Government Programs May Be Creating New Bubble

In the Quarterly Report to Congress from the Office of the Inspector General for the Troubled Asset Relief Program, it stated "Government Programs Risk re-inflating Bubble."

"To the extent that the crisis was fueled by a bubble in the housing market, the Federal Governments concerted efforts to support home prices risks re-inflating that bubble in light of the Government's effective take over of the housing market through purchases and guarantees, either direct or implicit, of nearly all the residential mortgage market."

Here is the break down of support for the residential mortgage market.

*Support of Primary Mortgage Market - Insure Mortgages of Homeowners
FHA - insured at $757 Billion
VA - insured at $269 Billion
USDA - insured at $56 Billion

*Support of Secondary Mortgage Market - Guarantee and Purchases Mortgages
Fannie Mae $2.1 Trillion for Guarantees
Freddie Mac $1.9 Trillion for Guarantees
Ginnie Mae $864 Billion for Guarantees
Federal Home Loan Banks $1 Trillion
Fannie Mae $752 Billion Purchased
Freddie Mac $762 Billion Purchased

*Emergency Support During Crisis - Buying MBS, Tax Subsidies, and Support GSEs
Federal Reserve $1.1 Trillion Purchased
Treasury $331 Billion Purchased and Senior Preferred Stock
Treasury TARP $40 Billion to support PPIP
Treasury IRS 2009 First Time Home buyers Tax Credit Tax Subsidies

Grand total $9,931,000,000 - Almost 10 Trillion Dollars!

The Government believes these are the mechanisms to support housing prices. Keeping Interest Rates Low, offer tax credits, buying bad loans are all aimed at creating a demand for housing. One of the fundamental problems here is that the Institutions that became "To Big To Fail" are ironically now even bigger.

The amount of money the Government has put into the mortgage market virtually guarantees control over the housing sector. The big question is two fold; first what is Government going to do with all the purchases, Insuring and Stock it has or will purchase; and second what's going to happen when the Commercial Real Estate Market needs Government Life Support too? A Government Run Mortgage Market, and still Wall Street manages to get subsidies for their "even larger" "too big to fail institution", changes little in the way the business is being done from the practices that brought the collapse of the markets and continues business as normal.

As the markets dry up due to these purchasing of loans, the low interest rates and add the tax credits, then what? Another bubble, if banks have more inventories, interest rates rise, no more tax incentives and home sales will drop fast.

Somehow knowing that 10 Trillion Dollars of the Government's Money, our Tax Dollars, literally owns the home mortgage market doesn't make me feel too confident about our chances to avoid a second bubble. I hope we don't hear a "pop" in the future.