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You Need To Drive Money Into The Housing Market — It’s Really Their Only Purpose

A weekend topic on this Politico article. “With millions of suddenly unemployed homeowners expected to seek relief on their mortgage payments, a libertarian regulator is standing in the way of the federal government using its most powerful weapon to stave off a housing crisis. Fannie Mae and Freddie Mac, the state-controlled mortgage finance companies with a $200 billion line of credit to the Treasury, were created to ease disruptions in the market.”

“Now, as bankers and affordable housing advocates alike clamor for the administration to tap the giant entities for a mortgage industry bailout, the Trump appointee who oversees them is rebuffing those requests. Federal Housing Finance Agency Director Mark Calabria has long been on a crusade to shrink the footprint of Fannie and Freddie, which back more than half the country’s $11 trillion mortgage market.”

“A free-market economist, Calabria has even said he would not have rescued the companies in 2008, when the government seized them to stave off catastrophic losses during the nation’s housing meltdown. The FHFA declined to make Calabria available for an interview for this story. But he has publicly dismissed industry concerns and forecasts as ‘spin’ and said it’s not Fannie and Freddie’s job to bail out private companies.”

“The collection companies, known as servicers, are legally required to pay out funds to investors in mortgage-backed securities each month even when a borrower doesn’t pay — and the stimulus bill made no provision for backstopping them. One industry projection estimates that servicers will be on the hook for $100 billion in payments — a scenario that would wipe out many of the companies and destabilize the housing finance system.”

“‘We are in this awful crisis, it’s only going to get worse, and we have these tools,’ said Anne McCulloch, CEO of the Housing Partnership Equity Trust and a former Fannie Mae executive. ‘Fannie and Freddie were created exactly for this point, when there is a major crisis and you need to drive money into the American housing market — it’s really their only purpose.'”

“Yet Calabria maintains that forecasts of 25 to 30 percent of borrowers seeking delays in mortgage payments are over the top and flatly rejected the idea of setting up a program for mortgage companies earlier this month, saying Fannie and Freddie don’t have the capital.”

“Mortgage bankers are scrambling to get the Federal Reserve to offer help to servicers, fearing that Calabria is counseling against any sort of lending for servicers. The Mortgage Bankers Association fired off a late-night statement slamming him for his ‘troubling’ remarks ruling out a Fannie and Freddie program for servicers last week.”

“David Dworkin, CEO of the National Housing Conference, an affordable housing advocacy group, warned that ‘we can very easily fall into the trap that we did 10 years ago of being obsessed with moral hazard and ending up with an immoral result’ that ultimately hurts consumers and taxpayers. ‘Right now, we’ve got to focus on crisis mitigation, because the housing crisis is coming, and if we don’t get in front of it, it will bury us,’ Dworkin said.”

“‘You don’t put 20-30 million Americans out of work and bring them back with the flip of a switch,’ Dworkin said. ‘Those people are going to take months and years to be reabsorbed back into the workforce. That is going to have a devastating impact on Americans’ ability to make their mortgage payments.'”

“Moody’s economist Mark Zandi suggested the moral hazard argument — that the government shouldn’t provide incentives for risky behavior in the market — has no bearing on the current crisis. If servicers are ‘struggling to survive, they’re not going to make loans, which is what the economy needs,’ Zandi added.”

This Post Has 97 Comments
  1. ‘as bankers and affordable housing advocates alike clamor for the administration to tap the giant entities for a mortgage industry bailout’

    Bankers and advocates. I’m an advocate I guess. These clowns haven’t lost one dollar yet. Look at them begging already. There’s Ho Chi Zandi, back at his commie BS.

    ‘One industry projection estimates that servicers will be on the hook for $100 billion in payments — a scenario that would wipe out many of the companies and destabilize the housing finance system’

    OK, lets take a look at these companies that if gone, would destabilize the system:

    May 25, 2018

    “In his corner of American finance, where hard selling meets hard luck, Angelo Christian is a star. Each time Christian sells a home loan, the company he works for, American Financial Network Inc., takes as much as 5 percent. Many of Christian’s customers have no savings, poor credit, or low income—sometimes all three. Some are like Joseph Taylor, a corrections officer who saw Christian’s roadside billboard touting zero-down mortgages. Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. ‘If he can help me, he can help anyone,’ Taylor says. ‘My credit history was just horrible.’”

    “Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk. Many borrowers ‘are living paycheck to paycheck and, if they lose their jobs, they go into default immediately,’ says John Burns, a housing consultant.”

