Tuesday, January 6, 2009

Much Anticipated Optimism

The news continues to be pretty terrible out there. Lowest housing starts on record, manufacturing numbers crumbling, auto sales are sluggish, and job losses continue to mount.

However, the much expected optimism to start the year is in the air. People are excited to hear our new leader is already cooking a monumental stimulus program.

Obama is coming out with guns blazing announcing massive tax cuts, state support across the board, and a huge fiscal stimulus.

His partner in stimulus, Ben Bernanke, announced this week the Fed's first purchase of Fannie Mae and Freddie Mac mortgage securities. This will continue until interest rates fall to the stated goal of about 4 to 4.5%. This will have a tremendous effect on loosening lending standards to take us as close as possible to the reckless lending we saw only a few years ago.

No Income, No Asset, loans are only just around the corner. A job, or down payment, will once again not be necessary to purchase a home because a bank will be able to immediately sell that loan to Fannie Mae and Freddie Mac. They will then immediately be able to sell those loans to the Fed.

Of course the Fed is saying that it will only buy "top quality" loans from Fannie and Freddie, but that will change as the economy continues to crumble.

That will take care of new buyers coming into the housing market. But what about the people already underwater? Obama will be coming to rescue them. The government is already working on a huge program to refinance loans to an "affordable" level. This means if you owe $500,000 on your house but it is only worth $300,000, the government will cover the $200,000 difference allowing you to refinance.

Where will the money come from to pay for huge tax cuts, state bail outs, checks sent to Americans in the mail, Fannie Mae loan purchases, and home loan modifications? Well, I think you know the answer to that by now.

A better question is, who cares? No one in America cares, except for a few strange people like myself, who still believe in supply and demand, economics, and all that nonsense.

Apparently people outside of the country are starting to take note. This came from an Asian newspaper this morning:

"Asia now understands that the increase of money supply decreases the intrinsic value of a currency. That is why China is seeking a possible and rational attempt to decouple Asian currencies from the dollar, as recent news stories report.

In practice, China is trying to make its currency convertible and give it a role as a reserve currency. The first experiment is limited to transactions between Hong Kong and the neighboring provinces. It is also proposed that the yuan renminbi be used in 8 neighboring countries, including Russia. With these countries, agreements have already been signed for the settlement of contracts in the Chinese currency.

Perhaps it is no coincidence that the news was released on Christmas Day, when Western markets are closed, reducing the impact on the dollar. In addition, the first weeks of January are usually fairly quiet. This means that although for now the trial is limited, China is preparing to establish full convertibility of its currency to all other currencies."

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