Nomo- GSE Problems are DEEPER than admited yet.. read between the lines on these comments from a senior FT writer. Could the Fed be preparing to take MS Roach's advice and put up ST rates?
F- "Mr Greenspan's warning was accompanied by one from Gregory Mankiw, the chairman of the President's Council of Economic Advisors, who warned: "Even a small mistake in GSE risk management could have ripple effects throughout the economy."
What's most odd about these warnings is that they appeared to come out of the blue. Over the past two or three years there has been a stream of articles, speeches, conference calls, and tedious op-ed columns by people such as yours truly about the potential systemic risk posed by Fannie and Freddie.
Since Mr Greenspan is the master of acting hyper-political while posing as non-political, and since Mr Mankiw is on a very short leash held by the White House's political operators, one has to wonder the following: what do they know that we don't know? Is some buttress in the financial system going to fail soon? Why are the pilot and co-pilot putting on their parachutes? Should we buy some more canned food and ammunition for the country house?
Not that I don't agree with everything both men said. They were entirely correct. However, there is no chance at all that there will be limits placed on housing finance in an election year. These are ass-covering memos.There is also a red herring buried in Mr Mankiw's remarks. He said: "The [GSE] charters do not require the federal government to bail out a troubled GSE." This is true. Furthermore, the GSEs themselves say they do not need a back-up federal bailout. Their derivatives book, they say, enormously reduces their risk from a rapid increase or decrease in interest rates. Both statements are subtly deceptive because they don't identify the parts of the financial system that would truly be at risk in the event of a serious "rate shock"."
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