    “One reason more borrowers may be stretching: Real estate prices are soaring again.”

    http://thehousingbubbleblog.com/?p=10443

    1. ‘One reason more borrowers may be stretching: Real estate prices are soaring again’

      These people pulling this crisis crap and predicting disaster unless they get their “bail-out” are despicable dogs. If lending was sound, as they lectured us a million times, there wouldn’t be a problem.

      Is this not what destabilizes the system?

      ‘Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay’

    2. Affordable housing and billions to bail out mortgage companies and “home owners” doesn’t mix.

      In fact, it just starts the next bubble on top of the current bubble.

      1. It all works fine, so long as it is generally agreed that affordable means, “We’ll get you into a house with mortgage payments at 50% of your income, and work to get you a personal bailout in the next financial crisis. “

    3. This article also describes half of Denver’s used house buyers 2017-present, i.e. the customer base of American Financing dot net.

      1. Eventually they will have to talk about the moral hazard in allowing BK for student loans and keeping your degrees.

    4. does anyone have an option train . leap , future on RE stocks that show future price declines?
      AMH home for rent etc don’t show weakness. What gives?
      it would seem evey class of RE I can think of is fooked.

  2. But what is the damage is the mortgage servicers suffer? Did they do long term borrowing with higher yield bonds, did they borrow from the money center banks … Other than these guys – who gets hurt – and how does it hurt the system. If they packaged bonds and sold it to pension funds, the pension funds will have to deal with it – and can over a period of 10 years

    “‘You don’t put 20-30 million Americans out of work and bring them back with the flip of a switch,’ Dworkin said. ‘Those people are going to take months and years to be reabsorbed back into the workforce. That is going to have a devastating impact on Americans’ ability to make their mortgage payments.’”

    1. ‘Those people are going to take months and years to be reabsorbed back into the workforce. That is going to have a devastating impact on Americans’ ability to make their mortgage payments.’

      We’ve seen this movie recently: Millions of Americans were enticed to use subprime mortgage loans to buy houses they couldn’t afford in the lead up to the 2007-2009 financial crisis, only to get wiped out by the Great Recession.

      And having learned nothing, a similar buildup in subprime mortgage loans by nonbanks occurred over the 2009-2020 period, leading up to the situation at hand.

      It’s Groundhog Day!

  3. I can hear Wall Street’s reckless subprime mortgage gamblers whining and wailing for bailouts by Fannie and Freddie all the way from SoCal. I guess they never heard of the saying, “you can’t squeeze blood from a rock.”

    However, given the advent of Modern Monetary Theory, it seems likely that the Fed will eventually throw some money into a bigger mortgage bailout, now that Quantitative Easing is Unlimited. What would stop them?

    1. If you were a subprime mortgage lender seeking an ally in Congress to curry special favor with the Trump administration, would you send Maxine Waters? LOLZ!

      1. Politics
        Mnuchin Under Growing Pressure to Help Struggling Mortgage Companies
        Firms are squeezed as millions of homeowners suspend home-loan payments amid soaring unemployment
        Treasury Secretary Steven Mnuchin must agree to let the Federal Reserve set up a lending facility to backstop mortgage companies.
        Photo: Yuri Gripas/Zuma Press
        By Andrew Ackerman
        April 16, 2020 4:11 pm ET

        Treasury Secretary Steven Mnuchin is under growing pressure from industry officials and members of Congress to ease strains on mortgage companies as millions of borrowers skip their monthly payments amid the coronavirus outbreak.

        The Treasury secretary is a key figure because he must agree to let the Federal Reserve set up a program to backstop the companies. Industry officials believe the central bank supports such a plan, while Treasury officials are seen as more lukewarm.

        Mr. Mnuchin has been hearing from housing-market veterans who know the Treasury secretary from his days on Wall Street, including his tenure running the mortgage-trading desk at Goldman Sachs Group Inc., according to people familiar with the matter. The officials include Lewis Ranieri, one of the pioneers of the U.S. housing-finance system and co-inventor of the mortgage-backed security, the people added. A spokesman for Mr. Ranieri declined to comment.

        Top lawmakers in both parties, including House Financial Services Committee Chairwoman Maxine Waters (D., Calif.) and Senate Banking Committee Chairman Mike Crapo (R., Idaho) have also urged Mr. Mnuchin in recent days to relieve cash-crunch pressures on the companies.

        Industry officials and policy makers say their concern isn’t just that some mortgage firms will fail without help, but that uncertainty over the costs of servicing loans could tighten lending standards to the point that only borrowers with pristine credit would obtain home financing.

