By ANDREW JEFFERY

This post first appeared on Minyanville.

The horses, pigs, cows, goats, sheep, llamas, ostriches, dromedaries and rhinos have all left the barn, yet the US Securities and Exchange Commission (SEC) still thinks it should be minding the door.

In light of its woeful inability to perform even the simplest of tasks — like making sure the biggest hedge fund in the world, I don’t know, makes a trade once every 13 years — the Obama administration is looking to strip the SEC of certain regulatory responsibilities.

And rightly so.

According to Bloomberg, plans could be announced as early as next week outlining just how watered down the SEC’s role in the new Obama regulatory regime could be. It’s expected the Federal Reserve may take over the SEC’s oversight of firms deemed “too big to fail.” Keeping tabs on mutual-fund operations could become the domain of certain banking regulators.

The SEC, for its part, under the new leadership of 20-year veteran of the agency, Mary Schapiro, is fighting back. Shapiro says she’s frustrated the SEC isn’t more involved in high-level negotiations with financial firms like Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), and is making great strides in repairing the regulator’s tattered image.

Commendable, but too little too late.

The SEC is widely viewed as having committed the biggest regulatory bonk in modern financial history, turning a blind eye to Bernie Madoff’s $65 billion Ponzi scheme, and failing to, even in the remotest way, protect investors from the implosion of the market for mortgage-backed securities and other structured financial products stemming from rampant fraud, scant disclosure and blatant conflicts of interest.

Oh, and just days before Bear Stearns collapsed into the waiting arms of JPMorgan Chase (JPM), then SEC Chairman Chris Cox went on national television, assuring the country Bear was in good shape. Oops.

The SEC is a case study in regulation gone bad. It’s one thing to have openly unregulated markets, where participants understand there’s no one guarding the hen house. But when markets are purportedly policed by a powerful government body, investors assume some level of basic integrity and honesty.

By violating this trust, the SEC proved that weak regulation — and more specifically, weak regulators — do more harm than any amount of deregulation could ever do.

The looming restructuring of the financial regulatory complex will be a messy, political, imperfect process. But if the first step is dismantling the SEC’s web of incompetence, then we’re off on the right foot.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Remember the good old days? Back when you and the credit crunch were young, and only those “subprime” people over on the other side of town — you know, the ones living wildly beyond their means, dependent on credit for the very necessities of life — had to deal with the harsh reality of life without free and easy credit?

Those happier times are long since passed, as the malaise continues to seep its way up the economic spectrum. Now, even the most creditworthy consumers who haven’t missed a payment in years are seeing credit lines cut, interest rates raised and finding it increasingly difficult to get a mortgage. They’d better get used to it - the free lunch is over.

Up in Washington, where economic rationale and populist rhetoric seem to be more mutually exclusive than ever these days, the Senate is voting on a widely debated new set of rules for the credit card industry.

According to the New York Times, although the legislation doesn’t cap the rates companies like Capital One (COF) and American Express (AXP) can charge their customers, they’ll be forced to up rates more slowly — and with more disclosure — meanwhile making it tougher to impose late fees on borrowers that can’t keep up. This will reduce lenders’ earning power, not to mention their inclination to give out credit lines to questionable borrowers.

While risky borrowers will bear the brunt of late fees, over-limit charges and slashed credit lines, the well-to-do are in for the biggest shock. Banks are considering curtailing or doing away entirely with rewards programs, grace periods before interest charges kick in and accounts without annual fees. Gone are the days when paying your bills on time was a path to free credit.

The country’s biggest banks, JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) have already told Congress the new rules will force them to limit credit availability and increase fees. While this may bode well for profit margins in the near term, not so for the broader economy.

In light of the financial implosion wrought by too much debt supported by not enough real income, it’s hard to argue credit card companies shouldn’t be a bit less free-wheeling when handing out plastic. But analysts are quick to point out that paring down consumer credit will have a dastardly effect on our consumption-based economy.

For a country whose economy is two-thirds consumer spending, and whose consumer is (still) addicted to credit, the new legislation is like pumping the economy full of Xanex - everything will just slow down.

