The Daily 2¢ - The China Solution

Seeing Housing and Urban Development Secretary Alphonso Jackson sitting next to Treasury Secretary Paulson at yesterday’s lender bailout summit jogged my memory of Jackson’s recent trip to China that, although covered in the traditional media, didn’t seem to garner the attention it deserved.

In early July, Jackson appeared in a very candid Bloomberg interview in Hong Kong as he was passing through on his way to meetings with Chinese People's Bank of China governor Zhou Xiaochuan, Construction Minister Wang Guangtao, and other Chinese officials.

In the interview, Jackson showed no hesitation when revealing that the purpose of his visit was to attempt to persuade China to participate in the “very lucrative” market of American mortgage backed securities.

Specifically citing both FHA and Ginnie Mae, Jackson’s intention was to lean heavily on the explicit federal guarantees that both of these programs provide when making his case to Chinese officials who, as he stated, had already showed some interest in the investment.

“The best argument that we can make is that they have the full faith and credit, and backing, of the US government. “

This was the precise message he pressed during the delivery of his speech as well stating “They are a sound, solid investment, a win/win situation for the investors and for the American people. These securities are attractive because they have no credit risk and are backed by the full faith and credit of the U.S. Government. Also, most Agency Mortgage-Backed Securities even have a higher yield than the Treasury Securities.”

The result of the meeting was a lengthy “Memorandum of Cooperation” that was signed on August 30 between the two governments that established many areas “of mutual interest”.

Given that the federal government now seems bent on dramatically expanding its role in the mortgage market, I thought it was important to recount the events surrounding the Jackson visit to China.

Keep in mind that all mortgage related programs and agencies of our government (Fannie Mae, Freddie Mac, Ginnie Mae, various FHA programs etc) require some form of private investment in order to function.

With a reeling and risk averse Wall Street now pulling back from mortgage securities, possibly even including government agency investment, China may inevitably pick up the demand for agency securities and even drive an expansion.

It seems to me that a more sensible approach, considering that compensation for failed government agency securities would be funded by the US taxpayer, would be to let the turmoil in the US housing markets play itself out before looking for additional fuel from foreign investors.

More private investment will likely equate to a broadening of these programs possibly putting them further in jeopardy of overreaching.

This would be especially risky considering the uncertain state of the housing markets at the moment.

I’m Back!

First, many thanks to all the wonderful readers that wished me a happy vacation… It was really nice to come home to so many great emails!

Well, Bermuda was really amazing. I would definitely recommend it to anyone looking for a fun, beautiful, quiet and relaxing island destination.

It has stunning beaches and coves (pink sands on the south beaches!), exceedingly nice people, loads of fish to snorkel at and plenty of great points of interest and activities.

We even rented a small Boston Whaler and spent half a day shooting to-and-fro across the Great and Little Sounds and to the back side of the island around Spanish Point.

We were literally whizzing in-between the island ferries and alongside cruise ships! They are VERY laid back on that island to say the least.

Also, with Jet Blue now flying there it’s MUCH cheaper to get to than it had been in the past… Just $200 round trip from Boston (and likely other cities as well).

Better yet, it’s such a short flight… only 2 hours from many cities on the east coast and the Bermuda International Airport is extremely easy to get in and out of. It’s so quick and easy that your arrival and departure days almost become full days on the island.

On the way home I found myself plotting out just how and when to get back there again in the near future.

As for the housing and economic events that have transpired since I left all I can say is WOW!

Is there any doubt now that Great Decline is in full swing?

Is there any doubt that Bernanke and the Fed, Paulson and Lazear, and all the Bullish pundits, either purposefully or not, underestimated the depth and breadth of the housing collapse and the spillover effects it’s having on the general economy?

It seems clear to me that, at this point, Bernanke, not Yun, is the new Lereah and that no amount optimistic speak of the health of the overall economy, false notions of “containment” or even massive injections of liquidity is going to spin the tide against this colossal bust.

The mortgage market is imploding, homes sales are continuing to slide, inventory is rising and prices are falling.

Most American consumers are tightening their “discretionary” belts and many are losing their homes to foreclosure.

The only question now is how long will it take for this ugly deterioration to completely unfold and lead to recession and a reversion to the mean for home prices?

As we can see from last week, the collapse is quickly becoming one of the biggest stories of our time… far larger, I think, than all the bubble hype that ginned up the mania to begin with.

We are still at the start of this immense process and as it becomes clearer and more obvious to the average American that the glory days of the run-up are long gone, I expect to see the real correction kick in.