15 More Recession Years?
by Henry Meers
Issue 212– September 26, 2012
Let us try to summarize what has happened to the economy over the past several years. Had the mortgage-backed investments that tripped up the big banks and some significant brokers — Bear Sterns and Lehman Brothers — been liquidated at the market to raise cash and restore firms’ capital, we would not be in the current real estate and foreclosure crisis. Most people are still looking backwards to the “good old days” when prices were “where they should be on this kind of property.” My experience in the financial markets and studying them says this ought to warn us the move down still has a ways to go.
The pain — it is severe and increasing — could have been avoided had the federal government remembered it has a duty to all the American people, not just those with the most expensive lobbyists. The response should have been a no-brainer, just as it was when Commerce Secretary Donald Evans turned Robert Rubin down when he lobbied the Bush Administration to lay off Enron.
Had the feds indeed stayed out, the big banks that had been speculating in mortgage-backed securities, as opposed to mortgages, would have been forced to sell assets to restore their capital adequacy like any other business. Several names would have disappeared. To a large extent, they would have been forced sell a lot of things, but the mortgages might have been forced down in price, allowing everyone to refinance at the new price (of the mortgage as a security), which could easily have been down 50%. A great deal for consumers.
In many ways real estate collapse bringing the credit system down with it can be considered today’s Smoot-Hawley Tariff, which brought world trade to a halt — instead we have Dodd-Frank. When the Federal Reserve poured money into the banking system, it was paying for last year’s model. Several large banks, brokers and investment groups made bad investments as the economy was changing — like buying canals at the dawn of the railroad age. Washington paid their losses and left them right were they were in real terms – all loaned up. There is plenty of money around, since the Fed’s inflation has been massive, but there are no good lending prospects or good borrowers who might actually be able to repay it.
The real estate speculation was what it always is, buying “inflation’s reflection”. Houses are non-productive assets. Capital going into them cannot be used by the productive sector. All those fancy subdivisions were absorbing capital that might have created the jobs elsewhere to keep the economy going, and home construction with it at a more sustainable rate. The Fed is the core of this for no other reason than Chairman Ben Bernanke doesn’t know what money is and does, any more than he understands credit. The Austrians were right about governments, inflation and malinvestment.
On a cyclical basis what we are doing right now has huge implications. If the Republicans do not cut taxes, assuming they win, and in other ways lower the overhead, we probably have another fifteen years to the downside to be remembered a part of Obama’s Second Great Depression – as the Roosevelt Administration lengthened the recovery from Hoover’s mere contraction. This is why I am hyper sensitive assuring the Ryan-Romney plan has tax cuts.
Most Americans do not realize that the mortgage market they were counting on throughout the last decade or two was known as the “shadow banking network,” made up of the very securities and firms, like Bear Sterns, they now love to hate. Regular banks, especially the big ones, had become simple mortgage brokers in a hurry to earn a fee and flip the paper to Fannie or Freddie and do it all over again. The paper was then bundled by an equally greedy Fannie Mae and sold into pools the public bought through its retirement plans, while the banks also took positions in them, which is how they too were caught in the crash.
The system or market for mortgages has now been closed for several years, but it was the pivot, the place where all the Bernanke Bucks went (along with a lot of Greenspan’s). President Bill Clinton and his Community Reinvestment Act was a political joke, but one that reflected the times of the blow off — the Democrats’ dimwitted effort to put their “less-advantaged” pals on the gravy train just in time for the wreck.
It really is this simple when you take the broad view. Every little thing had its effect, but the process remains part of a much larger cycle. These things are not inevitable, except men repeat their mistakes. The Democrats under Obama act as if nothing happened to the economy under President Reagan or the Republican takeover of Congress in the 1994 election. They go right back to dogma and the country into crisis. The ideological blindness never ceases to amaze.