And while in the long run, less dependence on cheap and easy credit will help prevent the sorts of credit crisis like the one we’re experiencing right now, we’ll likely look back with 20/20 hindsight and say this legislation went too far, constricted credit too much. This is a shame, since before Congress even cooked up the idea of the new rules, the natural deleveraging cycle was already restricting credit on its own.

Debt isn’t in and of itself, bad. As Minyanville’s Kevin Depew wrote today, “real lending and economic activity will only improve when real savers see real value at the right level of risk. That will only occur in the short-run with vastly lower prices, or in the long run with stagnant prices and the benefit of time.” Indeed.

Credit allows a transfer of risk from those who want to take it, but can’t, to those who can take it, but need to be appropriately compensated for putting their cash on the line. This can foster healthy economic growth - when used properly.

That day will come again, but that day isn’t today.

This post first appeared on Minyanville.

Freedom is back in vogue: Americans are finally growing tired of living in the shackles of debt.

According to the Wall Street Journal, government-led efforts to jumpstart lending are being derailed by weak demand for new loans. As the recession rolls on, an increasing percentage of consumers are opting to pay with cash or (gasp) save their hard-earned money.

Initiatives like the Term Asset-Backed Securities Loan Facility (TALF) aim to free up consumer credit by supporting the market for asset-backed securities. The Federal Reserve and Treasury Department hope their efforts will enable American consumers to start spending again.

During the boom, fixed-income investors snatched up bonds backed by all types of debt - credit cards, auto loans, and, of course, mortgages. High demand for these seemingly safe investments pushed down interest rates, which stretched consumers’ budgets to the brink - and beyond.

But now that investors have been badly burned by such investments, they’re shying away from the market almost entirely. Without Wall Street’s securitization machine, there’s simply nowhere to put new consumer loans.

After years of gorging on cheap credit, Americans are reverting to more responsible fiscal lifestyles. Savings are up, spending is down - which is as it should be. This is reducing the urge to borrow and thwarting Washington’s plans to pass the bailout buck down to taxpayers.

Every dollar we don’t spend or don’t borrow is another that could potentially be handed over to effectively insolvent financial firms like Citigroup (C), Bank of America (BAC) and American International Group (AIG), or failed automakers like General Motors (GM) and Chrysler.

That task is growing increasingly dicey, as it becomes clear that using debt to fix a system already crippled by debt is patently absurd. And even as the US government loads up on borrowing, consumers are doing the right thing: getting out of hock.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Despite Herculean efforts, the Federal Reserve is losing its battle to keep mortgage rates at all-time lows.

As fear that we’re headed for imminent collapse slowly wanes, investors’ appetite for risk is coming back. This renewed confidence has helped buoy stocks, and the major equity indices have rallied more than 30% from their March lows. The shift, however, has come at the expense of the Treasury market, which has been in a 7-week slump.

According to Bloomberg, big money managers like Blackrock (BLK) are betting the Fed will step in to support the Treasury market (again), as regulators hope renewed Treasury purchases will push down mortgage rates (again).

Bond prices and yields move in opposite directions. When investor demand falls, so do prices, pushing up yields. And as investors shun the safety — but relatively low return — of government-backed debt, the impacts are felt throughout the credit markets. Of concern to the Fed, and what has led Chairman Ben Bernanke to increase Treasury purchases in the past, is the effect this dynamic has on mortgage rates.

A mortgage is nothing more than a long term bond, given to a borrower to purchase a home. So when lenders get fearful they’re not being compensated for tying up money for as long as 30 years, they increase rates. Further, as the specter of inflation rises, lenders demand bigger interest payments to keep up with higher prices. In other words, when dollars in the future are worth less than dollars today, banks demand higher payments to make up the difference.

Keeping mortgage rates low has been a cornerstone of Washington’s efforts to jump start the flagging housing market. But with rates at the highest level since April, the “smart money” is betting the Fed may return to the Treasury market en masse.

