Toothless CFTC Tries to Bite Gold and Silver

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. CFTC (Commodity Futures Trading Commission) announced on January 14th that it was going to investigate trading in the gold and silver markets. This follows the commission's high profile hearings on speculation in the oil and natural gas markets held in the summer of 2009. Those led to the demise of the popular ETF, DXO and caused the natural gas ETF UNG to trade so irregularly that it no longer behaved like an ETF.  Both of these were investment vehicles for the small investor. Big-time speculators went on their merry way untouched and unscathed by the CFTC's action that was supposedly aimed at protecting the public. Anyone who was the least bit cynical might conclude that the CFTC's actual purpose was to protect the profits of the large commercial users of the commodities it regulates.

The CFTC efforts in investing oil and natural gas were in reality a thinly veiled attempt at price controls. Governments almost without exception resort to price controls when inflation becomes a threat. Price controls are of course extremely effective - not in controlling prices, but in creating shortages and driving prices much higher than they would have been if controls hadn't been implemented. Governments never learn however. In the short-term, the CFTC managed to drive natural gas prices to the low levels that were common in the 1990s. Natural gas was already trading at multi-year lows before the CFTC investigations and half of all natural gas rigs in the U.S. had already been shut down. The impact on natural gas was only collateral damage though from the CFTC's real target, which was oil.

Nothing has a greater impact on consumer prices than does oil and governments know that controlling its price is one of the keys to controlling inflation. Around the same time that the U.S. CFTC announced its hearings, the prime minister of England, Gordon Brown, and the president of France, Nicolas Sarkozy made a joint proposal that an international body of government bureaucrats should set the price of oil instead of the free markets. They suggested the price should be kept in the $70 to $80 range. For those who don't recall, Gordon Brown was the British government bureaucrat that sold half the UK's gold for under $300 in 1999 and the early 2000s. Gold has since quadrupled from the price where he sold it, so the UK didn't get that profit. The U.S. dollars that Brown bought from the gold sale then subsequently lost at least 30% of their value. This is the type of market 'genius' that government brings to the table. Would you like to let a government bureaucrat make investing decisions for your 401K?

The CFTC has more ability to impact oil and natural gas than it does gold and silver. ETFs that deal with energy commodities have to do so through some type of futures trading. Oil and natural gas cannot be easily stored as is the case with gold and silver. While there are ETFs for both gold and silver that only trade futures, there are 11 ETFs globally that buy physical gold. None of them store that gold in the United States. They are beyond the reach of the CFTC and the claws of the U.S. government, which for those who don't remember confiscated all of its citizens gold in 1933 and silver in 1934. In aggregate, the gold ETFs have become the sixth largest holder of gold worldwide since the first one was created in March 2003. They hold more gold than China, but less gold than France. In several more years, they could easily have more gold in storage than any central bank.  

Both oil and gold are completely international commodities (natural gas trades in regional markets). If regulation becomes too onerous in the United States, trading can and will shift elsewhere, just as trading in ETFs will shift from those that invest with futures to those that hold physical metal. When the CFTC made its announcement that it would be investigating gold and silver trading, the London Metal Exchange said it would offer clearing for gold over-the-counter (OTC) contracts in London by the second half of 2010. Hong Kong, Singapore, Zurich, Sydney, Tokyo, and Mumbai would probably like to have the trading business too if it leaves the U.S. commodity markets. The CFTC's action is just another government- motivated attempt to prop up the U.S. dollar by trying to hold the price of gold down. It won't work. The CFTC doesn't have the power to make it happen. Prices will eventually have to move to the point that the market dictates, just as they always do. 

Disclosure: Long gold and silver

NEXT: Lessons for Investors from the U.S. Senate Race

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Gas Takes Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Natural gas, the commodity, is having one of the most spectacular rallies of all times. It was up 11% yesterday alone. The near term contract hit a low of $2.40 and seems to be heading toward $4.00 (a low estimate of production costs). Even after the spectacular rally of the last few days, Natural gas futures are still in extreme contango. The October contract closed at 3.297 yesterday, while the February contract closed at 5.324. Actions of the commodities regulatory body, the CFTC, and its attempts to limit trading in the natural gas and oil markets have been responsible for natural gas's economically impossible behavior.

The CFTC drove oil ETF DXO out of business and is essentially trying to do the same with natural gas ETF UNG. UNG's price was artificially suppressed by actions of the CFTC and it has ceased to function according to any normal trading rules since this has taken place. An announcement from UNG that it would begin to issue shares on a restricted bases starting September 28th helped stoke yesterday's rally. By the beginning of the summer UNG owned 20% of futures contracts in the natural gas market and the big market players wanted the CFTC to crack down on it. Driving natural gas prices way down is also beneficial to the economy, so the government had a double motivation for interfering in the market.

