Despite a continuing decline in the 10-year T-note to the 4.2s, mortgage rates are stuck near 6.25 percent. That extraordinary spread is due in part to the poisonous status of mortgages; the rest is an aspect of leadership failure in this credit crisis.
In times of plague, wagons and carts each day clattered through cities and towns, the draymen calling, “Bring out your dead!” So it is on Wall Street today. You would think by now that surprise would have faded at the number and identity of new shrouds, contagion perfectly obvious. But, no, the secretive and blame-shifting culture of Wall Street is intact, markets as shocked each new day as the last.
Markets weakened by oil and dollar worries were hit with a new wave of credit news on Wednesday: Capital One (the credit card giant), IndyMac and other banks indicated deepening trouble; and credit insurers MBIA and Ambac continued their nosedive, exposing $1 trillion worth of insured bonds. All a complete surprise, of course.
That same day, New York Attorney General Andrew Cuomo announced appraisal fraud action against Fannie, Freddie and WaMu, adding their stocks to the heap on the way down. Young Cuomo was an embarrassing failure at HUD, is qualified for public office only by ego and his father’s good name, and in this grandstanding never contacted OFHEO, the regulator of his pretend perps. Civilians don’t know these things, so the news flash helped to push stocks below crucial support levels. Going lower.
Thursday … stocks stabilized, but a Cisco forecast changed the overall economic view. A collapse in sales to automotive and financial buyers says yes, there is linkage from housing and credit to the real economy, and hazard to the gold standard of the optimists: technology.
The worst of the week was Federal Reserve Chairman Ben Bernanke’s anti-inspirational appearance before Congress. Every Fed chairman has to deliver tough news form time to time, and it’s not a surprise that the Fed is cornered. His insistence that growth and inflation risks are “balanced” is earning widespread derision in the markets, but it should not: these risks are balanced, equally awful, the worst since the ’70s. The only way to deal with $100 oil is to destroy some demand, here and elsewhere, and that’s what the Fed must do.
The confidence-damaging aspects of the testimony was the man’s demeanor, and the void of ideas. He sat in half-smile (not Dubya’s smirk, but too close) until a very annoyed congressman from Baltimore broke from describing foreclosure pain in his district to snap at Bernanke, “You seem very calm about all this.” Throughout, the chairman seemed no more engaged than a man taking notes for a future book.
His blinking surprise at each new development is destructive. “Plague? Really? More bodies? Again? How odd.” The Fed’s phone log early in the August crunch shows a conversation between Robert Rubin and Bernanke. Rubin, greatly admired as Treasury Secretary and Goldman’s best-ever currency trader, has recently been hauling down a $17 million salary at Citi as resident nobility without portfolio. Now, three months later, neither Citi nor the Fed appears to have any idea the extent of Citi’s credit exposure, let alone systemic exposure, nor any sense of urgency to find out. No Fed since the 1930s has been as far behind the insight/information curve as this one.
The absence of invention is just as deadly. It’s OK to be cautious about rate cuts, but it’s not OK to just … sit. We need, immediately, a restoration of new credit, starting with mortgages. Bernanke floated a good idea about Fannie and jumbos … without conviction or urgency, gone on the afternoon breeze.
Right now, today, drop the Agency sand-box fight about mission and privatizing, and say something useful: “No one should doubt the credit of Fannie Mae or Freddie Mac.” Toxicity removed, mortgage rates would fall into the fives in an instant. The best quarantine for housing: refi bad loans to good, cheap, high-quality, low-risk, long-term, fixed-rate. If that means dropping a fixation with market solutions in favor of government guarantee, well, that’s where Fannie came in, in 1938. Late, that time.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.