There are rumours circulating in the USA that the authorities are thinking of a back door way of reviving quantitative easing.
The aim would be to sell the mortgage portfolio held by the Fed, so they could use the money released to buy yet more US Treasury bonds.
The plan might include seeking the early repayment and refinancing of these risky mortgages at lower interest rates. The deal would be that the mortgage holder gets a lower interest rate and a refinanced mortgage in return for promising to meet the reduced payments. Fannie and Freddie might be asked to do the refinancing and hold the new mortgages.
If the original lenders took the hit – and could afford to – and if thereafter most of the mortgage holders could meet their payments on time at the lower interest rates, we would see good progess in solving the US mortgage/housing problem.
However, if taxpayers effectively took the hit, and if state backed mortgage companies ended up with a portfolio of mortgages that still looked risky, all that has happened is another extension of US federal and related debt, with substantial new money creation into the bargain.
The President would be happy, because a large number of mortgage holders would just have received a windfall reduction in their debts, and might be grateful to him. The Fed might be happy, because they could undertake their QEIII but claim they had the money from the sale of the mortgage assets. The losers would be the savers, facing a longer period of lower rates and higher inflation than otherwise would be the case.
Meanwhile today’s story is possible legal action against the banks that packaged up mortgages and sold them on, only to pose financial problems to markets later. If this is the plan, it marks the third stage of the crisis.
In stage one, the age of collaboration, governments encouraged banks to lend more and more money to more and more people least likely to afford the loans, in the interests of growth and wider ownership. In stage two, the age of entanglement, governments subsidised the banks in an effort to shore up the dodgy loans and weakened balance sheets brought on by the previous collaboration. Now we might enter the third, the age of retribution, when fighting over the blame entails governments demanding banks repay, say sorry and even face legal charges.
The truth is, governments and banks are hitched together in all this. It suited governments to see easy money and loads of loans prior to 2008. It suited bad banks to be nationalised or bailed out when the authorities lurched to a super tough monetary policy in 2008-9. Now we are witnessing the fight over blame and over pays the bills, as the borrowing has run out.