Saturday, November 1, 2014

02/11/2011 No Exits *

For the week, the S&P500 gained 1.4% (up 5.7% y-t-d), and the Dow rose 1.5% (up 6.0%). The Banks jumped 2.6% (up 6.4%), and the Broker/Dealers gained 3.4% (up 5.7%). The Morgan Stanley Cyclicals increased 2.8% (up 7.6%), and the Transports jumped 3.6% (up 2.5%). The Morgan Stanley Consumer index added 0.7% (up 0.9%), and the Utilities gained 0.4% (up 1.7%). The S&P 400 Mid-Caps rose 2.6% (up 6.9%), and the small cap Russell 2000 gained 2.8% (up 4.9%). The Nasdaq100 advanced 1.8% (up 7.3%), while the Morgan Stanley High Tech index was little changed (up 7.5%). The Semiconductor index was unchanged (up 12.4%). The InteractiveWeek Internet index gained 1.4% (up 7.0%). The Biotechs added 0.1% (down 0.3%). Although bullion rose $8, the HUI gold index declined 0.8% (down 8.7%).

One-month Treasury bill rates ended the week at 7 bps and three-month bills closed at 12 bps. Two-year government yields were up 8 bps to 0.83%. Five-year T-note yields ended the week up 10 bps to 2.36%. Ten-year yields were little changed at 3.63%. Long bond yields ended the week 2 bps lower at 4.71%. Benchmark Fannie MBS yields were 4 bps higher to 4.42%. The spread between 10-year Treasury yields and benchmark MBS yields widened 4 to 79 bps. Agency 10-yr debt spreads narrowed 6 bps to only 6 bps. The implied yield on December 2011 eurodollar futures rose 6.5 bps to 0.845%. The 10-year dollar swap spread increased 1.5 to 11.75 bps. The 30-year swap spread increased 2.25 bps to negative 21.75 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 2 bps to 80 bps. An index of junk bond risk fell 14 bps to 385 bps.

Investment grade issuers included Wells Fargo $2.5bn, News America $2.5bn, GE Capital $2.0bn, Archer-Daniels $1.5bn, Unilever Capital $1.5bn, Citigroup $1.25bn, and CNA Financial $400 million.

Junk bond funds saw inflows of $523 million (from EPFR). Issuers included Ally Financial $2.25bn, Chesapeake Energy $1.0bn, Avaya $1.0bn, Ply Gem Industries $800 million, Venoco $500 million, Regal Entertainment $525 million, Chaparral Energy $400 million, Verso Paper $400 million, Ace Cash Express $350 million, Markwest Energy $300 million, ACL $250 million, Delta Air $235 million, Provident Funding $200 million, and Florida East Coast $130 million.

Convertible debt issues included MF Global $290 million.

International dollar debt issuers included KFW $4.0bn, Telefonica Emisiones $2.75bn, European Investment Bank $2.0bn, UPCB $1.0bn, Metinvest $750 million, Banco Votorantim $750 million, Empress ICA $500 million, Midwest Vanadium $335 million, and Raghsa $100 million.

U.K. 10-year gilt yields rose 5 bps this week to 3.87% (up 47bps y-t-d), and German bund yields added 3 bps to 3.29% (up 33bps). Ten-year Portuguese yields were 21 bps higher at 7.17%. Spanish yields jumped 22 bps to 5.35%, and Irish yields rose 20 bps to 8.89%. Greek 10-year bond yields jumped 55 bps to 11.37%. The German DAX equities index gained 2.1% (up 6.6% y-t-d). Japanese 10-year "JGB" yields rose 2.5 bps to 1.305% (up 19bps y-t-d). Japan's Nikkei increased 0.6% (up 3.7%). Emerging markets were mostly under pressure. For the week, Brazil's Bovespa equities index rallied 0.7% (down 5.1%), while Mexico's Bolsa declined 1.2% (down 4.0%). South Korea's Kospi index sank 4.6% (down 3.6%). India’s equities index declined 1.6% (down 13.6%). China’s Shanghai Exchange rallied 1.0% (up 0.7%). Brazil’s benchmark dollar bond yields rose 14 bps to 4.84%, and Mexico's benchmark bond yields jumped 12 bps to 4.69%.