        Access to credit is already drying up. JPMorgan Chase & Co., the largest U.S. bank, this week began limiting the pool of borrowers who qualify for loans to those with FICO scores of at least 700 and with down payments of at least 20% of the purchase price, a move that others will likely adopt. The bank says the move is temporary and doesn’t apply to existing customers seeking to refinance.

        “We do not yet know the full economic impact of this pandemic,” wrote Ms. Waters and Sen. Sherrod Brown (D., Ohio), in a letter to Mr. Mnuchin and Fed Chairman Jerome Powell on Wednesday. “But we must not allow the pandemic to destabilize critical markets, including our housing market.”

        Mr. Mnuchin has yet to commit to a facility to help the industry, but has said the Treasury is closely following developments in the mortgage market. A Treasury spokesman referred to his remarks at a White House briefing on Monday, when he said that “We’re going to make sure that the market functions properly.”

        The mortgage companies, which include firms such as Quicken Loans Inc. and Mr. Cooper Group Inc., originate loans and collect payments from borrowers. They then pass those payments on to investors in securities backed by mortgages.

        The companies are on the hook to continue payments to investors even if homeowners fall behind. The firms are eventually reimbursed by government-backed agencies such as Fannie Mae or Freddie Mac, which insure the loans, but the process can take several months.

        Normally this isn’t a problem. But some of the mortgage companies are bracing for a shortfall as millions of homeowners take advantage of a government offer to suspend payments during the coronavirus pandemic. The offer is part of the $2.2 trillion relief package enacted last month.

        Many of the mortgage companies are nonbanks that don’t have deposits or other business lines to cushion the impact. Nonbank lenders originate about 60% of U.S. mortgages.

        The size of the firms’ cash needs isn’t clear, but the industry puts it at tens of billions of dollars.

        1. Here’s another reason why a blanket mortgage bailout may not be in the Trump administration’s nearterm plans:

          1 hour ago
          Citigroup Cutting Ties with Anthony Scaramucci’s Hedge Fund
          By Juliet Chung
          Anthony Scaramucci, speaking during the SkyBridge Alternatives conference in Las Vegas in May 2019. Joe Buglewicz/Bloomberg News

          Citigroup Inc.’s private bank decided to sever its relationship with Anthony Scaramucci’s SkyBridge Capital and expects to see clients redeem $100 million over time, said a person familiar with the matter.

          Citigroup’s decision earlier this week follows a more-than-20% loss in March by SkyBridge’s flagship fund because of a big credit bet the fund made years ago. The fund managed $4.8 billion at the end of February. The person said Citigroup thinks the fund has too much exposure to credit and mortgage-related securities and expects clients will follow its recommendation they redeem.

  4. ‘we can very easily fall into the trap that we did 10 years ago of being obsessed with moral hazard and ending up with an immoral result’

    Barn door left open,
    All of the horses have fled,
    Hurry, shut the door.

    1. ending up with an immoral result

      Seems like no matter what we do we end up with an immoral result. I wonder why that is?

      1. All animals are equal, but some animals are more equal than others.

        — A proclamation by the pigs who control the government in the novel Animal Farm, by George Orwell

  5. “Fannie Mae and Freddie Mac, the state-controlled mortgage finance companies with a $200 billion line of credit to the Treasury, were created to ease disruptions in the market.”

    Who diverted their purpose into becoming a massive support for subprime mortgage lending?

      1. The goal is to keep housing unaffordable.

        Who is funding the affordable housing advocates? Somebody is calling in the chits.

        1. “Who is funding the affordable housing advocates? ”

          I bet it’s the same people who funded some social justice warriors to protest Fed’s decision to hike interest rates not long ago.

    1. were created to ease disruptions in the market.”

      Ironically, they have worked diligently for years creating the coming crisis in the market. More from them is not the cure.

      1. There’s nothing like a fireman who creates demand for his services by setting fires!

  6. I am struggling with who the feds and state govt help. Leading up to real estate agents, mortgage brokers, interior decorators etc. who ‘facilitate’ but dont seem to do heavy work.

    Lets use a non-realestate example. Movie theatres – there are a lot of folks that are working hard (with 25%? of min wage). They could be helped and support more families – but they could also get other (min experience) jobs. Why cant we wait for the billionaire to declare bankruptsy for the AMC chain – and then others could go in a buy up the theatre for a dime on the dollar and restart.

    I am not sure that i worry about Century, REMAX etc., the home builders going into proceedings and then others starting up.

