We are now nearly eight years into the great experiment. Following the economic meltdown of 2008, governments worldwide embarked on the largest economic interventions ever attempted. While the central banks and politicians promised wonders from these elixirs, the results have been quite different.
Tony Sagami, editor of the Rational Bear at Mauldin Economics recently published an article titled 4 Signs That the Lights May Be About to Go Out in the Housing Market that paints a disturbing picture of one of the more important parts of the US economy, housing. Sagami shares the following data:
- Currently the homeownership rate is back down to 1993 levels.
- The Wall Street Journal reported that pending US home sales dropped by 2.5% in January, as compared to December, and had a rather insignificant gain for the year of less than 1.5%.
- New home sales for January dropped by over 9%, according to the Investor’s Business Daily.
- The medium sales price for new homes dropped by 4.5% in January, following drops of 3.7% and .3% respectively in December and November.
A further indictor of the weakness in the housing market is the return of creative mortgage financing, the same type of gimmickry that helped create the original meltdown. Equifax reports an increase of the mortgages given to people with credit scores of less than 620. In addition, during the first nine months of 2015, over $50 billion in mortgages were of the sub-prime variety, a substantial growth in this risky lending practice.
The housing figures are troubling on their own. However, when taken in the context of the massive governmental interventions of the past 8 years, they are more problematic. These interventions included a massive stimulus program, running up the US debt to over $19 trillion dollars and keeping interest rates near 0% for nearly eight years (and now threatening to go negative).
Housing is not the only major part of the economy showing weakness. Sagami reports on weakness in manufacturing, corporate earnings, and restaurants.
It is evident to any with the most basic knowledge in economics that the governmental interventions and central banks fiscal policies have utterly failed to stimulate economic growth, as we were promised when implementing these radical programs. Now the question turns to whether or not these policies actually have led to economies worldwide heading toward recession. But do not expect the governments or central banks to accept responsibility. In fact they are doubly down on the failed policies by sending interest rates into unchartered territory, negative. These are challenging times indeed.
The Wall Street Journal reported that Greece has ordered that its banks remain closed for the next week to the stem panicked cash withdrawals by depositors. This drastic move indicates that the five year long Greek debt crisis is coming to an end game.
After the financial meltdown occurred in 2008, the economic folly of Europe’s single currency, the Euro, became apparent. The European Union was created in an effort by Europeans to create a political climate that would lessen the likelihood of future wars on their continent. This desire was a reaction to the carnage that inflicted on Europe during two world wars in the 20th century. While the political idea was noble, little thought was given to the economic consequences that a central currency would lead to. Those consequences are now playing out.
The Euro was destined to create an economic calamity because the political union was not accompanied by a truly economic union. European countries maintain their own banking systems and Euro central bank was weak.
After the European Union and the Euro were created, the more efficient and stronger economies of North Europe, specifically Germany, obtained the lion share of benefit created by the Union. With nearly all European countries having a single currency, less efficient countries had their cost of labor increased in relation to more efficient ones. As a result, the poorer countries had a artificially strong currency that enabled them to consume increased amounts of the more efficient countries’, i.e. Germany. Through the Euro, Greece had to access to relatively cheap borrowing via an overall European credit rating that did not reflect the realities of individual countries. As a result, Greece and other Southern European countries borrowed more funds than they could afford to pay back and use these funds to purchase imports from Germany and other exporting countries.
When the recession hit, Greece and other countries were unable to make payment on their debt. This led to a battle between the creditor countries such as Germany and debtors like Greece.
For five years the Greece debt crisis has been a can kicked down the road. Creditors including, Germany, have been unwilling to forgive Greece’s debt, even though Greece is not a position to repay it. Had Greece continued to have its own currency, it would have devalued versus the German currency making its exports cheaper and more likely that it would have been able pay back its debt obligations. The single currency has curtailed this natural rebalancing mechanism of sovereign debt. Continue reading
The Wall Street Journal reported the most often used creator of consumer credit scores, Fair Isaac Corporation (FICO), is introducing a new metric for rating consumer credit worthiness. These metrics will use consumers’ payment history for items like utility bills and how often they have changed their address. Previously, FICO scores have been created from information obtained by the major credit reporting firms.
In making the announcement, FICO indicated that over 50 million Americans who currently do not have acceptable FICO lending scores would be able to obtain them under the new system. This fact alone should raise significant concern as to the motivation behind FICO’s change. However, for those that need more convincing, the FICO’s rating changes come as a result of significant pressure from lending institutions and the real estate industry. These self-interest groups do not seek change for any other reason than a desire for greater profits. In the past, relaxing lending standards has resulted in significant economic damage to the greater society.