Freddie Mac 30-year fixed mortgage rates surged 24 bps last week to a 40-week high 5.05% (up 8bps y-o-y). Fifteen-year fixed rates jumped 21 bps to 4.29% (down 5bps y-o-y). One-year ARMs were 9 bps higher to 3.35% (down 98bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates rising 20 bps to 5.57% (down 35bps y-o-y).

Federal Reserve Credit jumped $30.9bn to a record $2.469 TN (14-wk gain of $189bn). Fed Credit was up $236bn from a year ago, or 10.6%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 2/9) increased $7.3bn to a record $3.363 TN. "Custody holdings" were up $407bn from a year ago, or 13.8%.

M2 (narrow) "money" supply surged $39.5bn to a record $8.868 TN. Over the past year, "narrow money" grew 4.4%. For the week, Currency added $2.6bn. Demand and Checkable Deposits jumped $31.6bn, and Savings Deposits rose $10.7bn. Small Denominated Deposits declined $2.9bn. Retail Money Funds fell $2.5bn.

Total Commercial Paper outstanding rose $18.1bn to $1.014 Trillion. CP was down $119bn y-o-y, or 10.5%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.471 TN y-o-y, or 18.8%, to a record $9.291 TN.

Global Credit Market Watch:

February 11 – Bloomberg (Ashley Lutz): “Sales of corporate bonds accelerated 40% to $29.2 billion this week as investors reduced the premium they demand to hold the debt instead of Treasuries.”

February 11 - Dow Jones (Joseph Checkler): “C-Bass, the once high-flying marketer of securities backed by subprime mortgages, has filed a Chapter 11 liquidation plan that calls for unsecured creditors to get nothing if they veto it. Formally known as Credit-Based Asset Servicing and Securitization LLC, C-Bass on Wednesday filed a proposal with details about how it will liquidate itself, four months after it filed its long-awaited bankruptcy.”

Global Bubble Watch:

February 7 – Bloomberg (Scott Lanman and Simon Kennedy): “Investors are betting with Ben S. Bernanke that surging food and energy prices won’t accelerate U.S. inflation, allowing him to maintain easy money… While pressure from commodity costs may cause a spike this year to what Pacific Investment Management Co.’s Anthony Crescenzi considers a warning threshold of 2.75 points, the spread won’t persist there or higher without strong job growth, Crescenzi said. That means the Federal Reserve chairman probably won’t raise benchmark interest rates from near zero in 2011 because of higher consumer prices, Crescenzi predicted… ‘Headline inflation is beginning to have a greater influence on monetary policy, but not yet at the Fed,’ said Crescenzi, who helps manage $1.2 trillion at Pimco… The central bank ‘remains anchored or hinged to the core rate,’ which excludes food and energy costs.”

Muni Watch:

February 11 – Bloomberg (Matt Robinson): “Investors withdrew about $1.2 billion from U.S. municipal-bond mutual funds this week, the 13th-straight period of withdrawals, Lipper US Fund Flows said. Outflows have totaled $24.8 billion since mid-November…”

February 7 – Bloomberg (Simone Baribeau): “Florida Governor Rick Scott proposed a 2012 budget that would lower spending by $4.6 billion, or about 7%, the most since at least 2002, as it eliminates almost 8,700 jobs. The budget would require public employees to contribute 5% of their wages to pensions, pare Medicaid spending by almost $4 billion over two years and renegotiate contracts and leases to save more than $660 million over two years. The first-term Republican elected in November faced a projected deficit of $3.6 billion and campaigned on a promise to fill the gap with spending reductions while still cutting taxes.”

Currency Watch:

The U.S. dollar index rallied 0.5% to 78.44 (down 0.7% y-t-d). On the upside for the week, the Brazilian real gained 0.5%. On the downside, the South Korean won declined 2.2%, the Swiss franc 1.9%, the Norwegian krone 1.6%, the Japanese yen 1.5%, the New Zealand dollar 1.2%, the Australian dollar 1.2%, the Taiwanese dollar 0.7%, the British pound 0.7%, the Singapore dollar 0.6%, the Mexican peso 0.4%, the Danish krone 0.2%, and the euro 0.2%.