    Am i naïve (or even stupid)

    https://www.bnnbloomberg.ca/-1.1422569?fbclid=IwAR2tB1CoajaazTvbD0RmSI9GBH2gbUkXG-Nrl6Db0DQeg5c4hzxOgT893Zg

    1. “Why cant we wait for the billionaire to declare bankruptsy for the AMC chain – and then others could go in a buy up the theatre for a dime on the dollar and restart.”

      If it were just a few players going into bankruptcy, no problem; the old system would work fine. But today, too many are in debt, and their debt is being bought and sold every day in the financial markets. A wave a bankruptcies would trigger a devaluation of that debt leading to an avalanche of defaults.

      Recall that all it takes are a few homes being sold cheap to cause the neighborhood’s comps to fall.

        1. Everything seems to be too-big-to-fail.

          When nearly everyone is up to their eyeballs in debt, then yeah. Even highly profitable firms have gotten into debt to buy back their shares

          1. Can’t afford to let interest rates increase when so many are up to their eyeballs in debt, either.

          2. Prior to globalism it was easy to create real inflation to settle old debts. Since then they’ve relied on ever lower interest rates to ameliorate debt servicing, but now rates are near zero. Help Mr. Wizard!

  7. It may be the most famous bit of economic policy advice ever given to a US president. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Treasury Secretary Andrew Mellon told his boss President Hoover. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

    https://www.businessinsider.com/no-silver-lining-to-the-great-recession-2014-9

    1. “Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

      At some points in history, the wreckage left behind by a protracted period of unbridled financial gambling becomes too-big-to-bail.

      My enterprising grandfather bought himself some oil stocks during the 1930s. Decades later, his investments kept my grandmother financially supported long after he passed away.

    2. This very moment in time could be historically opportune to purge the rottenness out of our mortgage lending system and blame the CCP virus for drying up the vast pool of Chinese saver monies that flowed into our housing market.

          1. If you know who Pogo is, you’re probably a boomer or even older. The last strip was published 45 years ago.

  8. Apparently to the moon for real-estate by RBC (top bank in canada) – esp for BC. Even if Canadians will take a long time to get re-employed.

    Perhaps more Hong Kong and India money will come rushing in. You just need $500K in investable funds in Canada to get the equivalent of a green card.

    ——-
    According to Hogue, the unemployment rate is expected to “surge into double-digits in all provinces this month before easing gradually thereafter”.

    “The longer unemployment stays high, the slower the housing market recovery will be. Our current view is the recovery will stretch into 2021 in most markets,” Hogue noted.

    Hogue also said that the chances of a significant drop in prices are “still low”.

    “Despite the rough patch ahead, we expect property values to generally hold up,” Hogue stated.
    https://www.straight.com/news/summer-revival-of-pandemic-ravaged-canadian-real-estate-seen-by-rbc-economist-robert-hogue

    1. the chances of a significant drop in prices are “still low”.

      I guess if it is already at $5/bbl it can’t fall much more before it’s at zero.

  9. “Fannie Mae and Freddie Mac, the state-controlled mortgage finance companies with a $200 billion line of credit to the Treasury, were created to ease disruptions in the market.”

    “Stabilize the market” means privatize the profits, socialize the losses, and redistribution income up. Fannie and Freddie were never intended to do anything but securitize conforming loans, which once required 20 percent down or private mortgage insurance, with a mortgage at no more than 3 times stable income, and debt service at no more than 25 percent of that income.

    If American workers no longer have stable incomes, housing costs need to fall to reflect that. Keeping housing prices inflated benefits the rich, the financial sector, and the richest and most self-serving generations in U.S. history. It is devastating for later-born generations, who are 25 percent poorer on average (or were, it will be worse after this).

    1. “Fannie and Freddie were never intended to do anything but securitize conforming loans, which once required 20 percent down or private mortgage insurance, with a mortgage at no more than 3 times stable income, and debt service at no more than 25 percent of that income.”

      What a fading memory that is, wiped out by decades of government-endorsed and guaranteed subprime lending…

      1. Seems like the biggest changes towards destabilizing the mortgage lending system came while the Clintons were in power. Is that accurate?

    2. “…(or were, it will be worse after this)…”

      That’s a possible problem if Quarantinive Easing is used to artificially prop up asset prices in the face of dismal fundamentals. (For some reason, it hasn’t worked with oil, though…)

      1. You can’t heal a gunshot wound with a bandage.

        Oil Isn’t Ready To Rally
        By Editorial Dept –
        Apr 17, 2020, 1:00 PM CDT

        The week started out promising for crude oil traders, hoping for a boost in prices to shore up the U.S. oil industry and to stabilize prices. OPEC, Russia and other oil producing nations overcame a slight snag and finally agreed on Sunday to cut output by a record 9.7 million barrels per day for May-June, representing around 10% of global supply, to support oil prices amid the pandemic, according to Reuters.

