Why not cramdowns instead of another bankster rescue?
http://www.readersupportednews.org/opinion2/279-82/9429-the-foreclosure-crisis-a-government-in-denialThe challenges faced by the U.S. housing market today reflect, in part…a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally)… Absent any policies to help bridge this gap, the adjustment process will take longer…pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.
This memo is notable for several reasons. First, it's important to remember that when the Fed speaks, it does so in sober, limited terms. So an unprompted Fed warning suggesting "a persistent excess of supply" and a "resultant drag on the economy" is comparable to the Secretary of Homeland Security holding a press conference to warn of the risk of an imminent national emergency. Second, an unprompted memo from Bernanke to the House means that he is so deeply worried he felt the need to speak out in as strong a voice as his position permits. Third, the Fed rarely speaks on issues unrelated to its direct activities. Indeed, The Wall Street Journal subsequently wrote, "For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters."
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There is also a far worse possibility. Today, an estimated 29 percent of all homes with mortgages are underwater. In addition, at least one respected analyst estimates that a total of 14 million homes will be foreclosed on from 2007 to the end of the crisis. This represents a hard-to-imagine one in every four mortgages. With foreclosures increasing, there is now such a looming imbalance of supply and demand that, as the Fed notes, further decreases in home prices are likely. Some believe home price reductions of another 20 percent are likely. This would, in all likelihood, have disastrous consequences on at least three fronts — and ripple effects that are impossible to predict.
What is shocking is the almost total lack of attention the administration has paid to suffering homeowners. It's hard for me (and apparently Chairman Bernanke) to understand how the administration can possibly hope to revitalize the economy without seriously addressing the overhang of consumer housing debt. Moreover, the failure to address the risk this poses for a broader economic catastrophe borders on the inexcusable.
If President Obama is serious about saving the middle class and reducing income inequality, the administration needs to be far more aggressive in developing policies to keep homeowners as homeowners. As I have written before, this was one of FDR's central goals in the New Deal. Detailed proposals for addressing this extraordinary risk do exist. However, they will require a determined effort. There are solutions, but they are not simple.
http://readersupportednews.org/opinion2/279-82/9439-the-foreclosure-to-rental-screwjob
And, why - in heaven's name - would congress want to take on more risk when they can keep millions of people in their homes by simply reducing the principle on their mortgages to the present value of the house? (aka - "Cramdowns"
Naturally, the losses would have to be absorbed by the banks who - by everyone's admission - were responsible for the present crisis due to their lax lending standards and, oftentimes, fraudulent behavior. This would lead to a restructuring of the country's biggest banks through a Resolution Trust Corporation (RTC) so their toxic assets and backlog of foreclosed properties can be auctioned off as soon as possible.
This is a straightforward way to fix the housing market and it should have been done long ago. Bernanke's solution is not only unreasonable, it's also deceitful. Here's more from the Fed's paper: "Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery"..(without action)…"the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large."
"Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that's being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion."
Did you catch that? Taxpayers are going to get slammed for another $750 billion. That's nearly as much as Obama's American Recovery and Reinvestment Act (ARRA), the fiscal stimulus that added 2 percent to GDP and kept unemployment from rocketing to 13 percent. Bernanke wants to throw that same amount down a Wall Street sinkhole.
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They are doing at least as well as most of the US banking industry:
If you have to be a banker, it's wise to be a central banker. You set the rules so it is easy to make money.
Every year the Fed pays Treasury. It's been growing very significantly due to the expanded Fed role. There is no possibility that they will take any sort of loss other than a duration/rate loss on almost all the MBS, because it's government-guaranteed stuff.
If you think the taxpayers put 2.9 trillion into the Fed, you need to read the Fed financial statements. This is the one for 2007/2008:
http://www.federalreserve.gov/monetarypolicy/files/BSTFRcombinedfinstmt20072008.pdf
Start with this one, because 2007 was before the rumpus started. Note that bank deposits increased to 860 billion in 2008 from 20.7 billion in 2007. They have from Treasury approximately an additional 250 billion.
You can follow the changes through 2009/2010 on the Fed balance sheet:
http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2010.pdf
Treasury has done quite well off its Fed bank deals.
There's a huge difference.
As to your other points - when the crisis hit, the Fed provided liquidity by opening up the discount window, and indeed pushing loans on banks. But total bank borrowings are almost nil, banks paid back that money ASAP because it was hugely costly and they couldn't place it, and bank deposits at the Fed have steadily grown ever since. H.4.1 shows 1.58 trillion of bank deposits, on which banks are earning almost nothing, which is why depositors are earning very little. The term deposit facility is paying 25 basis points, and the rate paid on excess reserves is the same:
Banks have no reason to borrow money from the Fed, so they are not. Find those huge borrowings on the Fed balance sheet and get back to me:
http://www.federalreserve.gov/releases/h41/Current/
Remember, duration risks have to be managed by banks. Banks can hold their true reserves in Treasuries, but they cannot possibly afford to buy much in the way of shorter term treasuries to place borrowed money for profit because returns are low. As of the 13th, to get a yield above 34 basis points you had to go to the five year treasury, and the 5 was only yielding 80 basis points.