Commodities and Food Watch:

February 8 – Bloomberg: “Shandong province, one of China's major grain producers, is facing its worst drought in 200 years if the eastern region doesn’t receive more precipitation by the end of this month, the official Xinhua News Agency reported… Shandong, which has received only 12 millimeters of rain since last September, is one of eight drought-ravaged provinces where the government has started a ‘grade II emergency response’ including 24-hour weather monitoring and daily damage reports… The four-month drought affected 35% of wheat in the eight regions…”

February 8 – Bloomberg (Poole): “A severe drought in the North China Plain, the country’s main winter wheat-producing area, may threaten production, according to the United Nations Food & Agriculture Organization. Rainfall has been substantially below normal since October, with diminished snow cover reducing the protection of dormant plants against frost… The drought is ‘potentially a serious problem,’ it said.”

February 7 – Bloomberg (Wendy Pugh): “World sugar output will probably fall short of demand, said Rabobank, after a cyclone with winds stronger than Hurricane Katrina destroyed homes and smashed crops in Australia, driving prices to 30-year highs. Tropical Cyclone Yasi ripped through northern Queensland, a region growing a third of the country’s cane, cutting output potential in the area by about 50%...”

The CRB index slipped 0.3% (up 1.5% y-t-d). The Goldman Sachs Commodities Index rose 0.7% (up 3.3%). Spot Gold gained 0.6% to $1,357 (down 4.5%). Silver gained 3.2% to $29.99 (down 3.0%). March Crude sank $3.45 to $85.58 (down 6.3%). March Gasoline rose 1.2% (up 1.4%), while March Natural Gas sank 9.3% (down 11%). March Copper declined 0.9% (up 2.0%). March Wheat gained 1.6% (up 9.2%), and March Corn surged another 4.1% (up 12.3%).

China Bubble Watch:

February 8 – Bloomberg: “China raised key interest rates for the third time since mid-October after growth accelerated and inflation stayed above 4% for a third month. The benchmark one-year lending rate will increase to 6.06% from 5.81%... The one-year deposit rate will rise to 3% from 2.75%. A jump in lending at the start of this year may have exacerbated price pressures by adding to an excess of cash in the fastest-growing major economy. Inflation may have climbed to as much as 6% in January… according to Daiwa Capital Markets.”

February 11 - Dow Jones: “China is likely to use interest rate tools cautiously and won't hike benchmark interest rates often, if at all, this year, Ba Shusong, an economist at a government think tank, said in a column published in the central bank-backed Financial News on Friday. China may make several policy adjustments in the first quarter, including to banks' reserve requirements, interest rates and foreign exchange rates, said Ba, a deputy director-general of the Financial Research Institute under the State Council's Development Research Center.”

February 10 – Bloomberg (Henry Goldman): “China, the world’s biggest grains consumer, will spend 12.9 billion yuan ($1.96bn) to bolster grain production and fight drought, China Central Television reported… citing Premier Wen Jiabao. The country should use reserves, imports and exports to balance the grain market and is able to keep overall consumer prices basically stable, CCTV cited Wen as saying.”

February 8 – Bloomberg (Joshua Fellman): “The number of divorces in China increased 14% to almost 2 million last year, Shanghai Daily said…”

Japan Watch:

February 8 – Bloomberg (Toru Fujioka): “Japan’s current account surplus widened in December as the global recovery boosted demand, underpinning the wealth that supports the nation’s debt burden. The gap expanded 30.5% from a year earlier to 1.195 trillion yen ($14.5bn)…”

India Watch:

February 7 – Bloomberg (Kartik Goyal): “India’s government predicted the economy will expand the most in three years, supporting the central bank’s case for raising interest rates further after the steepest increases in Asia. The $1.3 trillion economy will probably expand 8.6% in the year ending March 31 from a year earlier… India, battling inflation stoked by rising consumer demand and food costs, is bracing for the impact of a possible spurt in oil prices following political unrest in Egypt, central bank Deputy Governor Subir Gokarn signaled… Prime Minister Manmohan Singh on Feb. 4 said India needs to tackle inflation with ‘great urgency’ to sustain the economy’s momentum. ‘Inflation risks are growing rapidly,’ Shubhada Rao, chief economist in Mumbai at Yes Bank… said…”

Asia Bubble Watch:

February 7 – Bloomberg (Shamim Adam and Widya Utami): “Indonesia’s economy grew at the fastest annual pace in six years last quarter, adding to the case for the central bank to raise interest rates further as inflation accelerates. Stocks rose. Gross domestic product increased 6.9% in the three months through December from a year earlier… Rising consumer spending is driving the expansion in the world’s fourth-most populous nation, increasing pressure on the central bank to restrain price gains and protect purchasing power.”

February 7 – Bloomberg (Eko Listiyorini and Supunnabul Suwannakij): “Indonesia, the third-biggest rice importer in Asia, is seeking to ‘strengthen’ its stockpiles to protect the poor against rising costs, according to Bayu Krisnamurthi, Deputy Minister of Agriculture. ‘The price is expensive so the government needs to strengthen inventories,’ Krisnamurthi said… ‘Supply is enough but the problem is the price, especially international prices.’”

Latin America Watch:

February 8 – Bloomberg (Alexander Ragir and Andre Soliani): “Brazil’s consumer prices rose in January at the fastest pace since 2005, fueled by food prices and an increase in bus fares at the start of the year. Prices… rose 0.83% last month, pushing the annual rate to 5.99%... A jump in food prices coupled with domestic demand are stoking inflation…”

Unbalanced Global Economy Watch:

February 11 – Bloomberg (Jeff Black): “Inflation in Germany, Europe’s largest economy, accelerated to the fastest in more than two years in January, led by higher costs for food and energy. The inflation rate, calculated using a harmonized European method, increased to 2% after rising an annual 1.9% in December…”

U.S. Bubble Economy Watch:

February 11 – Bloomberg (Bob Willis and Shobhana Chandra): “The U.S. trade deficit widened in December for a second month as the cost of imported oil climbed to the highest level in two years.”

Fiscal Watch:

February 7 – Bloomberg (Caroline Salas and Scott Lanman): “Federal Reserve Chairman Ben S. Bernanke is trying to make sure the U.S. central bank doesn’t become a scapegoat for fiscal profligacy. Fed officials are warning that Congress needs to balance the nation’s budget, showing that policy makers are concerned about a loss of confidence in U.S. finances and want lawmakers to help prevent it, according to Dean Maki, chief U.S. economist at Barclays Capital Inc. Bernanke extended his campaign yesterday, telling the House Budget Committee ‘anything that can be done now to change that path’ would have a ‘good impact on the current economy’ and interest rates. ‘There is this tremendous fiscal problem looming, and Congress has to do something about it,’ said Mark Gertler, a professor of economics at New York University who has co- authored research with Bernanke. ‘If they have a fixed amount of time, spend it solving’ that problem, rather than ‘grandstanding about the Fed.’ The central bank’s plan to buy $600 billion in Treasury securities through June is ‘a relatively modest policy undertaking’ compared with balancing the $3.7 trillion budget, he said.”

February 8 – Bloomberg (Catherine Dodge): “As House Republicans parry Democratic criticism that they’ve gone too far with proposed spending cuts, they still confront a battle within their own ranks over whether the cuts go far enough. A faction of House Republicans plans to continue pushing for bigger budget savings than party leaders recommended last week, reductions Democrats argue would harm the U.S. economic recovery. Republicans won control of the House in November on promises to slash government spending by $100 billion this year.”

Central Banking Watch:

February 7 – Bloomberg (Cordell Eddings and Daniel Kruger): “The Federal Reserve’s Treasury purchases already have succeeded in driving investors to junk bonds and stocks. Now, policy makers are focusing on benchmark government securities, helping contain rising yields that set rates on everything from corporate debt to mortgages. More than 40% of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20% in December and 15% in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.”

