Andrew Huszar, the former head of the Federal Reserve bond buying program, wrote an honest mea culpa opinion piece acknowledging that the Fed’s $3.578 trillion bond buying program was a Wall Street bail out and did nothing to stimulate the private economy. The program simply lowered the banks’ cost of capital, expanded their interest income margins, reduced significant default risk from their balance sheets, and generated record profits while Main Street struggled. WSJ Op-Ed, 11/12/13: ‘Confessions of a Quantitative Easer’
Since 2008, the Fed has proven it can print $85 billion/month ($3.578 trillion total) to acquire 1) troubled mortgage-backed securities (eg MBS) from major US commercial banks to clean up their balance sheets and 2) US Treasury bonds to fund $1.0 trillion+ annual deficit spending (2013 deficit was $680 billion). The Fed now owns over 50% of the US mortgage-backed securities market. If the average mortgage value were $150,000 against a mean US household value of $186,000, the Fed effectively owns mortgages on 9.3 million homes or 10.6% of all owner-occupied homes covering over 24 million Americans. As of November, 2013, the Fed owns $1.393 trillion of MBS and US commercial banks own $1.322 trillion. (November 2013 Fed data on commercial banks). In addition, the Fed also owns $2.125 trillion of Treasury bonds/notes. Current US commercial banking deposits are $9.6 trillion.
Think for a moment if markets were left to work in 2008, certain banks were allowed to fail, the housing market found a sustainable bottom, Fannie/Freddie’s mandate and portfolio limits were reduced significantly, earnest depositors at failing banks found a new home for their cash, and delinquent homeowners found a new home or rental property they could afford. All the gamers on Wall Street and Main Street would have been naturally flushed out of the US economic system. We now know that the nation could have sustained a 35% reduction in deposit balances from mortgage foreclosures in a declining real estate market. The Fed could have printed the $3.5 trillion to bail out the Federal Deposit Insurance Company (FDIC). In turn, the FDIC would have replenished any qualifying depositors’ bank accounts ($250,000 cash/individual and $500,000 cash/couple). If there were any subsidy, the government could have expanded FDIC limits for depositors so no saver would have lost their money. That creative destruction would have rebuilt America’s moral, social, and economic fabric by rewarding productive workers and responsible homeowners in a reinvigorated ownership society while flushing out the gamers in today’s increasing entitlement society. Washington would likely have a new breed of citizen representatives and Americans could rest assured our nation’s mandate of freedom and equal opportunity was secure. Alas, the Leviathan of the federal government and vested special interests would not relinquish their chokehold on the golden goose. The laws of nature are indeed at work.
The nation is now faced with $17.1 trillion of national debt, $1 trillion of student loans guaranteed by the US government, $3.163 trillion of Fannie Mae guaranteed home mortgages, and $1.927 trillion of Freddie Mac guaranteed mortgages. The nation has $23 trillion of outstanding taxpayer obligations or $200,000/household). Consequently, the Federal Reserve does not have the same operating room to simply print money to bail out government obligations or future economic crises. Are all 114 million US households with a median income of $52,762 ready to pay to clean up this mess when the Fed steps out of the money printing business, interest rates increase, and the market is free to operate? Instead of printing $3.578 trillion to bail out Wall Street, think of the robust fiscal policy incentives the government could have provided the private sector to broaden economic ownership to all productive workers, reward US-based businesses to increase entry level jobs for graduating students with crushing college debt, work out troubled mortgages with committed borrowers, and reward vocational training centers who train and place welfare recipients into sustainable jobs. These incentives would build a sustainable Ownership Society that would reduce income inequality from the bottom-up through cooperation of capital and labor in a job and wealth creating private economy.
Proposed Solutions hot links: Work; Home; Education; Retirement; Health Care; Immigration; Rejuvenation & Relationships
September 2013 Fannie Mae portfolio
November 2013 Freddie Mac portfolio