An alternative ETF, GAZ, has been left alone by the CFTC and more closely reflects price action in the natural gas market. It's price movements are by no means ideal however. GAZ was up 4.5% yesterday, while UNG was up only 2.5%. Neither was up anywhere near 11%. The best performing Natural gas ETF was HZBBF (special thanks to New York Investing meetup member Kim L. for finding this obscure stock). It was up 19% yesterday. HZBBF seems to be the same as Canadian ETF HNU which represents two times natural gas (just as DXO did for oil), but it trades in the U.S. markets.

Natural gas is more subject to manipulation than other commodities because it is sold in regional markets. Unlike oil, it is hard to ship. Historically prices for natural gas are twice as much in Europe and Asia as in the U.S. Government attempts to control prices - and this is what the CFTC action represents - ALWAYS lead to shortages in the future. Natural gas will be no exception. Years from now we will look back and be amazed that natural gas was trading at $2.40 in 2009.

NEXT: Precious Metals Becoming More Precious

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

CFTC Kills Off DXO

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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DXO no longer exists. Deutsche Bank announced on September 1st that it would redeem all shares after the market closed on September 9th. DXO was started in June 2008 and had $600 million in assets. It was a investment vehicle that offered hundreds of thousands of small investors a leveraged oil play. Many members of the New York Investing meetup bought it in March and sold it in June of this year and made a 165% profit on this trade. We will not be able to do so again in the future.

The CFTC (Commodities Futures Trading Commission) has been holding hearings this summer to investigate 'speculation' in the oil market. It has specifically targeted ETFs and ETNs in this regard. Deutsche Bank did not directly mention the CFTC in its announcement but said this redemption is the result of “limitations imposed by the exchange” causing a “regulatory event”. How much behind the scenes pressure was put on Deutsche Bank is not known. Deutsche Bank is a holder of U.S. mortgage debt. While it doesn't seem to be on the list of TARP recipients, it did receive approximately $11.8 billion from AIG as a result of the government's nationalization of the company. It can also be assumed that Deutsche Bank benefits from other Fed programs that take junky assets off bank's books and replaces them with higher quality bonds. When the government 'owns you', you are likely to give it what it wants.

It is interesting that the CFTC is concentrating its efforts on 'speculation' from investment entities that are used by small investors. Like the SEC, it hears no evil and sees no evil when it comes to the large players. For years there have been two large banks that have held large short positions in Silver futures (and Deutsche Bank may be one of those banks). It took years of complaints before the CFTC agreed to investigate, just as the SEC continually ignored complaints about Bernie Madoff and his obvious $65 billion Ponzi scheme. So far, the CFTC has found nothing, just as the SEC never at any point found any wrongdoing on Madoff's part (his Ponzi scheme collapsed on its own accord). If the federal government wanted to limit speculation in the commodities market it could easily have done so, by forcing Goldman Sachs and Morgan Stanley to close down their commodity trading operations. Federal law prohibits banks from speculating in commodities and both Goldman Sachs and Morgan Stanley became banks in 2008. The government gave both firms a special five-year dispensation however. If you are a big player, you don't have to worry about 'the rules'.

The government's action in the energy market should be seen for what it is - an attempt at imposing price controls on oil and gas. Price controls never work and almost always lead to shortages and much higher prices. ETFs will not disappear either as a result of the CFTC's action, but will turn into closed-end funds. There will be an attempt to launch more of them. Each one will be smaller, less liquid and have a much higher expense ratio. More will move to overseas markets that are less restrictive. While it is just oil and gas this summer, expect other markets (particularly agricultural) to be affected in the future.

NEXT: The Cash From Clunk-Heads Program

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bernanke Says Don't Worry - You Should Worry

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Federal Reserve chair Ben Bernanke is testifying before the U.S. congress today. Expect him to paint the rosiest picture possible and the mainstream media to glom onto the 'good times are coming' scenario. In preparation for his testimony, Bernanke published an opinion piece in the Wall Street Journal today. In it he details all the policy tools the Fed has available to prevent future inflation. Indeed they COULD do all of the things mentioned. Whether they will be able to is quite another story and this is not discussed.