February 11 – Bloomberg (Christian Vits and Simon Kennedy): “Bundesbank President Axel Weber resigned, ending three days of confusion and opening the field for candidates from Finland to Italy to become the next chief of the European Central Bank. Weber, 53, ‘expressed the wish to resign’ and will leave office on April 30 with a successor to be named during the next week…”

February 7 – Bloomberg (Simon Kennedy and James G. Neuger): “The campaign for the top job at the European Central Bank was thrown open as the sudden and unexplained withdrawal of German front-runner Axel Weber cleared the way for a slew of candidates to replace Jean-Claude Trichet. Central bankers Mario Draghi of Italy, Luxembourg’s Yves Mersch and Erkki Liikanen of Finland saw their chances of winning Europe’s top economic post rise as did Germany’s Klaus Regling, who runs the region’s bailout fund. Trichet’s non- renewable eight-year term expires in October. ‘The top candidate is now out of the game,’ said Marco Valli, chief euro-area economist at UniCredit Global Research…”

February 10 – Bloomberg (Jennifer Ryan): “The Bank of England kept up emergency stimulus as officials tolerated the prospect of inflation accelerating to a two-year high to nurture Britain’s economic recovery. The Monetary Policy Committee… kept the benchmark interest rate at a record low of 0.5%... The bank may hold fire until later this year, when it will have official data showing the extent of the economy’s rebound from a fourth-quarter contraction.”

February 11 – Bloomberg (Joshua Zumbrun and Scott Lanman): “The Financial Crisis Inquiry Commission, created by Congress to investigate and report on the causes of the market meltdown late last decade, won’t publicly release its full 2009 interview with Federal Reserve Chairman Ben S. Bernanke, a commission spokesman said.”

GSE Watch:

February 11 – Bloomberg (Lorraine Woellert and Rebecca Christie): “U.S. Treasury Secretary Timothy F. Geithner presented Congress with a set of options for weaning the $11 trillion mortgage market from its dependence on the government, while calling for changes to be phased in ‘responsibly and carefully’ to avoid economic disruptions. The report… presents three approaches for a future housing finance system. It also calls for the government to shrink ‘and ultimately wind down’… ‘This is a plan for fundamental reform -- to wind down the GSEs, strengthen consumer protection and preserve access to affordable housing for people who need it,’ Geithner said… The report also pledges ongoing U.S. government support to make sure Fannie and Freddie can meet any debt or other financial obligations.”

New York Watch:

February 11 – Bloomberg (Michael Quint and Henry Goldman): “Governor Andrew Cuomo’s plan to cut New York’s budget for the first time at least 17 years is meeting resistance from fellow Democrats who want to spend more and pay for it by keeping higher income-tax rates set to expire at year-end. Cuomo… seeks record spending reductions in the two largest parts of the $132.9 billion budget, Medicaid and funds for local schools.”

February 7 – Bloomberg (Henry Goldman): “New York Mayor Michael Bloomberg told Albany lawmakers his city would lose about $2.1 billion and have to waste money on state-required spending formulas if legislators failed to change Governor Andrew Cuomo’s proposed budget. The mayor’s analysis… calculated a $1.4 billion cut to education aid… State Budget Director Robert Megna said the mayor’s view was ‘not realistic.’ Bloomberg… also said that Cuomo’s plan singles out the city for a second straight year in denying it revenue-sharing funds… Paterson took the money from the city for this budget year and then allocated about $300 million in his proposal for the state’s next fiscal year… ‘It was a disgraceful gimmick last year when we were cut 100%, and our citizens are not going to let it become the ‘new normal’ in the state’s relationship with New York City”…”

Real Estate Watch:

February 11 – Bloomberg (Brian Louis): “Washington office property values advanced the most last year among six major U.S. markets as employers added jobs and investor demand boosted prices, according to CoStar Group Inc. Office building prices climbed 15% in the U.S. capital city and 6% in New York, the only other city to show an increase…. Values in Chicago fell the most in the group, 22%, and in Los Angeles they dropped 17%.”

