The Fed has my back

I despise the Fed as much as the next guy (or at least as much as the next guy should despise the Fed), so it was interesting to see today that the President of the St. Louis Federal Reserve bank has my back regarding moral hazards and GSEs:

I am more skeptical of the financial strength of the GSEs, and believe that we could see substantial problems in that sector.

...

I would put the GSEs at the top of my list of sources of potentially serious problems. If those problems were realized, they would be a direct result of moral hazard inherent in the current structure of the GSEs.

I'm actually a bit surprised to see a Fed bank President acknowledging any moral hazard. Apparently there's a limit to how far some people will go to ignore the obvious.

The Captain is Drunk

Fannie Mae and Freddie Mac (government subsidized entities, GSEs) are posting billions in losses, facing insolvency, their portfolios are rapidly becoming worth less and less, a government bailout looms on the horizon, and what does the Office of Federal Housing Enterprise Oversight do? They raise loan limits for Fannie and Freddie, remove portfolio caps altogether and ease capital requirements.

As Mish is quick to point out, the mission of the GSEs is to make housing affordable, yet somehow instead of doing this they've been busy the last few years driving up home prices by buying risky loans, the results of which are now being felt by everyone. Now that the bubble has burst, instead of reversing course and getting back to their core mission of affordability, they decide to further support inflated home prices by raising the conforming limit to over $729,000. I defy anyone to explain to me how anything near $729,000 is affordable for the average American.

So, what the hell is going on you ask? Home prices are falling and banks and wall street are suffering greatly as a result. That's it. The mission of the GSEs now is to inflate home prices at all costs, quite a drift from their original mission of promoting affordability. Clearly the GSEs are headed on a course for disaster, but that doesn't matter. After all, what cost is it to them when they file for bankruptcy? The taxpayers will be picking up the bill.

The captain is drunk, the ship is heading for a reef and instead of turning away we're steering straight into disaster. The shipowners have an insurance policy they're hoping to collect on.