Although Bernanke did not state it specifically, there is one thing and one thing only that is absolutely required to stop inflation - the government has to stop printing excess money (more correctly referred to as currency). As long as this goes on, it doesn't matter what else is taking place. Governments almost without exception follow contradictory policies when inflation starts to get out of control. They will put on price and wage controls. They will try to limit capital outflow. They will try to prevent 'speculation'. They will try to lower the price of gold and silver with market manipulation. They will outlaw hoarding and black markets. They will do almost anything except printing less money and until they do, none of these other measures ever work.

More than once in his 'don't worry, the Fed has everything under control' article, Bernanke stated "economic conditions are not likely to warrant tighter monetary policy for an extended period". So the government doesn't even have the intention of printing less money. Even when it gets to the point that they know there is no other choice, they will either not do it or do it for a short time, realize it is damaging the economy, and then stop. This scenario has played out over and over again in the past. Central Banks always know that their excess money creation is causing inflation, but the economy becomes so addicted to their currency printing drug, it immediately goes into painful withdrawal when it's removed. Every central bank has the option of stopping the printing, just as Bernanke claims in his convoluted manner that the U.S. does now. But they don't do it.

As for claims that the economy is getting better, it is easy to engineer such statistics. Essentially economic activity consists of consumer spending, business spending and government spending. Increasing government spending by printing more money will improve the GDP numbers. If GDP gets better only because the government is spending more, it's highly inflationary. Better economic news is likely to be bad news. This issue wasn't discussed in the Bernanke article. Nor did he mention how he missed seeing the subprime crisis coming and how he subsequently mishandled ever aspect of it after its effects spread through the financial system. But NOW you can trust him. Yeahhhh, right.

NEXT: Dollar Watch; Bad Earnings are Good; Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Government Price Controls in the Making

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

British Prime Minster Gordon Brown and French President Nicolas Sarkozy had a article in the Wall Street Journal yesterday entitled, " Oil Prices Need Government Supervision". In this article they recommend that "the Expert Group of the International Energy Forum take the lead in establishing a common long-term view on what price range would be consistent with the fundamentals." They claim at many points in the article that producers and consumers benefit from price stability and the hand of government is needed to assure this. Obviously, their knowledge of history doesn't extend beyond yesterday's lunch.

The Brown/Sarkozy idea was tried on a mass scale in post-war communist Eastern Europe. The government kept prices very stable. That consumers benefited from the chronic shortages that resulted is doubtful. Industrial production was highly inefficient and ultimately fell apart. Some of the worst hyperinflations in history followed in the 1990s. Yes, there is certainly a lot of evidence from the real world that 'government supervision' of markets works well. Brown and Sarkozy hope to bring these benefits to YOU. Note to Brown and Sarkozy: There is already a mechanism for finding the correct long term price for any item - it's called the free market. Just because you don't like that price, doesn't mean it's the wrong price.

Unlike price controls, which is what Brown and Sarkozy are recommending even though they didn't use the term in their article and which NEVER work, there are solutions to the problems they have with the price of oil. Businesses and consumers are paying too high a price in their countries? Well they can cut the extremely high taxes that their governments place on fuel. The price of oil is going up too much. Well, stop letting it be priced in U.S. dollars or tell the U.S to stop running $2 trillion budget deficits and engaging in money printing through quantitative easing. Mr. Brown should follow this advice himself, since Britain is in possibly worse financial shape than the U.S. Don't expect any of these solutions that would actually solve the problem to be implemented though. That would require some real leadership. It is much easier to blame speculators for prices rises and this is the tack the governments have always taken throughout history.

Why should anyone listen to Brown or Sakozy as is? Do either of them have any record of economic success? I don't recall reading about any French 'economic miracle' in the last few years. As for Brown, he was the one that sold half of Britain's gold for $260 an ounce in 1999 and then bought a big chunk of U.S. dollars with the proceeds. The dollars lost a lot of their value subsequently while gold prices were rising to a $1000. The man is obviously an economic 'genius'. Britain also had a worse subprime housing crisis than the U.S. Banks there gave 125% mortgages to people who couldn't pay them back. When someone has done stupid things over and over and over again, it is generally a good idea not to follow their advice.

Nevertheless, you can safely assume that price controls will eventually be implemented because governments that create inflation are governments that try to take the easy way out. You can also safely assume that they will cause shortages. You can also safely assume that prices will subsequently rise much higher than anything previously imagined. You can also safely assume that if Western countries clamp down on free market trading, it will simply move elsewhere (to Dubai, the Far East or possibly any number of offshore money havens). Governments never learn and Brown and Sakozy's article yesterday is just more evidence that things are not going to be any different this time than they have been hundreds of times before in the past.