Paradoxically, even as the Fed tries to keep interest rates low — which are rising in part due to the expectation that higher prices loom in the years ahead — its actions increase the likelihood of future inflation. Running its printing presses around the clock has consequences, even if Fed officials are loathe to admit it.

Minyanville’s Mr. Practical often discusses the fallacy that credit markets are improving. As he points out, only in corners of the market where the government has stepped in to support lending is any so-called “normalcy” returning.

So too in the mortgage market.

Loans backed by Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Housing Administration account for the lion share of mortgages currently being issued in this country. Aside from the occasional jumbo loan written by banks like JPMorgan (JPM) or Wells Fargo (WFC), government mortgages are the only game in town. Coupled with the Troubled Asset Lending Facility (or TALF), which funnels money into the market for mortgage-backed securities, the home-loan market remains completely dependent on government support.

This is one reason recent “strength” in the housing market will provide transitory. There’s a limit on how much government can control markets, as evidenced by mortgage rates that move persistently higher every time the Fed eases its aggressive intervention. Fundamentals, not subsidies, will provide a true floor in prices.

And as banks prepare to unleash a firestorm of foreclosure inventory into the market, fundamentals will remain pointed south, thereby pushing down prices. And as foreclosures continue to infect higher end real-estate markets, these price declines will be felt by a growing — and more prosperous — segment of the population.

Mortgage rates, left to their own devices, would be far, far higher without government support. This is the message of the market - one bureaucrats in Washington seem unwilling to learn.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Washington just doesn’t get it: We don’t want more debt.

While congressmen berating bank CEOs for their unwillingness to lend out their bailout money makes for a nice media clip, it reflects the growing disconnect between our elected officials and any semblance of reality. Not that the relationship was ever particularly close - but lawmakers are floundering for good press while the nation’s economic future slips further and further from their tenuous grasp.

Bloomberg reports American consumers are wary of taking on more debt, as expectations about eroding economic conditions are forcing people, to *gasp* make responsible decisions about their personal finances.

Bloomberg cites Midsouth Bancorp (MSL) president C.R “Rusty” Cloutier, who says that, despite aggressive marketing, town hall meetings, and $20 million in TARP money, Midsouth’s customers just aren’t taking out new loans.

This is the rejection of debt Professor Depew speaks of when discussing the structural deflation we’re currently experiencing.

Credit is based on trust. And while conventionally we view this relationship as one in which the lender must trust the borrower to repay his debt — at least to an extent that’s commensurate with the interest rate — it does go both ways.

As lenders like Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) are increasingly being painted as corporate marauders out to rape and pillage the American public, would-be borrowers are wary of putting their financial future in the hands of these men of questionable repute. And with credit-card companies rushing to alter terms, it’s no surprise consumers are reluctant to extend themselves further.

Still, lawmakers are pushing through an economic stimulus package that depends, in part, on a willingness on the part of consumers to keep spending. Their delusion is only outmatched by their hubris - the belief that a bunch of self-interested politicos can coerce the average American into making ruinous financial decisions for the betterment of the country.

Floundering industries — notably automakers and homebuilders — are counting on government subsidies to encourage Americans to keep borrowing to buy their products. But what General Motors (GM), Ford (F), Centex (CTX) and KB Homes (KBH) don’t understand is this: We just don’t want what they’re peddling. And we certainly don’t want to borrow against it.

The transition from a debt-dependent, credit-drunk consumerist society won’t be immediate: It’s taken 18 months of financial panic for evidence of the shifting social mood to make its way into the mainstream.

But as the economic outlook continues to darken, the country becomes more disenfranchised, and the government grows ever-more addicted to sound bites and empty promises, reality will set in.

For the past 20 years, we’ve been blithely driving along an economic road that ends in a cliff. And that cliff is now in our rear-view mirror. We’re tumbling, groping for any branch that can save us from the fall. But each one of these new government programs, bailouts and rescues simply tries to set us gently back on the road from which we only just plummeted.

We already know where that path ends, and it ain’t pretty. What say we try another road?