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.
After the housing meltdown in 2008, private corporations Fannie May and Freddie Mac, who backed mortgages, required a $187 billion taxpayer bailout to avoid insolvency. At that time these quasi-government-backed corporations were placed in conservatorship under the FHFA (Federal Housing Finance Agency). The government also took a majority ownership position in the Fannie and Freddie. However, like so many other government actions, once it gets its mitts into something it never lets go and typically inflicts damage on the organizations they gain authority.
The Wall Street Journal reported that by the end of 2014 the federal government was paid back by Fannie and Freddie to the tune of $230 billion, approximately $40 billion more than the original bailout. So far so good for taxpayers. But that was just the start of this governmental intervention.
Four years after making the bailout to Fannie and Freddie, the government changed the rules allowing the US Treasury Department to take all of Fannie and Freddie’s profits and place them in the government’s general account. This is allowed the government’s budget deficit to look smaller than it actually has been. Even worse, taking these profits stripped Fannie and Freddie of the ability to build up capital, a necessity in warding off future financial crises for these firms. This has increased the risk that Fannie and Freddie will require future taxpayer bailouts.
The warnings of impending financial problems for Fannie and Freddie are percolating. The FHFA Inspector General announced that Fannie and Freddie may require further government bailouts if the housing market slows down. Slowdowns are inevitable! In addition, Fannie’s CEO Tim Mayopoulos warned that its depleted capital raises increased the likelihood that Fannie will require additional bailouts.
The government’s Fannie and Freddie actions are another indication that its interventions are not benign. While the initial bailout may have had at least some good intent, it has opened a dangerous door that has allowed the government to illegally raid these businesses’ balance sheets. Once again the government has shown that if it is unable to increase taxes or print money, it will take other actions to perpetuate its own interest and growth, irrespective of long-term consequences.
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.