Top TARP Cop Warns: The Bubble Is Back
In his latest quarterly report to Congress, Barofsky accuses the Obama administration of recklessly reinflating the real estate bubble in an attempt to keep the housing market going and prevent the collapse of financial institutions.
SIGTARP -- not a Bond villain but Barofsky's shorthand title -- sums up all the sundry spending in one handy place. The Federal Reserve has been buying mortgage-backed securities and other mortgage-related debt in enormous volume, projected to reach $1.2 trillion by the time the effort expires at the end of March. Treasury is spending hundreds of billions more to capitalize Fannie Mae and Freddie Mac, so the agencies can continue to finance home mortgages. Congress has extended the $8,000 tax credit for first-time homebuyers and added a $6,500 credit for existing owners buying new homes. And while Treasury's $75 billion Home Affordable Modification Program is designed to forestall foreclosure for homeowners, its direct (and intended) effect is to keep home prices high.
Combine all that spending to boost home prices with a still-bloated financial industry – too big to fail, expecting to get bailed out, and rewarding executives with huge bonuses in exchange for taking big risks – and, warns Barofsky, the U.S. financial system is headed for The Great Crisis, Part II. "Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," cautions the report.
It's old news that the feds are reinflating the bubble by propping up prices -- I wrote about it while George W. Bush was still president. But it's still a big deal to have a critic as influential as Barofsky. He is a prosecutor - a former assistant attorney general in New York specializing in mortgage fraud. When he says price inflation is not just a waste of resources but a dangerous development, we'd all do well to listen.