Quantitative Queasing

Helicopter Big Ben is coming to the rescue.  He’s convinced he’s Harrison Ford in Jackson Hole which is quite ironic seeing as that the Fed takes an annual retreat to the idealic ski town.  With the American economy failing to register strong growth out of the “great recession” the Big Ben feels the need to act.  The motto of American economic life has devolved to “if at first you don’t succeed, try, try again.”  Seven hundred billion of stimulus doesn’t work.  Don’t worry Paul Krugman will tell you how it wasn’t big enough.  One point four billion dollars of Fed balance sheet expansion fails to drop interest rates low enough to stimulate lending - lets try Quantitative Easing II with another $500BB of bond purchases! 

Quantitative Easing II is like a bad chase scene from a Don Johnston TV show - eventually the bad guy runs into the alley with no outlet and there’s no where else to go.  The Fed’s balance sheet has grown by about ~$1.4TT over the past two and a half years and will grow by another ~$500BB in the next few months for a total of ~$1.9TT in a three year period.  Over the same period of time US deficit spending will amount to ~$3TT.  The means the Fed has funded 64% of the US budget deficit - by printing money.  The U.S. Government is on crack and the Fed is it’s ever willing dealer.  Don't we have laws about dealing dangerous drugs in this country?

We’re unlucky enough to have two Big Ben’s in American Public life.  The athlete just spent four games on the bench for questionable behavior.  Compared to Helicopter Big Ben’s behavior football Big Ben got busted for going 36 in a 35 mph zone.  Helicopter Big Ben has a blood alcohol content of .21 going 100 mph down a pedestrian only alley - everyone is bound to get hurt and there will be more than a few casualties.  

Bill Gross has called the Fed’s action a “Sammy Scheme” (Uncle Sam and ponzi scheme - get it?) to take Americans’ hard earned savings and debase them to fund a social policy that is simply unsustainable.  We’ve been kicking the unsustainable budget can down the road for the past ten years, but at least the people doing the kicking were elected officials.  If the results of today’s election are any indication the populace has wised up and realized the folly of their ways.  Unfortunately Ron Paul’s Audit the Fed bill died a slow death in the Senate.  Helicopter Big Ben doesn’t have a Roger Goodell to hold him to account.  There are no laws in Fed Land.  The high crimes and misdemeanors committed will result in Helicopter Big Ben reeling in $100,000 speaking fees for years to come.  Unfortunately those $100,000 won’t be worth nearly what they were before he took the monetary reins.

A Modest (Modification) Proposal

As the housing crisis enters into its fifth year we’ve heard far more smoke about mortgage modifications that actual burning a portion of principal balances.  Politicians of all but the most liberal stripe have been hesitant to attack the issue, seeing modifications as a win to the reckless borrower and a loss for the hapless investor.  What if we constructed a scenario whereby mortgages were brought down while still providing a chance for the investor to recoup some of his losses?  Could such a program provide positive incentives for both borrower and lender behavior?  

I propose a simple solution.  Write down the mortgage to 100% of today’s assed value then allow lenders to recapture some percentage of the appreciation when the house is sold.  While this may seem like a daunting task, sites like Zillow have mounds of data the banks could use to quickly implement such a program.  Allow the lender to make an offer and the borrower to accept the proposed value.  Homeowners who want and have the ability to stay in their house see their home emerge from the water.  

Such a program creates a win-win proposition.  The homeowner is building equity - both by the application of his payments to principal and his share of the property’s appreciation.  The lender gets performing assets with write downs no greater and potentially much less than foreclosing with the potential for appreciation in the years to come.  Furthermore, make the program a model of government done right by providing strong incentives rather than forcing action by government fiat.

Large bold steps are the only ones that will arrest a crisis so large.  Interim measures are too small and lack incentives for the banks and servicers to pursue modifications over robo-foreclosures and other nefarious schemes.  Let’s take action that can reduce the uncertainty currently surrounding the mortgage morass.