Bernanke Threw the Dollar Under the Bus

Federal Reserve Chairman Bernanke threw the dollar under the bus yesterday. In trying to achieve market stability, he, and Secretary Paulson, only rattled the cage. I believe the market sold off on the belief that if we aren't going to defend our currency, why would anyone bother to buy financial assets denominated in that currency.

I understand the pressures being faced with the collapse of FNM and FRE, but those stocks have to sink or swim on their own. Stabilizing the multi-trillion debt market behind those companies can be done without bailing out the stockholders. I think Paulson is only too willing to let the stocks go to zero, but seems to be constrained from acting. I think that raising new capital should not be up to the companies. Since they need Fed backing they have surrendered control of their own destiny and should be forced to run their book off. The two get about $25 billion in mortgage repayments each month and as that comes in they can replenish their capital needs. They should not be allowed to relever and do it all over again.

One of the arguments against this is the need to supply the mortgage needs of the nation. 240 years ago Frederick the Great of Prussia (I got the history from the Financial Times) introduced the concept of "covered bonds" to allow his ravaged nation to recover from the devastation of the Seven Years War. A bank takes the mortgages it issues and bundles them into a mortgage bond, but keeps it on its balance sheet. The buyer of the bond has the stream of mortgage payments and the credit of the bank as security. Imagine, underwriting discipline would need to be employed since you (the bank) will be liable for the paper.

With two sources of repayment to secure the bond, capital required would not be onerous. There is an ocean of liquidity in the world looking for quality investments. The five largest sovereign wealth funds are believed to have over $2 trillion in assets and money market funds have well over $3 trillion. This vehicle is used in Europe and over $2 trillion in bonds have been issued.

So the mortgage market will revert to the private sector and FNM and FRE can figure out their own equity survival. Quality investment opportunities will attract investors if you have a stable currency. Defend the dollar, oil will move lower since it's priced in dollars, and inflation will be attacked.

Comments

[VivaZapata]

What's a dollar?

[nezumi]

I agree that FRE and FNM are not in the world to help the poor. So good riddance to them. But if if they shut down now, what about the mortgages they guarantee? It would make things harder for the banks relying on these guarantees and nobody wants to have 'the day the banks failed' - again. However, Bush's statement that he will bail them out but not nationalize them, is especially ridiculous. If you have to pay with taxpayers money for a doomed entity that apparently is worth nothing - you better repossess it. Wanna give that back to the scoundrels that created this mess in the first place?

[SisterAnn]

Fannie Mae was started up by FDR. Banks wouldn't loan money so the set up Fanny Mae so people could buy homes.

One of their goals is to destroy everything that was part of Roosevelt's New Deal.

They told on a financial show today, that once this was all over then they would shut down Fanny and Freddie. Banks won't have to compete with Fannie and Freddie.

Look out kids.

[swift_goat_pet_for_truth]

Vinnie, Vinnie, Vinnie....

Only NOW you are getting this?
And it wasn't just Bernanke.

[Rule Of Law]

part1

Wall Street has always been jealous of the quasi-government relationship enjoyed by these two lenders. They get cheaper money, and a host of other perks from it. They also hold almost 95% of their mortgage loans in A+ paper.

With this crisis, the Wall Street sharks smell blood and would like nothing better than to relieve FNM and FRE of some of their highest performing debt to add to their shaky bottom lines in order to avoid the fate of Bear Stearns.

Look to see some of the investors that Vince mentions here as possible white knights to include a few of our own Banks, trolling for cheap but good paper, and an ownership spot on companies that were their biggest competitors and perennial thorn in the side!

[Rule Of Law]

part1

This is Wall Street and the International banking cartels best chance to gain a foothold in a huge chunk of the mortgage business here to fore denied them. They hate being cut out of anything that makes a profit and will seize this chance to consolidate their strength by forcing partnerships on FNM and FRE.

As far as throwing the dollar under a bus, the plan is and has always been to destroy our currency through a mountain of debt from which we could never dig out. They've done it. The war, the ever increasing deficit spending and attendant massive borrowing based on the fractional reserve banking system has taken us to the brink.

The uber wealthy have already moved out of this sorry currency. All that's left is to call in all the debt notes you and i owe and then begin the takeover of whatever assets we pledged in collateral for the loan. If you don't own it outright today, you never will!

[WIpatriot]

Well stated, Rule. Central Banks from around the world now hold a piece of our collective mortgage pie, and guess who guarantees it? Us. Sweet deal.

[tompoe]

I found it interesting, that the clip shown on corporate media networks highlighted Bernanke referring to inflation and gas/food prices in the same sentence. This is the jerk that likes having energy and food stay out of the equation when referring to inflation.

[Henry]

Vince,
Sounds like some republican epiphany. Until you read the detail.
There is no easy deal fix the mess. Conservative lending has always
been and remains a good idea. Why do you think this is such a foreign
concept for republicans? Pappy and the sav & Loan crisis. Junyer and
this current debacle.

[WIpatriot]

C'mon Henry, you know about the two sets of rules....