FacebookTwitterGoogle+RedditEmail

Bernanke’s Failing Policies

The National Association of Realtors reported January existing home sales sank to 4.890 million from 6.380 million a year earlier, and the average price was $201,100, down from $210,900 or 4.6, percent from a year earlier. In December, sales were 4.910 million and the median price was $207,000. The large price drop from December was particularly disturbing.

These numbers were hardly surprising. The National Association of Realtors tracking statistics for new sales contracts have been sinking precipitously in recent months. Buyers are scared, and recent actions by the Federal Reserve, the Bush Administration or the Congress offer little hope for better times soon.

The U.S. consumer faces a constant drumbeat of bad news. Housing prices are falling, gas prices are rising, good new jobs are getting scarcer than hens teeth, and credit card terms are getting tougher, even as the Federal Reserve makes credit to banks cheaper.

Federal Reserve efforts to increase liquidity and bank lending have not made mortgages adequately more available, especially in the Alt-A and subprime categories. Alt-A loans are for homeowners offering good repayment prospects but either less-than-perfect credit or recent income records. Fannie Mae, generally, only takes prime lenders, and does not finance most upper-end, more-expensive homes.

Ben Bernanke’s strategy has two components. The Fed has lowered short-term interest rates by slashing the Federal Funds rate 1.25 percentage points since January 22, and the Fed has permitted banks to use subprime-backed mortgage securities to borrow from the Federal Reserve. The latter is the so-called term auction facility.

These policies do not solve the basic problem, because these policies do not provide banks with opportunities to write many new non-Fannie Mae conforming mortgages.

Banks cannot provide the housing market with adequate amounts of mortgage finance by taking deposits, writing mortgages and keeping those mortgages on their portfolios. Bank deposits are not nearly enough to carry the U.S. housing market. Much the same applies for loans to businesses.

In normal times, regional banks bundle mortgages into bonds, so-called collateralized debt obligations (CDOs), and sell these in the bond market through the large Wall Street banks.

The recent subprime crisis revealed the large banks were not creating legitimate bonds. Instead, they sliced and diced loans into incomprehensibly complex derivatives, and then sold, bought, resold, and insured those contraptions to generate fat fees and million dollar bonuses for bank executives.

This alchemy discovered, insurance companies, mutual funds and other private investors will no longer buy mortgage-backed bonds. Banks can no longer repackage mortgages and other loans into bonds and are pulling back lending.

Home prices tank, consumers spend less, businesses fail, and jobs disappear.

Private investors have taken massive losses, and the large banks have taken about $150 billion in losses on their books. This left the banks short of capital and in liquidity crises. The banks turned to foreign governments, through sovereign investment funds, to sell new shares and raise fresh capital, and to the Fed to boost liquidity.

Neither the sovereign investment funds nor Ben Bernanke have required the banks to change their business models, which essentially pays bankers for creating arcane investment vehicles that generate transactions fees, rather than writing sound mortgages and selling simple, understandable mortgage-backed securities to investors

Without those changes in business practices, the bond market remains closed to mortgage finance, other than CDOs offered by Fannie Mae, and it is inadequate to supply the volume and array of mortgage products necessary to support a full housing recovery.

The Economic stimulus package tax rebates, interest rate cuts and Administration help for distressed homeowners are palliatives. The stimulus package at about $150 billion is less than the losses taken by private investors and the banks on CDOs

Getting the housing market going and the economy growing will require Ben Bernanke to aggressively pursue banking reform. Without genuine changes in the way Wall Street handles mortgages, the economy can’t get back on track.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

 

 

 

 

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

Weekend Edition
January 18, 2019
Friday - Sunday
Melvin Goodman
Star Wars Revisited: One More Nightmare From Trump
John Davis
“Weather Terrorism:” a National Emergency
Jeffrey St. Clair
Roaming Charges: Sometimes an Establishment Hack is Just What You Need
Joshua Frank
Montana Public Schools Block Pro-LGBTQ Websites
Louisa Willcox
Sky Bears, Earth Bears: Finding and Losing True North
Robert Fisk
Bernie Sanders, Israel and the Middle East
Robert Fantina
Pompeo, the U.S. and Iran
David Rosen
The Biden Band-Aid: Will Democrats Contain the Insurgency?
Nick Pemberton
Human Trafficking Should Be Illegal
Steve Early - Suzanne Gordon
Did Donald Get The Memo? Trump’s VA Secretary Denounces ‘Veteran as Victim’ Stereotyping
Andrew Levine
The Tulsi Gabbard Factor
John W. Whitehead
The Danger Within: Border Patrol is Turning America into a Constitution-Free Zone
Dana E. Abizaid
Kafka’s Grave: a Pilgrimage in Prague
Rebecca Lee
Punishment Through Humiliation: Justice For Sexual Assault Survivors
Dahr Jamail
A Planet in Crisis: The Heat’s On Us
John Feffer
Trump Punts on Syria: The Forever War is Far From Over
Dave Lindorff
Shut Down the War Machine!
Glenn Sacks
LA Teachers’ Strike: Student Voices of the Los Angeles Education Revolt  
Mark Ashwill
The Metamorphosis of International Students Into Honorary US Nationalists: a View from Viet Nam
Ramzy Baroud
The Moral Travesty of Israel Seeking Arab, Iranian Money for its Alleged Nakba
Ron Jacobs
Allen Ginsberg Takes a Trip
Jake Johnston
Haiti by the Numbers
Binoy Kampmark
No-Confidence Survivor: Theresa May and Brexit
Victor Grossman
Red Flowers for Rosa and Karl
Cesar Chelala
President Donald Trump’s “Magical Realism”
Christopher Brauchli
An Education in Fraud
Paul Bentley
The Death Penalty for Canada’s Foreign Policy?
David Swanson
Top 10 Reasons Not to Love NATO
Louis Proyect
Breaking the Left’s Gay Taboo
Kani Xulam
A Saudi Teen and Freedom’s Shining Moment
Ralph Nader
Bar Barr or Regret this Dictatorial Attorney General
Jessicah Pierre
A Dream Deferred: MLK’s Dream of Economic Justice is Far From Reality
Edward J. Martin
Glossip v. Gross, the Eighth Amendment and the Torture Court of the United States
Chuck Collins
Shutdown Expands the Ranks of the “Underwater Nation”
Paul Edwards
War Whores
Peter Crowley
Outsourcing Still Affects Us: This and AI Worker Displacement Need Not be Inevitable
Alycee Lane
Trump’s Federal Government Shutdown and Unpaid Dishwashers
Martha Rosenberg
New Questions About Ritual Slaughter as Belgium Bans the Practice
Nicky Reid
Panarchy as Full Spectrum Intersectionality
Jill Richardson
Hollywood’s Fat Shaming is Getting Old
Nyla Ali Khan
A Woman’s Wide Sphere of Influence Within Folklore and Social Practices
Richard Klin
Dial Israel: Amos Oz, 1939-2018
David Rovics
Of Triggers and Bullets
David Yearsley
Bass on Top: the Genius of Paul Chambers
Elliot Sperber
Eddie Spaghetti’s Alphabet
FacebookTwitterGoogle+RedditEmail