Big Ben and the Fed - The Set Up Is Here

There are those that say the Fed is behind the curve on the current financial crisis, and that may be true. Seems they are behind the curve on lots of things...

Recently, and I mean as recent as March 1, Wreckonomics stated that we felt that a large bank bailout was coming courtesy of Fannie Mae, Freddie Mac and FHA.

Today Fed Chairman Ben Bernake gave a speach in Orlando urging lenders to do more, like forgiving principal on loans to help ease the burden on homeowners (many of who never deserved the loans they recieved).

"This situation calls for a vigorous response," Bernanke said. "With low or negative equity, as I have mentioned, a stressed borrower has less ability and less financial incentive to try to remain in the home."

Bernanke actually thinks that giving away equity in a home will help the situation. I disagree completely. How much equity do you think a lender is willing to just walk away from? 10%? 20%? And when the values of the homes fall even further and owner's are back to less than 5% and perhaps even upside down again, how long until they walk away?

And let us not forget about the millions of responsible homeowners who qualified for their loans, put a little money down, and have been faithfully making their payments on time since day 1. Some for years and years. Don't they deserve even a little more of this gift?

Honestly... I don't have a PhD from Harvard and I'm not considered the world's foremost economist (yet)... but this is an amazingly insane idea and worse than that, it shows that our chief central banker now has no viable solution in mind. Do you really think this would happen? Lets get serious. They'll never do it because they know it's ludicrous.

The bailout, however nuts, is in the works. Bernanke goes on to say:

"The government-sponsored enterprises (GSEs), Fannie Mae (FNM) and Freddie Mac (FRE), likewise could do a great deal to address the current problems in housing and the mortgage market," Bernanke said. "New capital-raising by the GSEs, together with congressional action to strengthen the supervision of these companies, would allow Fannie and Freddie to expand significantly the number of new mortgages that they securitize."

"I urge the Congress and the GSEs to take the steps necessary to allow more potential homebuyers access to mortgage credit at reasonable terms. "

The groundwork is being laid. The fix is in, and they know it. We are going to pay for this mess, folks. Better get used to the idea.

As for the market itself... they really don't care. The banks are the number 1 priority.