| | | | |  | | By Kate Davidson and Aubree Eliza Weaver | | | Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro. It's been nearly a year since the White House removed Mark Calabria from his role as regulator of U.S. mortgage giants Fannie Mae and Freddie Mac, after the Supreme Court gave President Joe Biden more power to fire him. In an interview released this morning with IntraFi's Banking With Interest podcast, Calabria lets loose — on the percolating risks he sees in the mortgage market, on problems at the Federal Housing Finance Agency and on his doubts about the Trump administration's selection of Jay Powell in 2017 to run the Fed. ("I think I've been in retrospect proven correct," said Calabria, who was involved in the selection process when he served as Vice President Mike Pence's chief economist.) Here are some highlights from the interview, which you can listen to here. On Fannie and Freddie and credit quality problems: "We're already seeing one in 10 FHFA borrowers delinquent today in a strong housing market, in a strong economy. What's going to happen when that turns? So I do think that we've got a ticking time bomb, particularly in FHA." Calabria pointed to the potential for historic price declines in the housing market, as well as what he said are lax underwriting standards that essentially provide subprime credit to borrowers with low credit scores, high loan-to-value ratios and high debt-to-income ratios. "Frankly, it's as bad in many places as it was before," he said, referring to the 2008 housing crisis. "FHA is the size of what subprime was last time."
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Former FHFA Director Mark Calabria sees big risks in the housing market. | Getty Images | On Washington being distracted by less risky issues: "I find it absolutely stunning that Washington spends more time freaking out about stablecoins than it does about the mortgage market. Talk about clueless." "I feel like Washington is just sleepwalking into this… But the risk in the mortgage market is of magnitudes far greater than anything we're seeing in crypto or stablecoins." On missing a window on revamping the GSEs: "I was of the view that, you know, I'm running against the clock, how do I restructure the balance sheets? How do I raise capital? How do I reduce risks to get these entities in shape, where they will be able to not just survive the next crisis, but be a source of strength. … If that window hasn't closed already, it's quickly closing to where an insolvency of Fannie and Freddie may well be an inevitability at this point." "Even if this administration wanted to go out and do big equity raises for Fannie and Freddie, the market window for that's probably closed this cycle." On the FSOC: "There was a September 2020 FSOC statement , directive set of recommendations to FHFA to improve the regulation of Fannie and Freddie. And that was a unanimous vote. And let me say, I think the fact that FHFA has back-rolled on that, and you haven't heard a peep out of FSOC is just a stunning indictment of FSOC." "There's nobody more systemically important as a nonbank as Fannie and Freddie." On Powell: "He's one of the nicest people in Washington … [P]eople don't realize how close Yellen got to being reappointed. So at the time, I considered Jay to be an acceptable compromise. And that's really what it was. He was nobody's first choice. He was a lot of people's second choice. But I think at the end of the day, the small minority of those within us from the White House who thought we needed someone who would take inflation seriously, I think I've been in retrospect proven correct." IT'S TUESDAY — Do we think Jay Powell will make news this afternoon? We'll be ready with the popcorn just in case. Meanwhile, send along your tips, story ideas or feedback for MM this week: kdavidson@politico.com, @katedavidson, or aweaver@politico.com, @aubreeeweaver.
| | A message from Blackstone: Blackstone's investment approach is focused on the future. We identify companies that are shaping a stronger economy and help them accelerate their growth. We can deliver for our investors by strengthening the communities in which we live and work. Learn more. | | | | | | Treasury Secretary Janet Yellen speaks in Brussels at 5:15 a.m. … April retail sales and industrial production data released at 8:30 a.m. … Acting SEC Enforcement Director Melissa Hodgman speaks at FINRA conference at 11 a.m. … House Financial Services marks up legislation at 12 p.m. … Fed's Powell participates in a discussion at WSJ conference at 2 p.m. … Sen. Cynthia Lummis (R-Wyo.) speaks at an American Enterprise Institute event on crypto regulation at 3:30 p.m. DEMOCRATS' NEXT WEDGE ISSUE: TAX BREAKS FOR BUSINESSES — Our Brian Faler: "Democrats' bid to extend the child tax credit is stuck in the mud, and that is raising a politically touchy question for lawmakers : Can they still help businesses with their tax problems? Some lawmakers think it's possible to walk that line, and want to use a bill before Congress aimed at boosting competitiveness with China to ease new tax restrictions making it harder for tech companies to deduct their research expenses." DALEEP'S STAND-IN — Mike Pyle, Vice President Kamala Harris's chief economic adviser, is set to temporarily leave Harris's office to fill in for Daleep Singh , the National Security Council's deputy national security adviser for international economics, WaPo's Tyler Pager reported. The White House has said Singh, a former New York Fed official who has led the administration's Russia sanctions policy, is taking a leave of absence for family reasons. Pyle previously served as global chief investment strategist for BlackRock, and was a member of the Obama White House economic team. A NADLER, MALONEY PRIMARY? — Our Erin Durkin in New York: "Reps. Jerry Nadler and Carolyn Maloney both said they plan to run for New York's newly redrawn 12th Congressional District — setting up a potential primary between two longtime Manhattan Democratic incumbents. "Maloney's currently configured 12th district is centered on Manhattan's Upper East Side while Nadler's 10th district is anchored across Central Park on the Upper West Side. But a draft map released Monday creates a new 12th district that covers both the Upper East and West Sides. And the two veteran members of Congress said they plan to compete for that one seat." YELLEN LOOKS TO GET GLOBAL TAX DEAL BACK ON TRACK DURING EUROPE TRIP — NYT's Alan Rappeport and Liz Alderman: "Treasury Secretary Janet L. Yellen arrived in Europe this week to join U.S. allies in confronting multiple threats to the world economy: Russia's war in Ukraine, soaring inflation and food shortages. "But one of Ms. Yellen's first orders of business during a stop in Poland will be trying to get the global tax deal that she brokered last year back on track after months of fledgling deliberations about how to enact it. … Turning the agreement into a reality is proving to be a steep challenge." WHITE HOUSE PUSHES BACK AGAINST BEZOS' BIDEN INFLATION CRITICISM — WSJ's Tarini Parti and Bradley Olson: "The White House on Monday pushed back against Amazon.com Inc. founder Jeff Bezos after he criticized the Biden administration in two tweets over the weekend for tying the corporate tax structure to rising inflation. The tweets were spurred by one from President Biden on Friday, which said: 'You want to bring down inflation? Let's make sure the wealthiest corporations pay their fair share.' Mr. Bezos responded by saying the two issues should be discussed separately. 'Mushing them together is just misdirection,' he tweeted." But Biden has Larry Summers in his corner — Bloomberg's Luke McGrath: "Summers weighed in Monday morning, saying Bezos is 'mostly wrong' in his exchange with Biden and that 'we should raise taxes to reduce demand to contain inflation and that the increases should be as progressive as possible.'"
