20 May Wall Street Seized by those that brought us this Housing Success
Your Senate passed a bill today that is surpassed only by the Health Care takeover bill in its audacity and absurdity. I refer to the Financial “Reform” bill in which the entity that single-handedly built the housing bubble, single-handedly caused the credit crisis, single-handedly destroyed the mortgage-lending business, and single-handedly dampened the most innovative and growth-oriented economy in human history, has been given sole oversight and power and control of the financial engines that run our economy. The entity I refer to is the United States federal government, and I am dumbfounded that we are all putting up with this.
It is nearly impossible for regular people to understand what is going on any more. Sound bites and rhetoric rule the day, no matter how insane they may be. We live in a world where a company that generates 32% return on equity (Goldman Sachs) is demonized, yet an entity that has accumulated $13 trillion of national debt is asked to assume control of our nation’s monetary policy, fiscal policy, entitlement policy, education policy, health care policy, and health & nutrition policy (the federal government). You all can hate those greedy bastards at Goldman all you want, but who do you want running the national treasury – seriously: Their prop desk, or your Senate. Please.
The saving grace regarding this financial debacle is that many of the more insidious provisions in the Senate Bill are not likely to pass the House reconciliation. But the core tenets – the creation of a new “consumer protection division” (because credit card fees are truly at the heart of this financial mess, aren’t they?, the granting of the title “Super Regulator” to the Federal Reserve (who has apparently earned the promotion after their incredible handling of the housing collapse), and finally, creating a systemic risk council (because no one is more qualified to monitor systemic risk than the people that created Fannie and Freddie) – these core pieces of the bill are all going to make the final draft. Next on the legislative plate is a plan to start taxing hedge funds and private equity funds more than double what they are taxed now (which sounds rhetorically nice, until you realize that billionaire’s don’t care, and venture capital groups now have that much less money to invest in new technology). In a day and age where the entire intent of Obama’s Keynesian policy drive is to “get credit through the system”, never has someone so purposely, or ignorantly, worked against their own agenda. I encourage all of you that read an article in Newsweek once that really made you hate the greedy bastards at hedge funds (but not as much as the greedy bastards at Goldman Sachs, of course), to understand this: Like Jack Nicholson said to Tom Cruise in A Few Good Men (very accurately, I might add), “deep down in places you don’t talk about parties you want me on that wall, you need me on that wall.” I do not recommend that those of us who just simply want to see the free market system work and jobs restored and credit flowing again (to good borrowers, of course) sit back and approve of this tyrannical legislation. If I have said it once then I have said it 1,000 times: Wall Street is going to be just fine. They will move certain activities off-shore. They will change protocols and margins. They will re-work the system. But they are not going to be regulated by some clown in a short-sleeved shirt and a bad tie who makes slightly less money in a year than their dinner allowances represent. Wall Street will win that little arm-wrestling contest ten out of ten times. The victims will be: the unemployed, the middle class, the regional banks, and qualified members of the economy who face severe limitations to the financial transactions they can now do (that represent no systemic risk to anyone whatsoever). Free flow of capital is under attack, and the incentives that create a free flow of capital are being shot with a bazooka. This is an extraordinary time, and there is far more to it than meets the eye.
But the one thing I thing my readers most need to understand is this: Those empowered by this new bill are, and have been, the supreme commander of U.S. housing policy for many years. Long before there was HAMP, HARP, HAFA, H4H, 2Mp, and the FHA, there were the GSE’s (government-sponsored entities called Fannie Mae and Freddie Mac). They now nonchalantly report $18 billion quarterly losses as if it were chump change (which it is compared to the hundreds and hundreds of billions of dollars they have already taken from the taxpayers). Are Fannie and Freddie part of the “reform” package? No. Does the government still backstop all of their debt to this day? Yes. In fact, because of the low rates and government protection given to this beast, there is virtually no loan being done at all within the conforming loan space apart from Fannie and Freddie. Their balance sheet is worse, not better; their indebtedness to taxpayers is far worse, not better; their daily operations are indistinguishable from their past. It is reprehensible. The government’s follow-up to the GSE debacle that brought the world to its knees was to pass HAMP, which is supposed to really help keep people in homes they can not afford. Well, there is good news and there is bad news. The people in those homes still can not afford them, and in most cases are not making any kind of payment. But thanks to HAMP, those homes can not be foreclosed upon, and therefore can not be put to market where they belong to fetch the highest bid for the senior owner of the properrty. No, instead of letting the market work itself through this the government has restricted banks from foreclosing, no matter how much money the borrower owes. Seems like this is causing a tightening in credit approvals, huh? The single thing hurting housing prices the most nationwide is the perverse amount of inventory available on the market. The deed-in-lieu requirements the government has forced on financial institutions (vs. foreclosure) are single-handedly creating the term “strategic default” as a household name (people who figure out that they can default on paying their mortage, but still collect the rent free, and then ultimately give the product back once nature has (slowly) run its course. This is what we want happening when the smartest guys in the room take over a part of the U.S. economy?
With very, very few exceptions, you live in a world right now where apart from the GSE’s and the FHA, there is virtually no mortgage credit whatsoever. I wonder if this is what we want as a society? Has the government’s management of the housing crisis, from when they pushed real interest rates to well below 0% in 2002 and then kept them there for over a year, created a high level of confidence in their ability to avoid creating a financial problem, let alone in navigating through that problem after the fact? We have seen the most educational illustration of government intervention in a generation – government entrance into the socialization of and financialization of thr housing market – and the result was the worst bubble collapse any financial asset class has ever, ever seen. And now, after that kind of performance, we want them to be the masters of the universe. It would be like asking Dustin Hoffman to play Jack Ryan right after his stunning performance in Ishtar. Only that movie cost six or seven bucks. This debacle rips the freedom out of an industry that we have long held dear, and it does it all for no reason whatsoever. It addresses no real problem, it is pork-laden to the core, and absolutely impedes vital parts of economic growth.
We need to be more indignant. But first we have to look in the mirror and wonder: Why did we ever let these people assert so much control over our lives? The answer is not an easy one. But it must be answered and rectified before we can take back our Republic.