No Exits:

The surprising resignations today of Egypt’s Hosni Mubarak and Bundesbank president Axel Weber are reminders of how quickly events and circumstances can change. At the same time, we witnessed further indication of the snail’s pace of U.S. financial reform.

We’re now into 2011. The Fannie and Freddie accounting scandal emerged in 2004. The mortgage crisis erupted in 2007. But Fannie and Freddie, along with the ballooning obligations of the Federal Housing Administration (FHA), today dominate the mortgage marketplace like never before. The Administration today released its “white paper” on GSE reform that will surely have little impact for some number of years to come. Democrats and Republicans remain united in their determination to talk the obvious need for reform and then do nothing. At best, everyone is stalling.

First, it was the Federal Reserve. After working studiously to create one, the Fed tossed its vaunted “exit strategy” right into the scrapheap. They were to have moved to reduce holdings and liquidity operations that had ballooned during the 2008 financial crisis. Our central bank abruptly reversed course and instead chose to significantly expand stimulus – even in a non-crisis environment. Fed Credit has inflated $189bn in the past 14 weeks, with market perceptions of “too big to fail” and moral hazard being further emboldened.

There was also a popular movement to rein in extraordinary fiscal stimulus. We had national elections, heated campaigns and an apparent mandate for an “exit strategy” away from massive U.S. deficits. Well, there has been talk and bluster and, what do you know, additional stimulus – and no exit anywhere on the horizon. The CBO estimates the fiscal 2011 deficit will be the largest yet, in the neighborhood of $1.5 TN. Fiscal reform joined monetary reform in their patient wait for a better day.

For the Fed, it is apparently a case of the unemployment rate remaining too elevated. For others in Washington (Congress and the Administration), the “no exit” strategy is consistent with the historical interplay between politicians and inflationism: once they (both) get going there is really never a convenient time to back away. And that’s why an independent, disciplined and well-anchored central bank is absolutely critical. With our (“activist” and experimental) central bank monetizing staggering quantities of federal debt, the markets remain content to accommodate the government borrowing and spending binge.

In an interview with the Financial Crisis Inquiry Commission, JPMorgan Chase’s CEO Jamie Dimon referred to Fannie Mae and Freddie Mac as “The biggest disasters of all time… that one was an accident waiting to happen.” As someone who warned about the dangers of these institutions going back to the 1990s, I am particularly frustrated by another Dimon quote (from Bloomberg): “We all knew about it, we all worried about it, no one did anything about it.”

One could argue that the timing is right today for a GSE “exit strategy.” After all, the economy is expanding and housing markets have generally stabilized. Moreover, there is these days quite weak demand for mortgage Credit (total mortgage Credit continues to contract). The revitalized banking system could easily handle today’s mortgage financing needs. Yet, according to Bloomberg data, GSE MBS issuance jumped to $450bn during the three-month period November 2010 through January 2011, with Fannie leading the charge. Why?

Mortgages have traditionally been an unattractive investment. When market yields rise, the duration of your instrument extends as borrowers hold tightly onto below-market mortgages. As an investor, you lose. And a lender will often receive an early return of principal when yields decline and borrowers gleefully refinance into more attractive mortgages. Here, you don’t win. Potential losses of principal from difficult to forecast Credit costs and losses also create considerable investor uncertainty, especially in periods of rampant Credit expansion and inflationary risks. If you’re going to lend to someone to buy a house in an arms-length transaction in an unstable environment, you would demand a hefty risk premium.

No one today seems willing to live with anything close to hefty lending premiums. So there remains an impetus to heavily intermediate - to “slice and dice,” securitize, throw on guarantees and insurance and, in the process distort various risks (including Credit, interest-rate and liquidity). This is all done in the name of ongoing cheap mortgage Credit – one way or the other backstopped by Washington. No one is willing to tolerate the pain of real reform.