        The cut was the single largest output cut in history. The specific production numbers weren’t released, but we do know that the 9.7 million barrels per day cut will begin on May 1, and will extend through the end of June.

        However, despite the efforts of OPEC+, oil prices continued to retreat throughout the week, hitting a multi-year low in the process.

        As it turns out, the agreement wasn’t especially bullish. The production cuts were smaller than what the market needed and all they are likely to do is slow down the stock building constraints problem.

        The move by OPEC+ is not big enough to plug the near-term imbalance, which could reach 15 to 20 million barrels per day. Additionally, storage tanks are expected to top out in May. Furthermore, the cuts are too short, ending in June. This is hardly enough time to bring stability and restore support to oil prices, leading some to speculate that OPEC may have to revisit the problem in June.

          1. Given the choice of going with the opinion of a market analyst or going with what Mr Market is telling me I would rather lean towards going with Mr. Market.

          2. It seems obvious, but perhaps worth saying anyway, that oil will skyrocket once the COVID-19 crisis is a fading memory only visible through the lens of the rear view mirror.

            The great uncertainty is exactly when this will happen. But the oil futures market reflects the certainty that it eventually will happen, with uncertain timing.

          3. Note that I said nothing about how faded of a memory…the most accurate predictions have no time specificity nor expiration date.

    3. If American workers no longer have stable incomes, housing costs need to fall to reflect that.

      But that would wipe out People Who Matter. There has to be another way.

      Keeping housing prices inflated benefits the rich, the financial sector, and the richest and most self-serving generations in U.S. history.

      That sounds much better. Let’s do that.

      1. If American workers no longer have stable incomes

        American workers haven’t had stable jobs or incomes for decades. It’s kind of why they have gone all in with the housing casino.

        1. If American workers no longer have stable incomes
          The permanently unemployed could be considered as having “stable incomes”.

          1. We have two young adult sons living at home who until recently were working and going to college. One is now collecting unemployment benefits, and making more per month than his brother who still works. The other one works at SBUX; they pay him by the hour, and have reduced his hours due to demand shrinkage. He has fellow employees who took an offer to stop working and are getting paid what they made before COVID-19 for staying home, i.e. more than those are still working.

            I told my son that it is better to keep working than to stay home, even if he is paid less, for the work experience and the intrinsic reward. He also brings home lots of free food and beans.

    1. Oh good – so they on their own can do 3-6 months of foreberance without govt help.

      Oh wait – they want the Bank of Canada (Fed equivalent) to reduce their capital requirements and access more of the lending window.

  10. Made my first vulture cash offer on a Foreclosed 1/3 acre dry lot near the beach in Fort Lauderdale. Missed by $13k….but marks the beginning of what could be an interesting time.

    1. Did you base your offer on a listed asking price?

      If so, do you mind sharing what percentage of ask you offered?

      Signed,
      TenCentsontheDollar

    2. “Made my first vulture cash offer on a Foreclosed 1/3 acre dry lot near the beach in Fort Lauderdale.”

      Will it remain dry as atmospheric CO2 concentration increases?

      1. Warmists gonna warm.

        The sooner we re-open the economy and get “back to normal” the sooner we resume and accelerate the irreversible destruction of the global ecosystem. Happy Earth Day!

    1. Stocks
      The Stock Market Is Ignoring the Economy
      The Dow enjoyed its best two-week stretch in more than 80 years, but the economy is still struggling
      By Gunjan Banerji
      April 17, 2020 6:00 pm ET
      The Dow Jones Industrial Average staged its best two-week performance since the 1930s, a dramatic rebound that has left many investors with a confounding reality: soaring share prices and a floundering economy.

      The explosive rally is a sign that many are positioning for the U.S. to make a speedy recovery when the coronavirus crisis eases.

      1. It couldn’t be that $1 million in Quarantinive Easing asset purchases a minute are buoying share prices? Nah…

    2. “Is the stock market healthy again at this point?”

      No, it has the same altitude sickness that it has had for all but a few months since 1995.

  11. Don’t these lenders have 4-6 months of cash on hand to pay the bonds until the people get back to work? And if they don’t, why don’t they foreclose on some houses and sell them to raise cash? After all, that’s what they tell us little people to do, sell possessions and save up an emergency fund.

