At his January 25, 2012, press conference, Federal Reserve Bank chairman Ben Bernanke stated that he expects the Fed to continue imposing near-zero interest rates well into 2014 on short-term Treasury securities. In response, the stock market surged, despite expectations of generally lower corporate earnings and reduced consumer spending. Loose credit and low interest rates usually facilitate stock market speculation.

However gratifying this may to individual investors and pension fund managers, it does little if anything to restore production of goods and services or to raise employment. It also continues to penalize increased savings, which alone provides a stable, long-term platform for economic growth. People living on fixed incomes have had their rates of income on saving chopped around 75% since the Fed first cut interest rates.

As Austrian school economists long have observed, central bank manipulation of interest rates and government deficit spending has an uneven impact on sectors of the economy. When unemployment is high and people are yet freighted with excessive personal debt, consumer spending will be among the last sectors to increase. Instead, deficit spending and loose money lead businessmen to over-invest in long term capital goods, because low interest cost for borrowed money makes even marginal investment projects appear profitable. When business finally revives and costs, including interest rates, increase, those marginal projects collapse and push the economy into recession.

Such was the genesis and progress of the housing bubble and subprime mortgage securities.

Contrary to the aggregate computer models of Keynesian economics, the economy as a whole never has been controllable via government stimulus spending. In fact, as reported recently, the 31% increase in business long-term investment over recent months has been largely concentrated in labor-saving equipment, which ironically adds to unemployment or postpones new hiring.

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If the government forces risky loans, can the government then claim that they didn’t know the loans were risky?

by John Lott on Friday, September 2nd, 2011

So what about the government forcing banks to make these risky loans? How can the government claim ignorance that these loans were risky? Can these banks now sue the government?

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation. A foreclosed home in Arizona. The Federal Housing Finance Agency suits are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others. The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter. The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims. The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value. Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers. . . .

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Can the government be trusted to regulate companies properly?

by John Lott on Thursday, August 18th, 2011

It constantly seems as if the government can not separate politics from what it does. Now the government is going after S&P at least in part because it downgraded the US credit rating. The government is also going after S&P for not foreseeing a financial crisis that the government itself didn’t foresee. The bottom line is this: if S&P doesn’t rate bonds and other assets properly, people won’t pay them very much for their ratings. The market punishes S&P for the mistakes that it makes. Apparently, politicians are telling the New York Times that they are letting S&P’s downgrade of the US impact their judgments on punishing the company. That is not good. Does anyone think that will make S&P’s evaluations of the US better in the future?

The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.

The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations. . . .

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