When this whole colossal credit crisis started and Congress tried to figure out what was going on--I still don't think many of them understand at this point--Fed Chair Ben Bernanke said the key is in the housing market. If the housing market returns, the economy returns. (I'm paraphrasing, of course).
Despite stupid subprime loans (i.e. interest only, no income, no asset, no job)--which are really not subprime but just stupid loans--the derivatives and structured investment vehicles tied to these loans turned a severe recession into a Great Depression--Part Deux.
However, don't think for a second the answer to this crisis is to revive a dormant housing market. The housing market will likely never be as heated as it was from 2002-2007, give or take a year, and consumers will never be spending like they did during that time for quite awhile. Yet, even though we know this, it seems the strategy is to keep mortgage rates low and incentivize potential homebuyers to do the same things that caused this mess in the first place.
Here's a few reasons it won't work:
1. Unemployment--most people can't keep houses without jobs or buy houses for that matter. The unemployment rate released today hit 10.2 percent.
2. Consumer deleveraging--The Federal Reserve reported today that outstanding consumer credit fell at a 7.2 percent annual rate in September, the eighth consecutive decline. Credit balances had never fallen eight months in a row before in the 66-year history of the data. Consumer credit fell by $14.8 billion to $2.46 trillion in September, down 4.7% compared with a year ago. Outstanding credit can fall if consumers pay off balances, or if lenders write off bad loans.
3. A Long Credit Time-Out--Yasmine Kamaruddin, economic analyst at Wells Fargo Securities, said consumer credit as a percent of disposable income was elevated during the previous business cycle, and "we may see a permanent downward shift as lenders continue to raise lending standards."
"Consumers remain reluctant to take on debt in the face of slow wage and salary growth and a weak labor market," Kamaruddin said.
But it's not just the consumer. Don't think for a second that banks want to lend to anybody remotely suspect of being a bad credit risk. They already need to hold capital reserves to the hilt for piles of valueless loans on their books.
No jobs, no consumer spending, no credit. It's a recipe for deflation even though no economist or expert with any political stature wants to admit it. Instead, the Fed/Treasury insists on going into its "toolbox" and using the "tools" it now has access to in order to fix this crisis.
Here are the "tools" in their arsenal:
1. Accounting manipulations--changing mark-to-market accounting to mark-to-model so banks do not need to write off all the bad assets on their books so their stock prices do not fall. Notice today how we discovered unemployment worse than expected and an historical drop in credit but the stock market ended in the positive range? Go figure.
2. Stimulus programs--Cash for Clunkers made it look like a resurgence in the auto industry when, in reality, it was "quick fix." Auto sales dropped immediately after the program dropped out of circulation. Also, the Homebuyer Tax Credit and its extension signed today. Again, another band-aid on a brain hemorrhage. With a supplemental 6,500 tax credit for current homeowners in their home five out of eight years, it should help incentivize some potential homebuyers out there.
The only problem with this "tool" is that it will add further debt onto the FHA, Fannie Mae and Freddie Mac balance sheets. For FHA, it is on its way to bankruptcy. There was supposed to be an announcement earlier this week showing why FHA is still solvent. They had to postpone that announcement to recalculate their numbers. No word on when they will have that press briefing.
Fannie Mae is now doing a "deed-for-lease" program meaning that borrowers facing foreclosure will be able to rent their house from a property manager hired by Fannie Mae. It also means Fannie Mae will not have to write down another bad loan.
However, as unemployment increases and consumers continue to not spend, it will cause a higher number of foreclosures. In normal circumstances, without stupid mortgages, the main reason for foreclosure is unemployment.
What is more dangerous, however, is that under normal circumstances, the housing market might slowly pick itself off the floor and start lending again through government programs. With Fannie and Freddie taking major writedowns--or renting out homes--more liquidity dries up and a bankrupt FHA dries up that government-based liquidity.
If you didn't hear, Fannie Mae said submitted a request to the Treasury Department for an additional $15 billion to eliminate its "net worth deficit." It is seeking to receive the funds on or by Dec. 31.
Therefore, the only money that banks can lend to homeowners will be from....from...hmmm....there is no money to lend to purchase a home.
Oh well, there goes the mortgage market.
Forget about a slowdown in homebuying...what about a shut down in homebuying???
So, if Ben Bernanke said that housing is the key, then this approach may just blow up in his face.
Without any mortgages--or a piddly amount--an economic revival appears highly unlikely for quite some time. Then, tack on commercial real estate's debacle of undervalued mortgages, and the community and regional banks become insolvent with those "toxic" loans.
Now, if you were a prudent bank or credit union that did not get into trouble prior to this economic crisis, with subprime mortgages and commercial real estate construction loans and private label securities, et. al. good for you. You're the winner.
Tell them what they've won! They've won the task of paying higher premiums to the FDIC because of all the other loser, irresponsible banks going under. Congratulations!!
And, for that consumer that purchases a home, takes out a prime loan, keeps up an impeccable credit history and goes to work each day trying to earn money to support his and/or her family to make their mortgage payments on time and not go hungry, what do they win??
Well, a free supply of food stamps and hopefully they can keep their job with potential salary cuts and furloughs, probably without a matching 401K and the fear of hyperinflation in the future!! They'll also know that the tax money they send to the federal government goes into all these programs that have been trying bail out the irresponsible, loser banks that destroyed the mortgage industry in the first place and the investment banks that melted down the entire global economy to go along with it.
A big thanks to Tim Geithner and Ben Bernanke for hosting this show, and thanks to the consumers for playing "The Rich Get Richer Everyone Else is Screwed." We'll see you next time on most of these politically correct stations!
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