  12. A weekend topic on this Politico article. “‘We are in this awful crisis, it’s only going to get worse, and we have these tools,’ said Anne McCulloch, CEO of the Housing Partnership Equity Trust and a former Fannie Mae executive. ‘Fannie and Freddie were created exactly for this point, when there is a major crisis and you need to drive money into the American housing market — it’s really their only purpose.‘”

    – The Fannie and Freddie GSEs were nationalized, along with the rest of the U.S. housing market after the GFC. The interventions have only increased since then in magnitude and scope. Think centrally-planned, command and control economy, and you won’t be far off. Of course, that worked out well for the (former) USSR, right? Fast-forward to today. Now everybody’s conditioned to EXPECT a bailout, when things go wrong (due to the previous cycle of interventions).

    – Laissez faire and free markets are dead. The sad history of government control and interventions, aka Socialism, speaks for itself. Adam Smith’s “invisible hand” of the markets has become the very “visible hand” of governments and their agents choosing winners and losers, even though the test of history has shown intervening is a failed policy. Free markets work, but there are too few opportunities for graft and corruption. What we have no is Socialism for the wealthy.

    “The enduring lesson of the 20th century is that socialism is a failure, and free markets are a success. But the politicians keep advocating just a little more socialism.” – Milton Friedman

    http://www.wsj.com/articles/the-depression-that-was-fixed-by-doing-nothing-1420212315?mod=WSJ_hppMIDDLENexttoWhatsNewsSecond
    Essay
    The Depression That Was Fixed by Doing Nothing
    The often forgotten 1920-21 economic crisis suggests that sometimes the best stimulus is none at all.
    By James Grant | Jan. 2, 2015 10:25 a.m. ET

    Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression), as well as a 31.6% drop in industrial production and a 46.6% fall in the Dow Jones Industrial Average. Unemployment spiked, and corporate profits plunged.

    What to do? “Nothing” was the substantive response of the successive administrations of Woodrow Wilson and Warren G. Harding. Well, not quite nothing. Rather, they did what few 21st-century policy makers would have dared: They balanced the federal budget and—via the still wet-behind-the-ears Federal Reserve—raised interest rates rather than lowering them. Curiously, the depression ran its course. Eighteen months elapsed from business-cycle peak to business-cycle trough—following which the 1920s roared.

    All this made 1921 a grim time. There had been a flu pandemic and a Red Scare. Labor and management were at each other’s throats. Prohibition had closed the bars and taverns (or driven them underground). Someone had fixed the 1919 World Series. And the Federal Reserve, determined to protect the purchasing power of the gold dollar, actually raised interest rates in the face of collapsing business activity—to as much as 8% in 1920. Without a federal safety net, people got by on savings, wits or charity—or they didn’t get by.

    In the absence of anything resembling government stimulus, a modern economist may wonder how the depression of 1920-21 ever ended. Oddly enough, deflation turned out to be a tonic. Prices—and, critically, wages too—were allowed to fall, and they fell far enough to entice consumers, employers and investors to part with their money. Europeans, noticing that America was on the bargain counter, shipped their gold across the Atlantic, where it swelled the depression-shrunken U.S. money supply. Shares of profitable and well-financed American companies changed hands at giveaway valuations.

    1. “Shares of profitable and well-financed American companies changed hands at giveaway valuations.”

      Older and richer asset holders, and homeowners, want them to change hands at INFLATED valuations.

      Why is the impact on the later-born never discussed? They end up with a higher cost of living and a low or perhaps negative long term rate of return on their savings. By stepping in to inflate asset prices, the federal government has redistributed income upward.

      I’ll note again, the city has claimed based on the last bubble sale that my little row house is “worth” $2.2 million. Great?

      My daughters graduated from a very good college summa and magna cum laude. They are earning less than we did at the same age, adjusted for inflation, like most Millennials. Some of their peers are doing better. BUT at least they have actual jobs, not “gig economy” positions, and they are still employed. Many are doing worse. In the long run, how does having housing prices so inflated affect THEM? Does anyone ask that question? Here is some perspective from someone else — from 2015, before it got even worse.

      https://gothamist.com/news/ask-a-native-new-yorker-should-i-move-in-with-my-parents-for-affordable-housing

      “I fully, wholly, totally understand how much this sucks. Each year this bubble goes on I lose a couple of more friends to Jersey or Westchester, and I see the psychic toll it takes on the ones who soldier on here. Even the friends who seem like they’re doing great moneywise still have an air of ashen ennui whenever the subject of housing comes up. I’ve yet to meet anyone, besides the parasite real estate agents and mortgage brokers, who has really benefitted from the surge in prices. Sure, there are a few friends who got in early, say in the ’90s, but even with the equity they’ve built they still can’t afford the mortgage payments on a place they really want to live.”

