Money & Politics with Larry Kudlow

Dick Bove: Ripple Effects of Debt Stalemate

Widely followed market strategist Dick Bove is firing a warning shot and he hopes DC hears it.  He told Kudlow Monday that if the stalemate over the debt ceilingresults in higher borrowing costs, the ripple effects will be severe.

Specifically, he’s forecasting damages in two areas—housing and banks.


Debt Downgrade Disaster Ahead?

Bove explained that mortgage rates are tied to borrowing costs via Freddie Mac, Fanny Mae and Ginnie Mae. And although it’s a complicated relationship, essentially higher borrowing costs for the US government will lead to higher mortgage rates.

“If mortgage rates go up, then you run into the problem of housing prices going down again and possibly inflating the problem in that sector,” he said.

In other words, it could generate a serious headwind in a sector that can barely seem to stabilize.


In the event that the cost of borrowing increases for the US Treasury, Bove is particularly concerned about what happens to all the existing securities in the market.

”$1.7 trillion worth of government-backed securities or direct government securities sitting inside the banking system,” he said. “If the value of those securities go down, then you’re destroying capital within the banking system."

And Bove said it couldn’t happen at a worse time. “You’re pushing the capital within the banking system down at a time when the government is demanding that the banks have more capital.“

Although he didn’t say it outright, the suggested impact would be decreased lending, which in turn would stymie growth and drag down the economy.

Bove also thinks other ripples could be felt in municipal bonds. Some are tethered to the treasury borrowing rate, which means there’s a possibility localities will have to increase taxes.

And he thinks China and Arab countries will be less likely to buy our securities, or even dump what they have on the market.

“It’s a rolling disaster,” Bove said.

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