By Mark A. Calabria
With FHFA’s chief Ed DeMarco declaring mass principal write-downs off the table, the attention, has appropriately turned to Congress. First of all, this is really where the debate should have been. DeMarco is an acting director with little, if any, statutory authority to impose potentially large losses on the taxpayer in order to help mortgage borrowers. If we are going to do a massive giveaway to borrowers, the responsibility for such lies with Congress.
One such proposal was been put forth by Sen. Merkley, discussed by Joe Stiglitz and Mark Zandi in today’s New York Times. Stiglitz and Zandi claim that lowering the interest rate on outstanding mortgages would “work like a potent tax cut.” Monthly payments would be reduced, increasing disposable incomes and like magic, turn around the economy. As I’ve mentioned elsewhere, however, such a scheme is really just a redistribution of wealth and not wealth creation, as the “savings” comes at the expense of the holders of mortgage assets.
The Federal Reserve Bank of New York has come up with an interesting argument why such a scheme would not be “zero-sum.” Their argument is that most mortgage assets are held by the government and that the government’s “spending on U.S. goods and services does not depend to any significant degree on their income from the mortgage bonds.” I’d be the first to admit that government spending does not appear to be deterred by massive losses or deficits, however that does ignore the fact that someone else ultimately pays for government.
If some version of Ricardian Equivalence holds, then losses suffered on mortgage securities would be viewed as future tax increases, decreasing current consumption. I applaud the NY Fed for at least attempting to put some numbers behind their already chosen policy, but the fact is I cannot see how anyone, with a straight-face, could claim to know with any certainty whether such a program would be zero, positive or even negative-sum. I can think of all sorts of reasons for such to be a net-loss, like scaring investors away from the mortgage market and hence reducing mortgage credit and weakening housing demand, but I’d be the first to admit I don’t know the net impact with any degree of certainty. If what Stiglitz and Zandi ultimately want to do is provide a tax cut, then call for a tax cut, such would be far more transparent than continuing to use mortgage finance policy as an opaque regressive transfer to well-off homeowners.
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Rome Demands German Help in Refinancing Debt
Italian Prime Minister Mario Monti, here during a visit to Berlin last week, wants Chancellor Merkel to open her pocket book.
Italian Prime Minister Mario Monti has called on Germany to do more to help Italy and other debt-stricken nations to push down their borrowing costs. If the efforts of nations submitting themselves to austerity programs aren’t sufficiently recognized, he said, there will be a "powerful backlash."
Just days after Standard & Poor’s cut its rating for Italy and eight other euro zone countries, Prime Minister Mario Monti has called on the German government to help his country service its debts.
In an interview with the Financial Times, Monti said it was in Germany’s interest to help lower the burden of debt refinancing for Italy and other euro states struggling under heavy debt loads. According to the newspaper, Monti said Europe’s north had not sufficiently acknowledged the efforts being made by highly indebted nations to reduce their debt and budget deficits.
"If this strong movement towards discipline and stability is not recognized as taking place, and a certain approach to financial aspects does not gradually evolve, then there will be a powerful backlash in the countries which are being submitted to a huge effort of discipline," Monti told the paper.
Euro countries have profited hugely from the single currency, Monti said, adding: "But Germany perhaps even more than others."
He described commonly issued bonds in the euro zone as a good way to calm nervous investors. His comments could put him at odds with German Chancellor Angela Merkel, who strictly opposes so-called euro bonds. Monti said that with S&P having now also cut its rating for the euro bailout fund, the European Financial Stability Facility (EFSF), Germany must help to reinforce the "firepower" of the fund.
Rating agency Standard & Poor’s downgraded nine of the euro zone’s 17 countries on Friday, with France and Austria losing their top-notch status. On Monday, it cut its credit rating of the EFSF by one notch to AA+ The other two major ratings agencies, Fitch and Moody’s, have not downgraded the EFSF and still rate France as AAA.
ECB Head Plays Down Importance of Ratings Agencies
S&P’s downgrades have intensified the debate over the power and the motives of the ratings agencies. Late on Monday, European Central Bank President Mario Draghi said regulators, investors and banks should become more independent of ratings agencies. Draghi told a committee of the European Parliament in Strasbourg that "one needs to ask how important are these ratings for the marketplace, for the regulators and for investors."
Jörg Asmussen, the German member of the ECB’s executive board, said he didn’t think there was any political motivation behind S&P’s move. "This view goes in the direction of a conspiracy theory and I don’t believe in that," he told the German tabloid Bild in an interview published on Tuesday. "Besides, such suspicions can easily be allayed by pointing out that the US itself was downgraded last year by an American ratings agency."
EFSF Chief Sees No Impact From Downgrade
Meanwhile, German Foreign Minister Guido Westerwelle renewed calls for the establishment of a European ratings agency modelled on the independent German foundation Stiftung Warentest, which tests consumer products. He said he would discuss the proposal with his European colleagues.
Speaking in an interview with Neue Osnabrücker Zeitung, he said it was "high time" that Anglo-American ratings agencies got some competition.
The minister added that he didn’t think Germany would have to contribute more to euro rescue efforts now that France had lost its triple-A rating. He said the agreed burden-sharing would remain intact, and that he didn’t see any deterioration of the "excellent relationship with France."
Separately, the head of the EFSF, Klaus Regling, said on Tuesday that the S&P downgrade would have little impact on operations and expressed confidence that investors around the world will keep buying the fund’s bonds.
"As long as it is only one rating agency there is no need to do anything really," Regling told reporters during a trip to Singapore to meet investors. "You had the same situation when S&P downgraded the US. The others did not follow. There was no market impact."
Statistics: Posted by yoda — Tue Jan 17, 2012 5:18 am
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