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Major Policy Shift -- or Politics as Usual?

Over the past few weeks, market's have been rather volatile, swinging wildly between triple digit gains and losses, closing at the highs and lows of the day. The sub-prime debacle, the credit crunch, the liquidity situation -- all turn out to be pressuring markets. The ongoing fear is that there are more bodies that will be floating up to the surface, and this will eventually crimp the economy.

This entire week has been a grand lead up to Federal Reserve Chairmen Ben Bernanke's major address on Housing woes at 10:00am.

Then, something rather intriguing occurred. Sometime last night, the White House announced that the President will deliver a speech -- at 11:00 am today.

I found that rather curious.

The WSJ reported that the key provision of the policy initiative as an "administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers."

Schaeffers Research notes:

"Traders seem to have packed away concerns regarding a speech by Federal Reserve Chairman Ben Bernanke, focusing instead on aid for subprime lenders being hinted at by the Bush administration. According to The Wall Street Journal, about an hour after Bernanke's speech, Bush is expected to announce plans for a change in the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages. The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance, the Journal reported."
-Bush Trumps Bernanke, Futures Surge Higher.

80,000 homeowners? That's a drop in the bucket of the millions of resetting sub-prime ARM mortgages. Very very small impact, at least as far as housing is concerned.

Still, I find this whole thing terribly interesting. A very minor policy change at the margins, but one with timing that is utterly exquisite. The President's speech:

• Immediately diverts attention from Fed Chair Ben Bernanke's speech;

• Comes right before a 3 day weekend;

• Is on the last day of the month;

• Is on the last day of the fiscal year many financial firms.

It just strikes me as . . . peculiar. Remember, White House chief of staff Andrew Card famously stated: "From a marketing point of view, you don't introduce new products in August." That's as true about wars as it is about major economic rescue plans.

And, we have seen more and more commentary like yesterday's WSJ piece (Bernanke Breaks Greenspan Mold) suggesting that Ben Bernanke understands Moral Hazard, and won't rescue reckless speculators from themselves, at every other taxpayer's expense.

How have these speculators impacted both the Housing and Credit Markets? As the front page of today's WSJ notes, Investors Default On Outsize Share Of Home Loans:

"Investors played a big role in pumping up home prices during the housing boom. Now, they account for an outsize proportion of loan defaults, mortgage bankers and builders say.

A survey by the Mortgage Bankers Association found that mortgages on properties that aren't occupied by the owner -- mostly investment homes -- account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast . . .

The four states were among the favorites of speculators during the housing boom. When the market was hot, many speculators bought homes hoping to flip them for a quick profit. But now that home prices have turned lower, that strategy is backfiring.

As a result, some investors have "simply walked away from their mortgages," said Doug Duncan, chief economist of the MBA, echoing recent comments from executives of Countrywide Financial Corp., the nation's largest mortgage lender."

Will we also be bailing out these speculators, too?

A hedge fund manager friend noted: "I don't see anything in Bush's plan that will change the insolvency of the home-buyer. The "system" is illiquid (and that "problem" was addressed by the central banks two weeks ago), but the "borrowers" are insolvent. Nothing I've seen yet changes that fact. Nothing. Besides, has this Administration, which doesn't believe in government programs, ever done anything bureaucratically well...?"

That's a point well taken.

Let's return to the timing: If you were introducing a major economic policy initiative that was going to address a major issue -- wouldn't you wait until Tuesday? Its only 4 days away. This is a huge vacation week, many people aren't around, and all they will hear is that the President did something.    

I normally stick to mathematical analysis, preferring numbers to instinct, data to politics. But todays "news" struck me as an exquisitely timed, very clever PR stunt. Not to be cycnical, but this appears to be much more politics than policy, and a lifeline to the big investment banks on the last day the month and (some  of their) fiscal years. I suspect hank Paulson had a major hand in the timing.

But a fix for what ails the system? Not even remotely close. That's a function of time and quite a bit of creative destruction. As we noted on Monday, "Capitalism without financial failure is not capitalism at all. . . .    

>

Sources:
Opening View: Bush Trumps Bernanke, Futures Surge Higher
Bush administration to bail out subprime;
Joseph Hargett
Schaeffers Research, 8/31/2007 7:58 AM ET    http://www.schaeffersresearch.com/commentary/observations.aspx?ID=20137

Bush Moves to Aid Homeowners
DEBORAH SOLOMON
WSJ, August 31, 2007; Page A4
http://online.wsj.com/article/SB118851742988914064.html

Bernanke Breaks Greenspan Mold
Managing Crisis, Fed Chief Dulls Notion That Turmoil In Market Leads to Rate Cut
GREG IP
WSJ, August 30, 2007; Page A3
http://online.wsj.com/article/SB118841384006012433.html

Investors Default On Outsize Share Of Home Loans
MICHAEL CORKERY and JAMES R. HAGERTY
WSJ, August 31, 2007; Page A1
http://online.wsj.com/article/SB118851838516214091.html

Friday, August 31, 2007 | 09:23 AM | Permalink | Comments (103) | TrackBack (1)
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Comments

As far as the market is concerned, i suspect this policy will matter far less than what the Fed does -- and even that is of limited impact . . .

Posted by: Barry Ritholtz | Aug 31, 2007 9:27:03 AM