| | | | DON'T MISS DIGITAL FUTURE DAILY - OUR TECHNOLOGY NEWSLETTER, RE-IMAGINED: Technology is always evolving, and our new tech-obsessed newsletter is too! Digital Future Daily unlocks the most important stories determining the future of technology, from Washington to Silicon Valley and innovation power centers around the world. Readers get an in-depth look at how the next wave of tech will reshape civic and political life, including activism, fundraising, lobbying and legislating. Go inside the minds of the biggest tech players, policymakers and regulators to learn how their decisions affect our lives. Don't miss out, subscribe today. | | | | | | | | BEN BERNANKE SEES 'STAGFLATION' AHEAD — Former Fed Chairman Ben Bernanke has a new book out today, '21st Century Monetary Policy: The Federal Reserve From the Great Inflation to Covid-19.' In an interview with NYT's Andrew Ross Sorkin , he said he is hopeful Powell can tame inflation without sending the economy into recession, but he says a period of "stagflation" is a real possibility. "Even under the benign scenario, we should have a slowing economy," he said. "And inflation's still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high," he predicted. "So you could call that stagflation." AN EARNINGS RECESSION LOOMS — WSJ's Justin Lahart: "It is too early to start worrying about a recession. Worrying about an earnings recession is a different matter. "Economic recessions don't occur all that often. Since 1948 there have only been a dozen of them, according to the National Bureau of Economic Research's business cycle dating committee (the accepted arbiter of U.S. economic expansions and contractions), and in recent decades they have become less frequent. This isn't to say that the country won't experience another recession eventually, but with the Federal Reserve only recently moving to start tightening policy, and with the job market strong and household balance sheets in good shape, it might not come soon." EU CUTS FORECAST FOR ECONOMIC GROWTH AS WAR'S FALLOUT WIDENS — AP: "The European Union has slashed its forecasts for economic growth in the 27-nation bloc amid the prospect of a drawn-out Russian war in Ukraine and disruptions to energy supplies. The EU's gross domestic product will expand 2.7 percent this year and 2.3 percent in 2023, the bloc's executive arm said Monday — its first economic predictions since Russia invaded Ukraine on Feb. 24."
| | | | A message from Blackstone:   | | | | | | GENSLER SAYS THERE IS MUCH TO BE DONE TO PROTECT CRYPTO INVESTORS — Reuters' John McCrank: "Cryptocurrency assets are highly speculative and investors in them need more protections or they could lose trust in the markets, Gary Gensler, chair of the U.S. Securities and Exchange Commission, said on Monday. Generally, people who buy cryptocurrencies do not get the disclosures they get when they make other asset purchases around things like whether the trading platform they are using is actually trading against them, or whether they actually own the assets they store in digital wallets, Gensler said. "'We have this basic bargain: You the investing public can make your choices about the risk you take, but there is supposed to be full and fair disclosure, and people are not supposed to lie to you,' he said at the Financial Industry Regulatory Authority's annual conference in Washington." ICYMI: CRYPTO PRICES MOVE IN TANDEM WITH TRADITIONAL MARKETS — WSJ's Gregory Zuckerman: "Cryptocurrency prices are moving in lockstep with stocks and bonds like never before, punishing those who bought bitcoin and other digital assets in part to diversify their investment holdings." ANOTHER STABLECOIN LOSES PEG AS ALGORITHM FAILS TO KEEP PACE — Bloomberg's Olga Kharif: "Deus Finance's DEI token has lost its 1-to-1 peg to the dollar , becoming the latest failure of an algorithmic stablecoin during a period of crypto market stress. DEI is currently trading at 70 cents, according to data tracker CoinGecko. With a market value of about $63.5 million, the token is tiny compared with the more than $18 billion TerraUSD stablecoin that shook crypto markets when it become depegged last week."
| | | Federal Reserve Bank of New York leader John Williams said Monday that bond market volatility doesn't look problematic to him, in comments that reiterated his view that the central bank will need to forcefully tighten monetary policy to contain inflation. — WSJ's Michael S. Derby The blank-cheque company set to merge with Donald Trump's social media start-up has warned shareholders that its plan to "cancel 'cancel culture'" faces risks because of the former president's history of business bankruptcies. — FT's Mark Vandevelde and Ortenca Aliaj Stocks ended another wobbly day mostly lower on Wall Street Monday, extending a losing streak for markets. — AP's Damian J. Troise
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