Bernanke

When the International Monetary Fund warned of a potential double dip in the housing market last week, it raised the question yet again of what would constitute a double dip, and how will it affect homeowners?

The IMF pointed to the fact that, while signs of recovery are stronger than expected, the backlog in foreclosures and the number of mortgage holders that are still underwater, as well as still-high unemployment, "pose risks of a double dip in housing."

Indeed, with even the rich choosing strategic default over mortgages on McMansions, and celebrities selling at a discount, it would seem that the housing market is still struggling to gain momentum. While the tax credit moved some inventory in the months prior to its expiration at the end of April, sales came to a screeching halt, and even though mortgage rates are at historical lows, tougher lending rules and gun-shy buyers are pushing a big "pause" button on house sales.

But does this mean a double dip in the housing market is in our future?

The market value of your house is down 20 to 30 percent from its peak and could have further still to go. Jobs are scarce and the idea that home values will rise again seems remote. But this, too, shall pass (yes, your home value will eventually recover). And I can tell you exactly why -- psychology.

The good news is that for all the economic pain and suffering, we've probably just bought ourselves, as a people, 50 years of immunity to economic depression. The bad news is that this immunity has nothing at all to do with house prices, public policy, Bernanke, Dodd, Geithner, or Obama, much less Paulson or Bush. It would have happened anyway.

Not long ago I wrote a post about a National Bureau of Economic Research study that blamed the Great Recession on a bank panic rather than that usual suspect, the sub-prime mortgage crisis. There was a sub-prime crisis, sure, but it was just the catalyst for the much more damaging bank panic that followed.

All this relates back to a little-noticed structural change in the U.S. banking system where Nixon-era deregulation led to the growth of money market funds that killed the savings deposits that had traditionally backed most bank lending. Rising to replace savings (and make a lot more profit) was loan securitization and REPO collateralized inter-bank lending enabled by Reagan-era deregulation. The Great Recession was caused by the banks all losing faith in each other, with commercial lending grinding to a halt as it continues to in many places even today.

Heck of a story, eh? Now that I had a better understanding of the actual crisis, I immediately began to wonder how we can avoid it happening again?

We can't.

Give the Federal Reserve some credit. Not only is it (for now) propping up a broken mortgage finance system with a trillion-dollar-plus commitment to buy mortgage-backed securities from Fannie Mae, Freddie Mac, and Ginnie Mae, the Fed is also combing through its regulations to fix glaring vulnerabilities, so the current crisis doesn't repeat itself.

While campaign contributions from the financial industry are shredding financial reform legislation in Congress, the real action is taking place at the Fed.

But not if the National Association of Mortgage Brokers can help it. Just before Christmas, the group rallied thousands of its members to protest new rules the Fed is currently considering that would effectively destroy brokers' compensation lifeline -- the yield spread premium.

Yield spread premiums are payments that brokers receive when they sell a borrower a higher-interest loan than he or she actually qualifies for. Brokers defend yield spread premiums as a way for consumers to pay off their closing costs over time. In proposing its restrictions, the Fed came to a very different conclusion: YSPs pose "significant risk of economic injury to consumers," because they give brokers a powerful incentive to put borrowers into loans that are too expensive and risky.

Or as official TARP watchdog Elizabeth Warren puts it, a YSP is "a bribe to steer you to the loan that is more expensive for you and more profitable for the lender."

The recession is over, we're told by Bernanke, Geithner, and Summers, it's time for an exit strategy, to wind down the economic stimulus before it turns inflationary. Big banks are booming, TARP funds are coming home to roost, the market's up, the Fed has stopped buying mortgaged-backed securities, and the first-time home buyer tax credit will end in a few months.

Why, then, are we all still so nervous? Because the recession really isn't over, not for you and me. And, absent renewed stimulus -- for which there seems to be no political will -- we're screwed.

Here's a look six months in the future if the U.S. continues to follow its current economic course.

Weak regulations for Wall Street, not low interest rates, caused the housing bubble, according to Federal Reserve Chairman Ben Bernanke.

In a speech to the annual meeting of the American Economic Association on January 3, Bernanke delivered a highly technical defense of the Fed's handling of events leading up to the housing and financial crisis. The cover-your-backside speech came as Bernanke battles to keep his job and preserve his agency's power.

The Federal Reserve, which Bernanke has headed for the past four years, has been accused of fostering the housing bubble through its policy of maintaining rock-bottom interest rates and by looking the other way as lenders and borrowers alike piled on risk.

Now, Bernanke is leading the parade on financial industry reform. He singled out "the increasing use of more exotic types of mortgages and the associated decline of underwriting standards," rather than monetary policy, as the underlying cause of the bubble, concluding that "the best response to the housing bubble would have been regulatory, not monetary."

A chastened Bernanke listed the Fed's attempts to regulate the housing bubble, which included issuing non-binding "guidance," but also admitted that more should have been done. "The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter," he said.

Since AOL is no longer of the Time-Warner body, it's easy to say Time made a mistake when it announced this week that Federal Reserve chairman Ben Bernanke should be its Person of the Year. But if Bernanke was a mistake, who should be Person of the Year? I nominate Grandma -- your Grandma, my Grandma, every Grandma -- because Grandmothers as a group are doing a better job than Ben is this year at propping-up the American way of life.

But wait, didn't Ben save us all from a Great Depression? Didn't his inspired and bold action opening taps and taking an axe to hogsheads of money down at the Fed preserve our very way of life? No. He preserved Wall Street's way of life. He saved the banks, not their depositors. In fact, he used the depositor's money (our money and that of our children and grandchildren) to not save the depositors, which I find particularly ironic.

We had a real estate crisis that precipitated a banking crisis, but Ben only fixed the banks, and not all that well, either.

And Grandma? She wrote a check, lots of checks, to her kids and grandkids helping them keep their homes. There is right now a charitable transfer of wealth happening from the oldest Americans to their middle-aged children that is, in many cases, the only thing keeping the latter in their homes.

Funny nobody talks about this.