Politcs? or Solution?

I am a fiscal and social conservative and Bush has blown it over and over again fiscally. I am tempted to write a long editorialized post on what Bush did and how bad it is for America and the slimy politics all around it but that stuff really doesn't matter, though I will find it enjoyable. What matters is how if at all this affects the market picture in the next 6 to 12 months. Is the big move up today short covering or does this really change the picture? That is what matters.

As I have said over and over the FED cannot fix credit crises. Their jobs are two fold. 1) Make sure the banking system is running smoothly. 2) Fight inflation. It's very very simple. Now when the banking system freezes, when liquidity is the issue, the FED has several tools to fight with. When the problem is a credit crises they can't do anything to solve the problem. They can prescribe some Tylenol to help ease the symptoms but they can't cure the sickness unlike with a liquidity crises. Other branches of the government can!! They can orchestrate bailouts and wave a magic wand with your and mine tax dollars to erase bad credit that was made. That is why the cut in the discount window couple of weeks ago I thought meant jack squat in the big picture. It helped ease the liquidity crises but it took none of the toxic debt out. The junk was still out there. What Bush is proposing does change things, a little. Whether you agree with it not (my thoughts should be clear) it does change things on the margin. Even more important is it signifies that the federal government is able and willing to step in to alleviate the credit crises. The reason this is important is because it is a 100% reversal from what the White House said just three weeks ago. 100%.

I have spent most of my day trying to understand GSE pass-throughs and the role of the FHA trying to understand the impact because I am ignorant to a large extent the way that all works. Here are a few points that I think I can I have gathered. Forgive me if I misstate something because like I said this was not an area of expertise for me.

1) The FHA is essentially an insurer. Typically if certain types of loans meet certain conditions the FHA will collect a guarantee fee in exchange for insuring the creditworthiness of this loan.

2) What Bush is proposing essentially lowers the standards of what FHA can insure. Essentially increasing the risk the Federal Government is taking on their books.

3) However for this to be doable it seems the FHA would have to raise the guarantee fee. What is the problem with that? Well a large portion of the loan problem is adjustable rate mortgages that are getting repriced up. Individuals could afford the 3% teaser rate but can't afford the 12% fixed rate this is adjusting up to. Will individuals be able to transfer into fixed FHA loans that will be more expensive to cover the increased guarantee fee? It is unclear if this makes it really that more affordable. Maybe a little but not much.

4) What about the prepayment penalties? Who pays for these which in some of these are loans are very high. It is unclear.

5) This does not help anyone who is underwater. In fact I have read estimates that this really only has the potential to help somewhere between 3% to 10% of troubled loans.

In general, I think we are seeing a bunch of posturing. Yes it changes things on the margin which can be very important. This was obviously masterfully orchestrated to take the attention away from the Bernake speech and be the headlines all over the United States going into a long weekend.

Does it lessen the chance of a recession? Maybe. How important is psychology in all of this. Huge. In general though after studying and reading through all of this I think it really doesn't change all that much. Reason is because the majority of these borrowers are insolvent. Helps on the margin but many homeowners are underwater. Looks much more like politics and not a solution.

I will read more and may change my opinion. We shall see. I did not rush and emotionally trade anything today. What matters is fundamentals and fundamentally I did not think the lowering of the discount window or if we lower the interest rate by 25 to 50 bips changes anything. This (even if the first move does not) has the potential to change alot though my initial take is at least initially it doesn't change much. More thoughts will be coming.

I am about to head out to the land flowing with milk and honey (College Station). So everyone have a great weekend and stick to fundamentals.