http://www.rttnews.com/Content/TopStories.aspx?Node=B1&Id=1755833
Ben Bernanke is reliving the 1930s trying to replay the Great Depression and winning – when the world is not living in the 1930s.
The reason that Fannie Mae is losing so much money now isn’t so much the losses on defaulted mortgages, as it was due to the Federal Reserve.
In normal times, the basic business model of Fannie Mae was it would borrow money by selling long term bonds and using that money to buy up pools of mortgages. So long as they’re paying less for the money they borrow than what they charge on the home mortgages, it’s a slam dunk to make a profit.
Unless interest rates drop a lot – for a long time.
When interest rates drop, most people will want to refinance their mortgages. When that happens, Fannie Mae gets paid back early, but is still holding the 20 year debt for the money it borrowed. It can’t just “pay off” the bonds early. If interest rates went down, then the value of those bonds will have gone up and they’ll take a big loss to buy them back in the secondary market. The alternative is to relend the money for new mortgages, but at a lower interest rate – lower than what they’re paying on the outstanding bonds locking them into to a slower guaranteed loss. FNMA (and GNMA) build assumptions into their risk models about what % of mortgages will prepay – and then use derivatives like interest rate swaps to protect themselves from the unexpected.
Interest rates near zero % is a really bad strategy. It’s clear that it isn’t going to get business to start building new factories and hiring people. All it is doing is ripping the heart out of the existing mechanisms that bind the U.S. eocnomy together and draining money away from the savers and giving it to the takers and the government employees paid by borrowed money.
When the policy is reversed, it will be “Katy bar the door” on the whiplash as the spring unwinds and people who bet that interest rates would stay low forever get clobbered.
Well said. In spite of all the incompetent “hacks” who have run various offices at FNMA and GNMA, there remains cold logic behind the lending. If only we could remove the Barney Franks and the Chris Dodds, then we could home in on the “Bernanke Effect”.
Inflation may not cover the observed effects following this administration – IF America survives – and that’s a big IF.
Is there such a thing as the Nero Effect?
I heard a rumor that Rome may be on fire.
> ” Barney Franks and the Chris Dodds, effect”
BINGO ! What Briand75 says ! Ol barney is probably on a boat anchored in a harbor in St. Kitts with Charle wrangle sipping apple-tini’s and having slave boys spray him down with sun tan oil, (or Mobile1) . Who is voting for this fool ?
Art is right : while Rome and Cincinnati burn baby!