Santelli Introduces Subprime 2.0
In his first major speech since The White House got their 'flexible' man in to manage the GSEs, Mel Watt outlined his strategic plan for Fannie Mae and Freddie Mac. Predicated on the maintenance of liquidity, competition, and resilience of the national housing finance market, Watt's remarkably blind to the past proposal will, as CNBC's Rick Santelli warns, create Subprime 2.0. Easing lending standards, not lowering limits, and raising the possibility of principal reduction seems to do anything but reduce taxpayer risk and merely creates more perverse incentives. Santelli steams, as the orthodox monetary policy channel of the last 30 years continues to be pumped ever higher, "immense fiscal and monetary stimulus has gotten us nowhere." As we suspect Rich might have concluded... Watt the fuck!? "if you believe any of this, you have to be crazy after what we've been through."
Santelli and Alhambra's Jeff Snider explain how monetary policy uses housing as its funnel...
"the piggy bank becomes this faux appreciation that gets funneled in a house that becomes an ATM on the "wealth effect"
"The major economic orthodoxy is aggregate demand. The way you fill demand is through credit and debt.
So the primary channel, and all the orthodox literature agrees, for aggregate demand in this framework is through housing.
For the last 20, 30, 40 years the monetary policy of this country and around the world really has been dedicated to using housing as a way to increase economic growth... but it's incredibly inefficient.
That's what we've seen with bubbles, that's what we've seen with asset inflation and prices... the fact that it takes an immense credit production capacity to create even just a little bit of economic wealth."
And then Santelli goes off on Mel Watt's plan... starting at 1:50...
As former FHFA boss Ed DeMarco warned, "do not confuse weakening underwriting standards & underpricing risk with helping people or promoting market efficiency" - it seems Mel Watt doesn't give a shit... Santelli screams to Congress - welcome to Subprime 2!
As Santelli concludes...
"if you believe any of this, you have to be crazy after what we've been through."
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