THE BASIS POINT

Which Gets Done First: NFL Deal or U.S. Budget Deal?

I am smart enough to realize that I am not smart enough to know, “Why the focus is more on the debt ceiling than on actually reducing our deficit?” To me, it seems like an artificial waste of time and energy—raising the debt ceiling has happened 10 times since 2001, and our government spends a lot of time doing it. In the meantime, our deficit grows. Did the governments in Greece, Ireland, Spain, etc., spend their time raising debt limits rather than increasing revenue and decreasing spending?

The budget woes continue. Albert Einstein said, “The significant problems we face cannot be solved by the same level of thinking that created them.” And a trader asked yesterday, “Which one gets done first: the NFL agreement or U.S. budget deal?” Greece problems persist despite short term relief, and it’s becoming more accepted that there will be some sort of Greek default. Plus fears over Italian solvency and political stability have infected European markets and many are questioning the EU’s ability to handle the damage. The U.S. has been through this drill before, the Treasury refuses to speculate on a contingency plan in the event of a default.

A default would be (technically) a “default on legal obligations” but most believe that the Treasury would continue to make interest payments on Treasuries. We went through the same drill in February of 2010; the Treasury had to use “extraordinary measures” in June 2002, April/May 2003, and November 2004, and delayed auctions in May 2003 and November 2004.

What does the unlikely event of the US government freezing up mean for the mortgage biz?

Banks do not sell significant services to the government so they do not significant accounts receivables that may be hurt. But banks own large amounts of Treasury debt and the value of those could plunge given the threat of default, and/or, if the US debt is downgraded, and banks must own AAA-rated securities, it could cause problems. The inter-bank lending market could be hit if banks become unwilling to extend each other overnight credit for fear about losses on Treasury securities. I didn’t check the numbers, but one August projection from the Bipartisan Policy Center shows that the U.S. Treasury will take inflows of $172 billion from Aug 3-31 and have $307 billion in outflows for a $135 billion deficit. Interest on Treasury securities is expected to be $29B.

At this point it is fairly accepted that the government had a key part in the housing crisis about ten years ago when it heavily promoted home ownership (at the expense of underwriting guidelines.) And recently the Obama administration is ramping up talks on how to revive the housing market, which is obviously weighing on the economic recovery. The article I saw noted:

“Policy ideas include having Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to absorb excess housing inventory easier. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut. Other incentives may be for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.”