      “My parents and their friends are all paper-millionaires, but they’re all hardcore New Yorkers who want to die here, and so they can’t sell their places or even use much of the equity they’ve built. And they have to listen to their kids bitch about housing, or worse, dip into their retirement accounts to help their kids buy apartments, or worst of all, see them move away.”

      1. “Why is the impact on the later-born never discussed? They end up with a higher cost of living and a low or perhaps negative long term rate of return on their savings. By stepping in to inflate asset prices, the federal government has redistributed income upward.”

        – The Fed’s plan, esp. after the GFC was to generate the “wealth effect” in stocks and home prices. While the wealth effect has been discredited in academic papers, it definitely leads to wealth inequality. Unfortunately, that’s been the Fed’s plan until now, and it appears “it’s (not) different this time.”

        https://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372.html
        washingtonpost.com > Opinions
        What the Fed did and why: supporting the recovery and sustaining price stability
        By Ben S. Bernanke | Thursday, November 4, 2010

        “Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

        – BTW, none of these stated objectives were actually realized, but rather mostly contributed to blowing asset bubbles.

        – Here’s one view on how Fed policy is “helping” now. I don’t think it’s far off the mark.

        https://taibbi.substack.com/p/the-trickle-up-bailout
        The Trickle-Up Bailout
        It’s early days, but the Federal Reserve “bazooka” has mostly impacted the 1%
        Matt Taibbi | April 17, 2020

        As we head into the second month of pandemic lockdown, two parallel narratives are developing about the financial rescue. 
        In one, ordinary people receive aid through programs that are piecemeal, complex, and riddled with conditions.

        A law freezing evictions applies to holders of government-backed mortgages only. “Disaster grants” are coming more slowly and in smaller amounts than expected; small businesses were disappointed to learn from the SBA early last week that aid would be limited to $1000 per employee. 



        A one-time “economic impact payment,” reportedly delayed so recipients could experience the thrilling visual of Donald Trump’s name on the check, might help make half a rent payment.

        Unemployment insurance amounts have been raised, so tip and gig workers can now be ineligible for $600 a week more than before! The cost of a coronavirus test might be free, but you test positive, you could up paying $50,000 or more in hospital costs even with insurance. And so on. 

        Meanwhile, “relief” programs aimed at the top income levels were immediate, staggering in size and scope, and often appeared as grants rather than loans. One of the biggest layouts of the Covid-19 rescue was a political carrying charge that members of congress extracted just to get the larger bailout out the door – a pre-bailout bailout, if you will.

        “The Fed may feel all of this is essential to protect the financial system’s plumbing and reduce systemic risk until the virus crisis passes, but make no mistake that the Fed is protecting Wall Street first. The goal seems to be to lift asset prices, as the Fed did after the financial panic, and hope that the wealth effect filters down to the rest of the economy.”

        The coronavirus rescue is a “trickle-down” plan. Many of the Fed programs don’t appear even secondarily concerned with maintaining employment. The basic idea instead has been to hurl money at “assets,” underscoring the bizarre dualistic nature of this rescue.

        If the ordinary person during the crisis dreams of being relieved from market stresses like housing and medical costs, only to receive (at best) one $1200 check, it’s Wall Street actors who are seeing the tyranny of markets fundamentally overthrown, replaced by a giant financial happy face called the Federal Reserve that appears to want to simulate real buying and selling, only with the downside removed. Party on, Wayne!

        – On a historical note, the “let ’em eat cake” proposal didn’t work out so well for the French aristocracy, as I recall.

        1. “Blessed are the young, for they shall inherit the national debt.” – Herbert Hoover

        2. “Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.“

          – BTW, none of these stated objectives were actually realized, but rather mostly contributed to blowing asset bubbles.

          Right. If you got Bernanke, Geithner, Pauslon, Yellen, etc in a room today they would probably said they succeeded in preventing disaster. But if you got them in a room in 2008 and asked what they hoped the world would be like in 2020 as a result of what they were doing, it would be nothing like the world we ended up with. Their 2008 selves would be horrified.

          Anyone dig up Greenspan and ask him if HE is happy with that has gone on? Ayn Rand would probably be thrilled to see the meek inherit the dirt.

          1. “If you got Bernanke, Geithner, Pauslon, Yellen, etc in a room today they would probably said they succeeded in preventing disaster.”

            High fives all around!

            Psychology Today
            What Is Groupthink?

