President Bush, seeming very much the clown-in-chief, led the
way last week by proposing a mortgage crisis bail-out that would appear
to have no chance whatsoever of working as advertised. He called it,
arrestingly, the New Hope Alliance. It blithely assumed that those
"servicing" mortgages -- that is, collecting the monthly payments --
have the ability to suspend scheduled upward re-sets of adjustable
mortgages for five years for certain select homeowner payees -- so that
theoretically said homeowners could avoid foreclosure.
What might have worked in 1934, when the originators of
mortgages were local banks that also "serviced" them (i.e. collected
the monthly payments) is unlikely to avail today since the mortgages
have been sold off in bunches to pension funds, hedge funds, money
markets, and foreign investment funds -- none of which have an interest
or the ability to renegotiate loans with millions of schlemiels from
Cleveland to Denver to Fresno -- while the companies "servicing" these
contacts are mere errand boys, with no say over the terms of anything
they collect on.
So, what if these loans are not "restructured," that is,
renegotiated on new terms by both parties on what is, after all, a
contract? What if the government just "declares" that the current
terms are void? Since the mortgage contracts have been bundled into
bonds and sold off, it means that the value of the bonds is no longer
what they were sold to represent. So, while a command to suspend
mortgage re-sets might give comfort to schlemiels who used bad judgment
in signing mortgage contracts for houses they couldn't afford, it will
further impair the value of the bonds dispersed throughout the
investment markets and increase disarray in the basic system of
creating future credit. That is, if it worked as advertised.
But how can it work? The president said that this relief action
would apply only to those who were current in their payments or no more
than 60 days behind. Is it possible that a federal bureaucracy that
could not even helicopter bottled water to desperate people trapped in
plain sight on highway overpasses in New Orleans in 2005 can process
millions of sheaves of relief applications in 60 days? Or even concoct
the forms and print them?
Even if the paperwork could be designed, printed, and
distributed overnight, in reality, the applications would collect in
the in-boxes for decades. Meanwhile there would be no way to
meaningfully establish time-based qualifications for relief. The absurd
process would quickly only cast more doubt on the market value of the
bonds sitting "out there" while it would create a monumental
disincentive for any financial enterprise to lend money for future
mortgages (or perhaps anything else). So the New Hope Alliance would
have the dual effect of killing the housing "industry" and the credit
markets. It could easily have a third and not inconsiderable effect of
destroying the credibility of the currency of the nation engaging in
such obviously foolish political theatrics. And if the dollar goes, the
entire global system of currencies could enter a state of dangerous
instability.
These are some of the hazards of suspending law as applied to
financial markets, which can only function on the basis of contract
law. Once contract law goes out the window, so does the faith of
parties with reserve capital in lending out capital at interest. If the
interest rate can be changed arbitrarily or capriciously by third
parties, then those with capital would be better off buying gold or
impressionist paintings or Manhattan apartments or private armies for
protecting their Hampton estates, than lending money at interest
established by contract.
Anyway, this argument is academic because the New Hope Alliance
is just a political sham. The purpose of it is not to save the hapless
occupants of over-leveraged houses, but first to buy a little more time
so that the worker bees in the financial industry can justify awarding
each other multi-million-dollar Christmas bonus packages, and second,
to postpone the "workout" of all this bad investment as far into the
future as possible.
I have been wrong in the past about timing things, but I don't
see any way on God's green earth that such a workout of mis-investment
can be put off until somebody else is sworn in to lead the government
in January 2009. The capital allocation system is already listing and
groaning like a leaky ship in a hurricane.
Maybe all the players really know that keeping the ship afloat
until Christmas is really the best they can hope for. Christmas means a
lot in this country. It represents all Americans' old hope that
miracles can happen. Bums turn out to be Santa Claus. Old curmudgeons
are transformed overnight into loving uncles. Angels save us when we
jump despairingly into icy torrents. And Goldman Sachs executives pass
out multi-million-dollar checks to the wizards who "innovated" an
ingenious way for the rest of their country to commit financial suicide.
LINK & COMMENTS: Clusterfuck Nation