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DBCooper
7th August 2010, 10:09 AM
An Argentinaville Stimulus?
Wall Street comes to life with rumors of a back-door stimulus.

It's August, so one expects the vapors to fill with humid and overripe rumors. But the ride given yesterday to rumors that the Obama Administration is planning an "August Stimulus Surprise" was remarkable even by the sodden standards of this summer.

A wire service put out the story that Wall Street was abuzz that the Administration might lower Fannie Mae's and Freddie Mac's mortgage refinancing standards or trim mortgage balances for homeowners, thereby putting billions of dollars overnight into the pockets of benefiting consumers, thereby producing a "free stimulus," estimated by one Morgan Stanley analyst at $46 billion. And this stimulus "spending" would be achieved without a moment spent passing it through the Congressional appropriations process. A "slam dunk stimulus" is how the overheated Morgan Stanley commentator described it.

The Treasury Department yesterday tossed cold water on the story. "The Administration is not considering a change in policy in this area," a spokesman said.

We hope that stays true. People make jokes about the U.S. turning into Argentinaville, and a gambit like this would push us close.

What's striking is that the notion got this much elevation. Serious mortgage analysts on Wall Street have been discussing it in postings all this week, with input not only from Morgan Stanley but also Credit Suisse, Goldman Sachs, Deutsche Bank, Barclays Capital, UBS and FTN Financial.

You don't see this sort of firepower deployed unless the big boys think something real is afoot. Why would they think that?

They would think that only if this Administration had created an atmosphere in which such notions could fester.

For starters, there is the Administration's well-established faith in the power of stimulus spending. Its official spokesmen strongly dispute that the original $862 billion stimulus package hasn't worked, while its off-stage chorus in the punditocracy cries that the government should double down with a massively larger, new stimulus package.

But with many vulnerable Democrats in Congress disinclined to campaign for re-election on yet more federal spending, naturally the political sophisticates on Wall Street would believe that the ever-clever Obama White House might design a back-door stimulus. A cynic might suggest the reason Fannie and Freddie were kept outside the financial reform bill was so they could be used as an in-house Appropriations Committee.

The argument behind the "free stimulus" is that Fannie, Freddie and the Federal Housing Administration own or back about 37 million loans, and so the government "already owns the risk." If the mortgage agencies effectively forgive some of that debt, voila, the indebted homeowners have more cash to spend.

Skeptical mortgage analysts were quick to point out that the government's two existing programs for struggling homeowners—HAMP for loan modifications and HARP for refinancings—have poor acceptance records. Their failure suggests that even a huge new forgiveness program is unlikely to work as hoped. An analysis this week by Credit Suisse, which calls the idea "too difficult to do properly," estimates the "stimulus" would be more like $10 billion to $15 billion.

Set to one side that this would trash much of the discipline that has returned to banking. And set aside the suggestion under current stimulus theory that requiring contributors to the financial crisis to honor some of their debt obligations is less important than the hope that they will spend an alternative windfall on flat-panel TVs and iPads. For an Administration given to trumpeting "economic justice," any such transfer of taxpayer wealth from renters and homeowners to irresponsible borrowers would be a spectacle. And if it were done outside the appropriations process, the scheme would sound like the SEC's recent charge that Goldman Sachs illegally failed to inform one side of its famous securities deal.

As noted in the editorial below, Nancy Pelosi is ordering her dispirited Democratic spear-carriers to return to Washington to whoop through bailout spending for teachers, whose unions ship more than 90% of their campaign contributions to these same Democrats. On the evidence, all this spending has mainly narcotized the Democratic base, while animating the GOP, which in this week's Missouri and Michigan primaries turned out by a two-to-one margin over Democrats.

A back-door stimulus via Fannie and Freddie probably would have all Republicans and most independents camped out for a week to vote on November 2. Reason enough for the Obama Administration to assure the world that like August's thunderstorms, the "free stimulus" rumor was merely passing through.

http://online.wsj.com/article/SB10001424052748703748904575411553343672456.html?m od=WSJ_article_MoreIn_Opinion