Sounds like a good idea. Hope it works.
Yesterday several key central banks, including the US, put forth a plan to give bankers confidence in each other. If it works, the plan will allow the central banks to turn straw into gold. If not, it will be just another fairy tale for which local tax payers will have to shell out.
Basically, the financial systems of the world outsmarted themselves. The idea of bundling mortgages and selling them as securities is very sound, if you don’t over do it. Well, people being people, over did it to the point where the bankers of the world became confused by their own ideas. They didn’t know the details of what was in their securities and determined that it was safer to not trade them than to trade them. Not a bad strategy for a few financial institutions, but if everyone does it the economies of the world grind to a halt. That is exactly what the central banks of the world saw building out there.
The plan is to take the securitized mortgages of uncertain risk and trade them for government bonds. The bonds have the full faith and credit of the issuing government. This will work well if in fact the risk in the securitized mortgage instruments isn’t horrible or at least its measurable.
That last point may be the big one. As events have played out and financial markets have collectively come to understand how the mortgage market is going to react, they understand the risk in a broad market sense. With that understanding they can put a price on it and control it. If they financial market is right and yesterday’s stock rally might lead one to think that they are then the financial machines will again begin to turn. It will take a little time, two to three months, to really know.
If the program of trading government bonds for securitized mortgage instruments works, we will see the real estate market begin to stabilize nationally. Individual markets will react differently, but across the board we will have seen the end of the beginning of the real estate market crash. That will mean that it will not be a bad time to buy at the new low, low prices.
It does not mean a return to previous market conditions. Lenders have learned lessons. Money will be much tighter than before and probably more expensive, but there will be money.
Yesterday was good news. Split a half-bottle of champagne with two friends and sleep better. Some rationality may be returning to the financial world.
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