mortgage securities

Comments from the real world

by Julie Walsh on November 11, 2008 · 1 comment

in Bailout Watch, Economy

Here’s some insightful comments from Thomas Haynes, a friend of CEI’s:

There’s a very interesting debate that could be conducted on who’s the madam, who’s the john and who’s the pimp in the relationships between the executive branch, the legislative branch and the financial services industry, but only so much of that debate can take place on Internet.

I did, however, want to note to those involved in the debate over TARP that my experience as a borrrower, plus some candid comments from bankers, make it crystal clear that these public funds are not being deployed for the stated public purpose of making credit more available and more affordable and thus stimulating (or resuscitating) economic activity.  The credit markets that we tapped were both flowing and reasonably priced shortly before the bailout bill. They continue to flow now, but they are no longer priced as reasonably.  Credit spreads over benchmarks (LIBOR being the most relevant) have widened by 150 basis points since late September.  Every banker I’ve spoken too  confirms this, citing supply demand and cost of money factors.  When you question the cost of money component, however, they begin to stammer once your make the point that either LIBOR or the fed funds rate, or some combination of the two, should be very precise indicators of the cost of funds for big banks.

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Why the Bailout Won’t Help Money Markets

by Iain Murray on October 2, 2008

in Bailout Watch

It will actually divert money to the Treasury from commercial lending. Naked Capitalism has more, concluding:

When Paulson dumps out his 700 billion in treasuries it’s going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson’s billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson’s billions divert credit from working capital to long-term mortgages – from where it’s most needed to where it’s most wasted.

Even if the giveaway adequately props up the banks, which I doubt, they still can’t make working capital loans, because the raw material they used (commercial MM deposits) will be desperately short.

I think it’s very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson’s plan will increase the supply of, say, inventory loans. It’s not that every economist in the world is an idiot, it’s just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson’s plan falls into the category of very expensive way to hurt ourselves.