Will the Housing Bubble Swallow the Fed?

"Surely now, with crises once more brilliantly contained and Fed money flowing freely, consumers will get back to borrowing and buying, housing markets will stabilize and the economy will turn smartly upward.

Not a chance. The Fed has now committed all the ammunition it has to prop up Wall Street, and shore up shaky mortgages. All that's left in its trick-bag is to turn on a Weimar-style printing press.

With all the attention focused on the Fed, investors may not have noticed that the so-called Government-Sponsored Entities, (GSEs) Fannie Mae, Freddie Mac and the utterly obscure Federal Home Loan Bank, have been pouring even more money than the Fed into housing, with little effect. The mortgage mess, it now appears, is a black hole that can swallow up the Fed without a trace.

According to the widely accepted calculations of intrepid Fed-watcher and blogger Steve Randy Waldman, the Fed can plow, at most, $400 billion into Wall Street balance sheets. After last weekend, they've already used up $90 billion of it. In the second half of 2007, however, the three housing GSEs poured more than $600 billion in new money into the mortgage markets, obviously without "fixing" the problem. In the third quarter, when GSE financing peaked, according to analysts at BNP Paribas, it was equivalent on an annualized basis to 15 percent of GDP.

The huge volume of GSE financing, of course, has begun to push up the cost of GSE borrowing, despite the winks and nods from the Treasury and the Fed that this is really federal debt. Congress and the Bush administration, in the meantime, are working on legislation that will raise GSE borrowing limits and allow it to lend on lower-grade paper.

If you're into housing bubbles, the thinking seems to be, you might as well make it a really big one - like a dirigible. We could call it the Hindenberg."