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Nuthin' But 'Net: To bail, or not to bail?

That is the question, as the housing market's decline accellerates, commodity prices soar, consumer confidence crashes, and the question of what to do about it seems to stump just about everyone.

President Bush said this morning there'll be no recession, and rejected calls from governors around the country for a second stimulus package that would focus on (job-creating) infrastructure and transit improvements. And Treasury Secretary Paulson says the Bush Administration does not support a taxpayer funded bailout of the mortgage banking industry/overwhelmed borrowers. Here's the quote: (bookmark it) "I don't think I've seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars." And to think it was just a few months ago that Secretary Paulson, his boss President Bush and Fed Chairman Bernanke all said raising the portfolio caps of giant mortgage Government Sponsored Enterprises Fannie Mae and Freddie Mac would not happen, at least not without significant regulatory reform. Ahem. More on the GSEs below.

First, the whole "what to do about the crashing housing market" thing. There are lots of proposals circulating on Capitol Hill, and the first one up has as its centerpiece something known as "cramdowns." I guess the poetic name comes from the fact that it involves lenders having modifications of loans crammed down their throats. Tanta is for them, which is probably all you need to know. But the Bush Administration says this is a lender bailout. Which is rather puzzling considering the Mortgage Bankers Association is against it. Housing expert Elizabeth Warren might be on to something when she guesses the bankers' opposition might be related to a hope that a much bigger bailout could be coming.

And what form would that take, you ask? Check this out: both Alan Blinder, who was on President Clinton's Council of Economic Advisors, and analysts at the American Enterprise Institute are advocating re-creating a 1933-era program to buy mortgage debt from banks and re-lend it to borrowers facing foreclosure, with taxpayer-backed guarantees. The agency was called HOLC, the Home Owners Loan Corporation. Setting aside for a moment the fact that Alan Blinder and the AEI agreeing on something is a bit of a scary development, here's what both are ignoring: by 1933, home prices had already fallen 30% nationwide from 1925 peaks. NOW, prices need to fall ANOTHER 30% to get back to levels that held for generations in this country (median home price = 3X median income). Bank of America and Credit Suisse are also floating a bailout scenario: make no mistake, it's a bailout geared to LENDERS, not borrowers.

But hey, why wouldn't banks be looking for a helping hand from taxpayers: bank failures are coming.. which we've talked about in this space and Chairman Bernanke affirmed today. I guess we could have taken the hint from the WSJ confirming that the FDIC is hiring retirees to handle a coming increase in workload. At least there's one growth industry out there. Oh here's another hint: bank earnings fell 83.5% in Q4 from the prior year.

And an interesting Marketwatch story that you can file under: those who refuse to learn from history are doomed to repeat it.

Now to those GSEs. On the same day Fannie Mae reported horrible 2007 results (a $3.6B loss in Q4), they also announced that regulators were suddenly allowing Fannie and Freddie Mac to lift their portfolio caps and expand their business. This on the heels of the stimulus package which raised conforming loan limits. Flashback for some background: Yves Smith as NakedCapitalism did his usual bang-up job of getting to the heart of the matter back in October. Moody's expects FNM to lose a lot of money in coming months. Bloomberg's Jonathan Weil looks at Fannie Mae's precarious position. And blogger Mike Mish Shedlock looks at systemic risk at Fannie.

And speaking of systemic risk, economist and NYU professor Nouriel Roubini testified on Capitol Hill yesterday, and if you want to ponder the downside risks to the global financial system, take a look. (Hat Tip: finance professional with integrity Scott Gerstein.) 

But since we like to get all points of view around here, here's businessman Sam Zell, who unloaded his real estate empire at the top tick, saying the real problem with the economy is that the Democrats are talking it down.

One last topic: the announcement this week that the agency that guarantees pension funds is reaching for yield by putting more if its assets in the equity markets. If that makes you feel uneasy, try this on for size: the GAO says pension plans investments in hedge funds have grown from $3.2B in 2001 to $50.5B in 2006. And this might not be the worst idea ever, but it's up there: the 401K debit card.

And hey if you really want to understand the mortgage crisis, and don't mind bad language, here's your primer, right here.

Confidential to my buddy Tom Lea. See ya tomorrow.