            Groupthink occurs when a group of well-intentioned people make irrational or non-optimal decisions spurred by the urge to conform or the discouragement of dissent. This problematic or premature consensus may be fueled by a particular agenda or simply because group members value harmony and coherence above rational thinking.

            In a groupthink situation, group members refrain from expressing doubts and judgments or disagreeing with the consensus. In the interest of making a decision that furthers their group cause, members may ignore any ethical or moral consequences.

          2. Their 2008 selves would be horrified.

            Maybe. But I doubt it. They knew what they were doing. I know they like to play stupid “nobody could have seen that coming” games but I refuse to believe it. You don’t make it to that position if you’re that stupid.

  13. Weekend i$olation$.$it.uation$ epi$ode #86

    Monk finds the Smith$ alive & living the “good.life!”

    Monk: … 👀 here’$ what happened!

    “The “Victim$” Purcha$ed a $250,000 $helter.$hack with $4,750 dollar$ down drawn on a 24% apr credit.card. Then they went about working & playing (vacation$, 4x4boy.toy$, girl.bing$ etc, etc) whil$t “every.single.year!”, the apprai$ed 🏠 Equity increa$ed uncea$ingly by $50,000+ or even a $100,000+ U$D” ($ee graphic below):

    💲6 months↗💲year#1↗ year#2↗ 💲year#3↗💲year#4↗💲💲💲💲ca$h.out⬆🏠🏧💰💳🍼 …♻

    “@ $ome point they had a brillant💡! Iffin’ this works so wonderfully for a $250,000 $helter.$hackie, why knot purcha$e a $500,000+ or $750,000+ 🏡 & double (x2) our accumulating Equitie$!”

    💲6 months↗💲year#1↗ year#2↗ 💲year#3↗💲year#4↗💲💲💲💲ca$h.out⬆🏠🏧💰💳🍼 …♻

    💑👶👪”… they lived happily ever.after$ … The end! ”

    Detective Stottlemeyer: “But Monk where are the $mith’s bodie$”?

    Monk:😒 I’m knot $ure, but let’s visit Mr. Ben Jones, iffin’ anyone has seen them, it’$ him!


    Po$t.$cript:
    (The $ame thing works for “art work$” & “other.thang$” that “alway$.goe$.up⬆, but the denomination$ are $omewhat, more$ or le$$, accumulative $ometime$)

      1. I recall the acronym of SBD from my childhood (“silent but deadly”), which might be literally true in the COVID-19 era.

  14. Apr 10, 2020 – Economy & Business
    Some economists wary of Fed’s coronavirus-driven asset purchases
    Dion Rabouin
    Data: Federal Reserve; Chart: Axios Visuals

    Some market analysts and economists have gotten wary of the Fed’s expanding laundry list of asset purchases.

    Why it matters: The big worry for most is that the Fed is now manipulating larger and larger swaths of what is supposed to be a free market.

    Just as investors reap gains in good times when the economy is strong, they are supposed to suffer losses when it weakens, and the Fed is artificially keeping that from happening.

    What they’re saying: “The Fed has redefined moral hazard by acceding its independence to the Treasury Department with the establishment of the Special Purpose Vehicle to purchase corporate bonds which is in direct violation of the Federal Reserve Act,” Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, tells Axios in an email.

    “Investors are wise to the Fed having crossed this red line … and are acting under the auspices of the Fed continuing to expand the array of assets that qualify, down to junk bonds and eventually stocks. Investors are playing a timing game, shunning toxic paper they deem won’t survive to see the light of Fed purchases.”

    1. I’ve read in the MSM that the Fed was recently buying assets at the rate of $1 million / minute. I thought it might be interesting to check the maths, using the official data from their own web page.

      Here’s what I get:

      Total Assets of the Federal Reserve
      In millions of dollars
      Date Balance ($millions)
      3-11-20 $4,311,911
      4-15-20 $6,367,887

      Elapsed days from 3-11-20 through 4-15-20 is 35.

      Here are a couple of arithmetic calculations which may be of interest:

      1) Daily amount of balance sheet expansion

      ($6,367,887-$4,311,911) / 35 = $58.7 billion/day

      2) Additional time to reach $10 trillion if this rate continued
      (hypothetical exercise; no guarantees it will):

      ($10,000,000-$6,367,887)/(($6,367,887-$4,311,911)/35) = 62 days
      (June 16, 2020)

      3) Amount of balance sheet expansion per minute from 3-11-20 through 4-15-20:

      ($6,367,887-$4,311,911) / (35*24*60) = $40.8 million (over 40X the
      MSM claim of “$1 million per minute in asset purchases”)

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