One cannot overstate the role that the taming of (unwieldy) mortgage Credit risk over the past two decades has had on the U.S. financial sector, the U.S. economy, the global financial system and the structure of the global economy. The securitization – and effective nationalization – of upwards of $10 TN of U.S. mortgage debt risk altered the rules of U.S. and global finance. On the margin, it allowed our massive Current Account Deficits; it worked to de-industrialize our economy; and, over time, unleashed our Credit Bubble upon the world.

One could argue that there’s now “no turning back.” A strong counter-argument would posit that the past 20 years of mortgage Credit reform – the U.S. mortgage finance Bubble - was a historical aberration (recalling John Law).

For years now I’ve dismissed notions of privatizing the GSEs. These gigantic and meagerly capitalized institutions simply could not stand on their own, least of all in a post-mortgage finance Bubble/housing mania backdrop. Besides - and especially after the policy actions of the past few years - the markets would gladly assume an implied “too big to fail” government backstop. For now and for the foreseeable future, any institution acting singularly as a mortgage risk repository poses a systemic risk.

The private mortgage insurance stocks rallied sharply today on notions that these companies will benefit from reform. Today’s white paper suggested a lesser role for FHA insurance and possibly additional reliance on private insurance to protect Fannie and Freddie. Long-time readers know that I am no fan of Credit insurance. It tends to distort risk and exacerbate the upside of the Credit cycle, while providing no real protection when the bust arrives. As appealing as it sounds, private mortgage insurance is not part of any long-term solution to our festering mortgage crisis.

Passing meaningful GSE reform in the face of well-financed support for their ongoing role in mortgage Credit is anything but assured, even some years down the road. Today from the California Association of Realtors (C.A.R): “A reduced government presence in the mortgage market will raise the cost of homeownership and make mortgages less available. Moreover, Congress needs to understand that during economic downturns, the housing market needs government involvement to ensure capital stability. History has shown the private market is incapable and unwilling to step in during the hardest of times and meet the demands of the nation’s home buyers. C.A.R., along with the National Association of Realtors, believes that Fannie Mae and Freddie Mac government-sponsored enterprises should be converted into government-chartered, non-profit corporations.”

Today’s “white paper” provided no clear plan but instead offered several proposals. And, from a Bloomberg article, “All three proposals would accompany an end of taxpayer support from Fannie Mae and Freddie Mac…” I would caution against any optimism that this financial black hole is losing its energy.

Indeed, I would argue strongly that not until the government finance Bubble bursts will it be possible to comprehend the true costs of the ongoing mortgage crisis. The scope of this problem won’t really be appreciated until the current extraordinary fiscal and monetary stimulus has run its course; not until market yields are left to adjust to less government intrusion and intervention; not until inflated U.S. income levels are weaned from massive government expenditures; not until the requisite restructuring of the U.S. economy is on course; and not until private Credit is able to make inroads into market-based home lending.

The Administration and congress are content to delay a timely exit from massive fiscal stimulus, fearing the economy might fall right back into recession. The Fed is also content, worried of what an exit from quantitative easing would mean for a marketplace that must muster the necessary liquidity to fund intractable federal deficits at low interest rates. And I believe all of Washington is content to defer any meaningful mortgage finance reform until they perceive that housing markets have recovered. Yet it will take years – and a huge increase in government-backed mortgage Credit – to revitalize our nation’s housing markets. And this is why I refer to – and worry greatly about - the unfolding government (Treasury, Federal Reserve, and the GSEs) finance Bubble.

Returning to Mr. Dimon’s comments from above, my guess is that the head of JPMorgan and many other persons of influence have similar thoughts about rapidly expanding Federal obligations as they did previously with the GSEs. As we witnessed with Fannie and Freddie, the powers that be will not intervene to repress a Bubble, especially when it is viewed as providing near-term benefits and rather nebulous longer-term risks. I have no doubt that the future holds more crisis committees, inquests, and reports. There will be additional questions about Fannie, Freddie, and new issues with the FHA and unmanageable federal debt. I expect similar answers: “We all knew about it, we all worried about it, no one did anything about it.”

Put meaningful GSE reform – along with changing fiscal and central bank management, and go ahead and throw in the return of an international gold standard - on my wish list of things so highly improbable that they don’t merit much time contemplating.