Duration risks prevent banks from doing what you are suggesting. They do not have deposits on long terms. Banks always borrow short and lend long, but with interest rates at historical lows, banks would go bankrupt if they bought long term treasuries with short-term deposits at rates that are going to rise in the future. The Fed discount rate is currently 75 basis points. Is anyone going to make money borrowing from the Fed at 75 basis points (0.75%) - that's the overnight rate - and buying US 7 year Treasuries at 0.8%? Not only don't you make money NOW, but if that rate rises in 2014, you are going to lose big time.
What do you teach? Do you know what duration (rate) risk is? You don't seem to know what is currently going on in the US banking system.
Banks are subsidized. But the real subsidy comes from FDIC deposit insurance, for which in effect depositors pay.
As far as banks being the greatest obstacle to world growth, I think you are wrong on that point. The problem is that every society has a maximum borrowing limit. Most of the world went on a multi-decadal borrowing binge, and this is the result. In countries (such as Spain, Dubai, areas of the US, Ireland) in which the borrowing was used to fund bubbles, of course the crash is worse. China's sitting on a hell of a mess in local government borrowing.
Ask yourself why countries as diverse as Denmark, Canada and Australia have all been worrying about household debt? Those countries have healthy economies and slowing growth, and it is because borrowing has reached the point at which it is an economic drag.
In a lot of ways, we are in a Misean super-cycle caused by unbridled Keynesianism. Monetary looseness works in the short term only when debts in the economy are below a certain point. If debt is very low, easing money produces large growth. If debt is moderate, easing money produces moderate growth. If debts are high, easing money does very little.
So while bad/excess debt is a problem, the reason why we got here is largely a result of central bank laxness. Your local credit union is not responsible for world global cycles, and it can only calibrate its lending based on what it sees in the marketplace.
Growth almost solely funded by debt has produced a global excess of buying, and it's easiest to see when you look at US car sales:
The primary reason that we have such low car sales now is that consumers bought so many vehicles during the prolonged period of cheap money that extended from the end of the dot.com bubble through the beginning of the GR in 2006 (when industrial activity began to drop).
There are plenty of people with money, but most of them just don't need new cars yet. Then there are people without money who do need cars, but new car sales are still suppressed, so they have trouble getting used cars. That one graph sums up an awful lot about the world economy. Growth in consumer spending in economies with pretty low debt loads and decent average household real incomes is still quite good, but as energy costs rise the net spending propensity worldwide is dropping because real incomes are dropping.
The problem with a Misean supercycle is that it cannot be addressed by Keynesian monetary techniques once accumulated debt has reached a saturation point. So then the governments tried to step in with more direct measures, but that requires governments accumulating more debt, and many of those governments were already close to or very near to their own debt carrying capacity.
There is no really easy way out of this - it's something that only the passage of time can really amend. In the US, we built more homes than we really needed, and we sold a ton of cars, and now even if we wiped out all consumer debts overnight, we wouldn't be manufacturing cars and building houses at 2005 levels, because the economy just doesn't need them.
Only to gold credit, and then it has to be to super-high-equity borrowers or the loans have to be variable rate mortgages to good credit borrowers with substantial equity (because when rates rise, you'll get stuck if the borrower can't pay the higher interest rate and can't refinance elsewhere).
You can't write normal mortgages low enough to compete with the GSEs. You can write jumbos that don't qualify for GSE financing, but even then, the duration risks are so extreme that you have to demand a lot of money on the table plus good credit.
Banks can only lend more to commercial accounts - all variable or short-term - and a little bit more to consumers, but consumers on average are cutting their debt. A lot of us are old and looking to retirement, and with savings returns so low, the best return on their capital consumers can get is to pay down their debt. So the lending demand is very low, except for prospective borrowers on whom you stand a very high chance of losing money over 5 years.
The Fed deliberately created this situation to help with cash flow for mortgagees, but this is the logical result.
That's why there is so much bank money on deposit at the Fed.
Bank deposits in the US are up hugely, but there's no way for banks to place the money out, so much of it is at the Fed. By 2010 the banks had 968 billion on deposit at the Fed - now:
As long as mortgage rates are so low that banks can't lend safely, they won't. Velocity of money is very low because prospective borrowers can't afford to borrow and lenders can't afford to lend to prospective borrowers.
So we have tons of money sitting inert in the system - as production has picked up, C&I has improved but that's pretty much it:
