A Light Goes On at the Fed

With yesterday's big news that five government agencies, including the Federal Reserve, have issued risk management guidelines for home equity loans and lines of credit, you have to ask one question:

What about the first mortgages?

Admittedly, it is difficult to determine whether a credit card to directly "tap" the equity in your home is more evil than a no money down, variable rate, interest-only, negative amortization loan - but it is quite clear which one comes first. And, which one enables the other (although, they now seem to reinforce each other).

[It is as if a man goes to his doctor complaining of stomach pains - a growth has formed in the patient's abdomen and it becomes larger with each passing day. The doctor at first assuages the man's fears by prescribing antacids, but the mass grows larger and more uncomfortable. It is now impinging on his spinal cord, making it difficult for the man to walk without sharp pain occurring with increasing frequency. Upon further examination the doctor fits the patient with a back brace, rather than excising the tumor. A horrible way to practice medicine, but passable monetary policy.]

So, what prompted this call to action?

Could it be that a Fed Governor read one of the recent zillion or so articles about real estate speculation and a housing bubble that only the Federal Reserve and real estate professionals can't see. An article about people quitting their jobs at Costco to flip houses full time? Or about condo-mania sweeping the country?

Let's see, the FDIC was one of the five agencies issuing the guidelines - they recently published this report: U.S. Home Prices: Does Bust Always Follow Boom?. Maybe they conducted an intervention with the Federal Reserve Board members - gathering them in an oak paneled room under false pretenses, then imploring them to take more seriously the impact of their monetary policies on ordinary individuals.

Ordinary individuals who own homes in bubble areas and who are now wealthier than they could have ever imagined due to the miracle of rising asset prices, and who are now unable to resist the temptation to spend this new found wealth to finally realize the life style to which they feel they are entitled.

Or, maybe, just maybe, this is just the first step - the proverbial trial balloon - to see how financial markets, and more importantly the over-extended, over-indebted, consumption-crazed American homeowner, will respond to reigning in the credit excesses which have deluded an entire nation into thinking that they are getting wealthy.