Diary of a Financier

I’ll Play Politics: Finally Fiscal Stimulus for Housing & Infrastructure

In Economics, Politics on Tue 30 Aug 2011 at 17:25

I’ll play politics for a hot-minute. I’ve been barking for solutions for a long time now. I’ve been discussing my own ideas for just as long. Today, I look at the bearishness of oft deterministic monthly fractals, and I want to know how equities can rally from here. I aptly titled an entry last week, “Bernanke Will Defer, So Why Do Bond Look Weak & Stocks Strong in the Short-Term?” Posted before Ben Bernanke’s big Jackson Hole press conference, the entry was fully accurate on all accounts. It’s worth rehashing one of my musings therein:

In its most deterministic [monthly] fractal, the S&P 500 (SPX) stochastic shows remarkable ability to persist in overbought territory, clearly due to the monetary support savior:

SP v Fed Funds Effective Rate

Any Fed-led solutions henceforth will not call upon the Fed Funds Rate, as it’s zero-bound. (Quantitative Easing was the progression of monetary policy beyond ZIRP.) This persuades me to prepare for continued equity weakness…

Given his resources, his responsibility and his critics, Mr. Bernanke will defer further easing until either his critics are silenced by a crises or Congress rallies to complement the Fed’s efforts… otherwise, the Fed would be draining resources to continue pushing on a string.

Equities show little resolve in intermediate/long term, but short-term is quixotically constructive.

I was correct about the short-term equity move, yet I remain bearish on the intermediate-term (coming weeks). I want to know what might prove me wrong? what catalyst can propel us higher? Since capital markets have momentarily found hope–and therefore levitation–in the promise for an upcoming twin-killing of a White House jobs/housing plan (next week) and a Fed plan (September 22), I thought I’d expound upon my own suggestions.

To wit, revisit my entry from March 2011:

Come June, “HAMP 2″ will be the artist formerly known as “QE3”… With mortgages & housing being the real aims of stimulus, future stimulus needs to directly impact mortgages & housing… without any residual effect upon food & energy. HAMP 1 was wrought with corruption and idiocy, so I hope Washington takes a few months to carefully plan an effective sequel.

Yes, it’s more government spending, but the New York Times reminds us:

“Congress set aside $50 billion for foreclosure prevention, amid administration projections that three million to four million homeowners would benefit from modifications. So far, the Treasury Department, which oversees the program, has spent slightly more than $1 billion, and just 607,000 homeowners have received permanent loan modifications.”

policymakers will continue to argue for housing stimulus, because they’ve only deployed 2% of their foreclosure prevention allowance. (Mostly due to the fact that HAMP was implemented hastily, proving itself an operational nightmare.) Not to mention deflation in housing is truthfully a greater risk than inflation in consumer staples:

Consumer Expenditures as a Percent of Income

Murmurings now project a housing-related stimulus forthcoming from Washington DC. Pundits say it will resemble something broad, like fixing everyone’s mortgage rates at 4%. I should hope not: consider the violation of America’s sacrosanct contract law. Modifying mortgages broadly as such would lay waste to MBS & first liens (mortgages), without impairing second liens (HELOCs). It would also render useless the public monies already spent on HAMP/workouts/mods, plus the private capital spent on refinancings.

I’ve floated my scheme before on the blogosphere: I would prefer to see the government deploy public monies to make a full month’s payment on behalf of all mortgagees. In addition, the government can make a promise to deploy a second month’s worth of payments on behalf of mortgagees a full year thereafter. In other words, mortgagees would avoid those months’ payments, booking the cash as savings/disposable income. The kicker is that participating (“opt-in”) mortgagees–having had the government cover two payments–extend the maturity of their loans by two months, effectively repaying the government at the end of the loan’s term (an “end-around”).

The rationale here is sound, particularly superimposed over the prevailing recommendations from DC’s economists.

Under this approach, Mortgage Backed Securities (MBS) and loan assets will not face impairment. That’s not desirable out of a propensity to sidestep haircuts (I’m all for haircuts), it’s critical to avoid the moral hazard of restructuring senior claims without impairing junior/subordinated holders. It avoids violating legal contracts, capital structures. The mortgage interest should not be deductible for government-aided monthly payments, naturally.

The pitfall is largely in the execution. It could be fairly expensive and/or tedious for the government to operate the program. Yet, it creates a critical incentive to keep mortgagees in their homes, paying their monthly P&I.

Additionally, I like the idea of a federal Infrastructure Bank. It’s a notion that a bit vanilla for my taste/aspiration, but by that very virtue, it’s conceivable that Congress would allow it. I would request the Bank not simply repair bridges and fill-in holes, because so little continuous monetary velocity can stem from such churn. The initiative must include riders for an alternative/renewable energy infrastructure, a smart grid, and public WiFi hotspots–all summing to job creation and sustainable growth. Limiting the taxpayer’s contribution, a key tenant should be a public/private partnership for the Bank, in which the government is a managing partner.

–Romeo

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  1. […] have a paltry 14% long equity allocation against 5% short. Like I said last week about equity markets, a monthly fractal overlay of SPX v. Fed Funds Rate shows that this point of […]

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