FHA in Shambles and Fed Leaves Rates Unchanged

In the WSJ, an article talked about how the FHA is close to being under capitalized and may require money from the US goverment. Fannie Mae and Fredi Mac were taken over by the US government and instead of curving its lending and running off it's portfolio of bonds, it continues to make loans. The FHA does not make loans, but it gurantees the housing loans made by lenders. Althought the guarantee is not a credit default swap, the effects are pretty much the same. Lenders give money to risky buyers, collect fees and profits, and the US government, that is, the tax payers, foot the bill when defaults occur.

Yet the Fed leaves rates unchanged, and promises to do that for the foreable future. Home prices will tumble. The buying that is taking place today is buying at an artificial price. Without FHA guarantees, the home sales numbers would be horrible, and home prices would have dropped even more.

I know the Fed wants to stabilize the economy, but there are too many artificial price signals that are occuring in the market place. Take banker bonuses for instance. According to the current thinking, bankers need to be rewarded for results, and if they are not, they will leave for a competitor. How ironic that the people most responsible for the economic collapse are complaining that they are not being properly compensated.

The economy seems to be on the mend but without true price transprarency, that is, real rates that reflect the economic reality no true recovery can last. After all, what will the Fed do after the FHA fails? Will it start to underwrite the home loans that the defunct government agencies are no longer compable of subsidising? Maybe the Fed will need a bailout itself.