Weil's Views on Finance
Good morning, dear readers. Here is a look at some of what I've been reading.
Obama's principles for housing-finance reform
President Barack Obama laid out four principles underlying his support of legislation in Congress to wind down the government-backed mortgage giants Fannie Mae and Freddie Mac. One is that "private capital should take a bigger role in the mortgage market." (Who could be against that?) Another principle: Home buyers should have access to 30-year, fixed-rate mortgages. (They create huge risks for the financial system, but Americans love them.) Another, he said, is that "we've got to keep housing affordable for first-time homebuyers." Earlier in his speech he took credit for rising home prices -- which have more to do with the Federal Reserve's interest-rate policies than anything else. If he wants homes affordable, why not let prices drop? But it was this principle where I wondered just whom Obama thought he was kidding: "The era of expecting a bailout after you pursue your profit and you don't manage your risk well -- well, that puts the whole country at risk. And we're ending those days. We're not going to do that anymore." Too big to fail is dead? Right.
Another crisis-era figure is off the hook
Magnetar Capital won't face any disciplinary action by the Securities and Exchange Commission, according to the Wall Street Journal, which cited unnamed people familiar with the matter. The hedge fund made large profits betting against the housing bubble, in deals similar to the one that led to fraud claims against Goldman Sachs by the SEC. Like John Paulson's hedge fund in the Goldman matter, it seems the people running Magnetar were smart enough to know not to make false statements to other investors. Hence, no case.
Detroit and the case for austerity
Mark Spitznagel, founder and chief investment officer of Universa Investments, says Detroit's bankruptcy is an "Austrian moment" in the making: "Detroit's `Ponzi'-like fiscal situation would have continued to deteriorate, with no options other than to borrow more. But, as long as investors were willing to purchase risky bonds, neither politicians nor unions would admit how unsustainable Detroit's situation was. With the Federal Reserve's near-zero interest-rate policy and purchases of trillions of dollars in long-term securities driving demand for such bonds, Detroit's leaders were able to delay public-sector reform for far too long (a situation that is frighteningly similar to the federal government's today). Detroit's bankruptcy is thus exactly what the financial system needs."
A new spat between the IMF and Germany
The International Monetary Fund released a report that said Germany must reduce its trade surplus by half to ease inequities between the euro area's northern and southern countries. "The two have clashed at each stage of the crisis, with the Bundesbank deriding the IMF as the `Inflation Maximizing Fund' under the control of Keynesians who have overstepped their `institutional and legal' authority," writes Ambrose Evans-Pritchard, columnist for the U.K.'s Daily Telegraph. "The rebukes have infuriated the IMF board members, especially those from Asia, Latin America, which think the fund has been doing Germany's work for it. They grumble that the IMF has been dragged into ill-designed rescue packages, and that the lion's share of IMF resources have been used to prop up the currency experiment of rich countries well able to clean up their own messes." Grumble all they want. Germany will do as it pleases.
Bubble indicator of the day
The headline on the most-read article yesterday at Beijing-based Caixin Online: "Readying for Financial Bubbles to Burst."
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Jonathan Weil at firstname.lastname@example.org