In the last few days, the economic news has been increasingly grim, and the latest is the failure of IndyMac:
IndyMac Bancorp Inc. became the second- biggest federally insured financial company to be seized by U.S. regulators after a run by depositors left the California mortgage lender short on cash. […Snip…]
The Pasadena, California-based lender specialized in so-called Alt-A mortgages, which didn’t require borrowers to provide documentation on their incomes. The demise adds to the crisis caused by the subprime collapse and may mean regulators will have to raise more money to support the federal deposit insurance program that repays customers when a bank fails.
“IndyMac is the vanguard, the precursor of more stuff coming,” said Christopher Whalen, managing director of Institutional Risk Analytics, a market research company in Torrance, California. “It’s not surprising to see IndyMac resolved. What you have to ask is what’s coming next. It’s going to be a wave of medium to bigger-than-medium institutions.”
I suppose one could arguably put Fannie and Freddie under the heading of “bigger-than-medium”, although their failure (and it’s looking pretty bad for them right now) will literally shake the foundations of the mortgage world.
So what, if anything, should be done? Is there any way to head these failures off? And should we even try?
I don’t see how. Even if we could identify an approach (and so far, we haven’t), we can’t implement it. We don’t have the money.
We can debate and argue til we’re blue in the face about the source of our current economic mess, or how it is that the country with the largest GDP on the planet is operating so far in the red, but all that hot air won’t lift us.
Are you a proponent of an immediate end to the Iraq war, because that money would be helpful here at home? Even the most ambitious plans won’t bring relief in under two years.
Do you want to drill off-shore? Any short-term adjustment in the price per barrel will level out to at least current prices. Do you like alternative energy solutions? We’re looking at least ten years down the pipe, and probably more like twenty.
Are high health-care costs your personal bone of contention? Any legislation, however dramatic, would take years to implement.
And directly on topic — how does it help anybody (much less Fannie and Freddie) if the mortgage crisis “fix” buckles the economy and the dollar:
Things have become so dire that according to a report in the New York Times, senior Bush administration officials are considering a full-on government takeover.
Treasury Secretary Henry Paulson played down that prospect on Friday, but markets took little comfort in his comments, and the situation remained fluid enough that many are still counting on an eventual bailout.
Such a bold step, unprecedented in scale, would not come without risks. For one thing, the absorption of Fannie and Freddie’s liabilities would effectively double the public debt, leaving it at a hefty 65 percent of the gross domestic product.
And since that housing “rescue” bill includes a new tax on Freddie and Fannie, the cost of borrowing money is definitely going to go up.
In short, we’re going for a ride, folks, and however this plays out, there’s little we can do — right here right now — to change things. Buckle up.