NEXT: Energy, Commodities and the U.S. Dollar

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Commodity Shortage Disaster in the Making

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The government is planning on doing something about those pesky speculators that keep driving up the price of commodities. Even though this has been tried thousands of times previously and has NEVER worked - and even though we have the example of the complete economic collapse in Eastern Europe that this behavior caused - and even though last falls ban on short selling of financial stocks didn't prevent their prices from falling off a cliff - this will not discourage the U.S government from creating a new mess in the commodities markets. It is true that some people never learn and it appears that many of them get elected to political office or work as regulators.

The CFTC (Commodity Futures Trading Commission) announced yesterday that it will hold hearings this month and next to explore the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets (even though natural gas is at a multi-year low and oil is 60% off the high it reached one year ago). The CFTC can also set restrictions for other commodities as well and can change margin requirements for trading (and this is also being bandied about). ETFs, which are used as investing vehicles by small investors, were especially singled out for restrictions.

It has been pointed out that insiders like the floor traders and commodity trading firms in Chicago are unlikely to be impacted by the CFTC proposals that are supposed to be protecting the public and not the industry. For those not paying attention, commodity prices nose-dived before this news was released, not after. Probably just an amazing coincidence and not the insiders getting the word before the public (if you believe that, I have a bridge in Brooklyn that I'd like to sell you). It is quite clear that if anyone gets disadvantaged from changes in CFTC policy, it is meant to be the small investor who relies on ETFs and not the big players.

Political pressure is being put on the CFTC by senators Bernie Sanders, who is a Socialist even though the media describes him as an independent and Bryon Dorgan, the biggest economic ignoramus in congress -and that's really saying something, and congressman Bart Stupak from Michigan who wants lower oil and gas prices to protect the state's auto industry (or what's left of it). Attempts to control oil and gas prices were last tried in the U.S. in the early 1970s when Nixon imposed wage and price controls. Oil producer profits were cut to such an extent that U.S. oil production dropped substantially. The U.S. which had been self-sufficient in oil up to 1969, then became extremely dependent on foreign sources. OPEC was then blamed for the shortages and big price hikes that followed, but it was U.S. policy that made it all possible. Did the government blame itself? Of course not! It was those rapacious speculators and evil foreign forces that made it happen. Historical analysis of past inflations shows very clearly that without exception speculators and foreigners are blamed for inflationary price rises that originate with government printing too much currency and then attempting to limit the mess it engendered with price controls. This scenario has played out hundreds, if not thousands, of times. This time will be no different.

The forces of economics can no more be banned by government action than gravity can be outlawed. So what is likely to happen? Since commodity trading is not limited to the U.S, but large active markets exist in London, Tokyo, Hong Kong, Singapore and up and coming Dubai, expect trading to increasingly move to those places. Dubai in fact wants to capture more commodity trading business. When U.S. policy hands this to them on a silver platter, except to hear how those scheming Arabs stole this activity from the U.S. ETFs also exist in the English, Canadian and Australian markets (and some others), that American small investors can get access to. Investment money will simply move out of the U.S. - at least until the government tries to impose capital flow restrictions to prevent this (expect this at some point in the future).

If prices of oil are held down temporarily (and it will only be temporarily) by CFTC restrictions or other government action (yes, this will be coming) you can expect shortages in gasoline, heating oil and diesel. There were long gas lines in the 1970s for good reason. While people had to wait a long time and sometimes could only gets a limited quantity of gas, they still got some gas. Heating oil was in danger of running out in certain places - like Minnesota - as well. Things could get much worse this time, since shortages are the only thing you can rely on from price controls. Even worse, prices always wind up higher than they would have been if the price controls had never been imposed in the first place.

One more piece of advice. In case the U.S. government does decide to outlaw gravity and some politician tells you it's safe to jump off the capital building. Make sure you reply, "You first".

NEXT: Government Price Controls in the Making

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

First Four Trading Days Review

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The message from the markets has been quite clear in the last four trading days. The big money is negative and taking its money out. All indices had significant drops today, leaving the first of the quarter indicator highly negative. Technicals deteriorated even further. About the only thing that was up today was the U.S. dollar, although bonds rallied after today's auction was over. The dollar and bonds should be tanking big time. Oil went down even more and the reason for its decline, natural gas and other commodities has now become clear.

The Dow closed down 161 points today, even further below its 50-day and 200-day moving averages. The 50-day is below the 200-day and both are declining, a typical bear pattern. Nasdaq, the strongest of the averages pierced its 50-day today, closing down 41 points. The S&P fell 18 points and broke and closed below its 200-day today after breaking below its 50-day last Thursday. The Russell 2000 fell 10 points and managed to hold just above its 200-day. All and all, a pretty ugly situation.

