Thursday, August 6, 2009

Agency spreads way back to normal

After hitting an intraday peak of 172 bps last November, spreads on 5-year FNMA debentures have collapsed to a mere 21 bps today. You couldn't ask for anything more normal than that. What this means is that investors around the globe have fully recovered their confidence in the ability of the U.S. government to support Freddie and Fannie. The subprime crisis has completely passed, according to this measure of financial health. Restoring confidence and stability to the Treasury and Agency market would for most observers be an essential precondition to the return of other markets, and the economy itself, to normalcy.

I don't mean this to be an endorsement of Freddie and Fannie, of course, and I have severely criticized them and the many subsidies that Congress has heaped on the housing market over the years. Government subsidies and meddling in the mortgage market are a big reason we had a housing crisis. But we are stuck with the problem, and for awhile the world wasn't sure we could handle the mess that Freddie and Fannie had become. Thanks to (very costly) taxpayer support we have effectively socialized the losses and can now move forward. Not the best of outcomes, of course, but it could have been worse.

6 comments:

Public Library said...
This comment has been removed by the author.
Public Library said...

Hooray for the socialization of our markets! Now that We the People are on the hook it is safe to go about your daily business.

Cabodog said...

What would the alternative have been? Not crazy about socialization, but the government did its thing and worked for the greater-good.

Now if our leader can just realize the stimulus package might have been a tad overzealous... and maybe isn't for the "greater-good..."

Public Library said...

The alternative would have been to let a plethora of companies fail. Instead, government has expanded even further into our daily lives and you wonder why they want more...

MW said...

I don't think spreads did a moonshoot because the mkt doubted the abiliity of the govt to pay the bills, but rather because of the uncertainty of whether FNM and FRE would be allowed to fail or not. IIRC, the govt is still refusing to take the GSEs' assets/libailities onto it's own balance sheet, and is refusing to say whether or not their debts are indeed explicit liabilities. This is why CBs have been doing the Agency/Tsy switch.

Scott Grannis said...

MW: Since the Treasury had implicitly guaranteed FNMA and FHLMC debt, allowing them to fail would have seriously damaged the credit worthiness of the US. Whether they would be allowed to fail or not was the key question.

I have speculated in an earlier post that the decision to avoid taking the GSE's liabilities onto the US government balance sheet was largely political, since it would have caused a huge increase in the national debt. Nevertheless, the government's actions mean that the liabilities of the GSE's are effectively liabilities of the federal government, just as they were always considered to be.