Light Sweet crude closed at 62.93, but was even lower during the day. Oil has dropped 12% since last Wednesday. While the media is claiming its because it was overpriced and the economy is bad, this is not the reason (as usual, if the press reports it, you should first assume the explanation is wrong). What has happened is CFTC (Commodity Futures Trading Commission) says it wants to crack down on rampant speculation in the energy markets, by imposing position limits for commodities of finite supply (which is every commodity). The commission is planning hearings and is also considering raising margin requirements. One of the major implications of this proposal is that ETFs will have quotas imposed on them. The big money players presumably had the news before the public and shorted into it. Will the CTFC investigate this? Don't hold your breath. The people who are supposed to be stopped from speculating are the small investors like yourself, not the big insiders.

A quote from the CFTC news, "The government's use of free markets via auctions to help find prices for hard-to-sell assets in the financial sector shows how adept supply and demand are at setting values. But when it comes to commodities that people, industries, economies and nations depend on, the susceptibility of free markets to manipulation can prove dangerous". Free markets are indeed dangerous to a government that doesn't like the prices they set because it continually overinflates its currency. So we must save the free markets by destroying them! Huh???

It is interesting that this attempt to control rampant speculation in oil is taking place one year exactly after oil peaked at $147 a barrel and while it is now trading in the 60s. Something doesn't seem to make sense with this picture. This move is effectively an attempt to create price controls on commodities (by a government that is constantly telling us that there is deflation and a big risk of prices falling). The only things price controls are effective in creating is big shortages and black markets. They ultimately cause prices to go higher than they would have. When you can't get any gas for your car two years from now you'll at least know why.

NEXT: Commodity Shortage Disaster in the Making

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Subprime Freezes Over

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

In December of 2007, the Bush administration proposed freezing the rates on adjustable subprime mortgages for 5 years. This program was 'voluntary'. Indeed the U.S. government had no legal authority to void valid contractual commercial transactions between parties, one of the most fundamental underpinnings of our economy. Nevertheless, presidential candidates Hillary Clinton and John Edwards both immediately criticized the proposal as not doing enough and advocated an even longer freeze on rates.

While the alleged purpose of this program was to help the 'struggling homeowner', an examination of the details indicated otherwise. Homeowners with fixed-rate mortgages got no relief. Homeowners with non-subprime variable-rate mortgages got no relief. Why were just sub-prime adjustable-rate mortgage holders singled out? The answer is simple, these mortgages were defaulting and would be defaulting at the highest rates. Many of these had been granted at the end of the mortgage boom and were for a substantial percentage of the house price at the time of sale (up to and even exceeding 100%). Mortgages for 100% of equity, especially when housing prices are falling, are the last thing banks want to take back and have to write off on their books. These are guaranteed losses for the bank since the foreclosed house would likely sell for much less than the amount of the mortgage. Any bank that had a large number of this type of defaulted mortgages could become technically insolvent fairly quickly. Mortgage bond holders, many of them big banks and brokers, who had bought bonds containing these loans would also lose out. It is a much better deal for banks to foreclose on mortgages that have been substantially paid down, since they make a big profit on these. These homeowners were the most deserving and required the least assistance, so they should have been the centerpiece of any mortgage relief program - but they weren't. Helping them would mean hurting bank profits.

The proposed freezing of sub-prime mortgage rates also represented the first attempt at price controls on the part of the government. Price controls are an almost universal response to inflation by the authorities and prices for necessities are the most likely to be controlled. While the rise in mortgage payments was preplanned and the exact amounts were known in advance (rarely the case with most inflation,) this was no different from any other attempts to dampen rising prices by freezing them. it was not surprising that this took place first in housing either since it is one of the most basic of necessities. Unfortunately, price controls always have negative consequences. In the case of the mortgage freeze, anyone offering loans in the future would have to demand higher rates to compensate for the possibility that rates might be frozen. Or lenders seeing higher risk in the market would simply not offer loans at all. In both these scenarios future mortgage rates will be higher than they would have been. The government could then solve this problem that it created by offering subsidies (a common second response to increased prices for necessities), most likely through Fannie Mae and Freddie Mac. These government supported enterprises would then wind up dominating the mortgage market so much that it would effectively be completely socialized. By the end of 2007, it looked like this was already taking place.

NEXT: The Fed's (long) Term Auction Facility

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please see our web site: http://investing.meetup.com/21