- Easing Doesn’t Help This
Markets were up on Friday after a speech by Federal Reserve Chairman Ben Bernanke indicated that some form of monetary easing might be in the cards, as the Fed continued to seek a magic bullet to combat chronic economic weakness.
Supporting the Fed’s previous use of easing, and signaling its potential use again, Bernanke said, “Central bank securities purchases have provided meaningful support to the economic recovery…we should not rule out the further use of such policies if economic conditions warrant.”
According to Zachary Goldfarb of the Washington Post, the Fed could announce such a measure as early as mid-September.
But to what end? After two rounds of Quantitative Easing (QE), what would be the purpose for a third round?
QE-I came in 2008-09 as the market crash was in progress where the Fed bought one trillion dollars in mortgage backed seucrities to pump liquidity into the market and prevent a credit freeze and deflationary spiral.
QE-II came in November 2010 as slow growth and high unemployment persisted. The Fed bought $600 billion in Treasury securities, with the goal of stimulating the economy. Though QE-II had a pronounced impact on the stock market, driving up prices artificially with all that no-cost money floating around for banks to arbitrage in the market for financial gain, it did little for the economy at large.
Now, with continued slow growth and chronic high unemployment, Bernanke says that QE-III may be necessary.
But if QE-III is a solution, what is the problem?
In reality more easing by the Fed would be more “show” then “action,” but with the added problem of stoking inflation.
According to the Post’s Goldfarb, QE-III would be, “a new round of massive bond purchases, [with the purpose of] pushing record-low interest rates even lower and making it even cheaper for people to buy homes or refinance mortgages.”
But surely even the Fed knows that it is not the availability of capital that is the problem.
It is access to capital that plagues the system.
Banks and financial institutions are awash in capital. It is the lending standards and practices created by the banks that exempt loans to the very people that Fed easing might be trying to attract in order to stimulate broader economic growth.
Consider the 11 million Americans who owe $700 billion more on their homes than the properties are worth, an enduring legacy of the market crash that policy-makers never saw fit to correct. Banks and financial institutions won’t touch these people as potential borrowers, even those that somehow stay current on their payments.
Others, who are falling behind despite their best efforts, are being tortured by the banks.
Late on payments? Your credit score will take an immediate hit. If you are foreclosed on, all your creditors are advised of the default and all your credit is cut, even if you have otherwise perfect credit with everyone else.
This iron link between the housing mess and individual credit or FICO scores is the untold story of the mortgage crisis. FICO scores don’t impact just the ability to buy a house, but the ability to buy or do most anything. It is an immediate, artificial, financial representation of every American in the public marketplace. Your credibility by the numbers reported on you. And you have almost no control over it in a format that does not allow nuance.
Want to buy a home? They check your FICO score. Want to rent a home? They check your FICO score. Want to get a job? They check your FICO score.
What good are lower mortgage interest rates if the banks won’t lend based on your FICO score? Renter’s that are not denied outright based on their score are forced to pay more upfront. Job seekers, particularly anyone who wants to work in a position of trust for the US government – ironically – will be turned down for a bad FICO score.
Banks and financial institutions are not just terrorizing borrowers and taking homes. Using the FICO tool, they are wrecking lives, and preventing otherwise honest and hard working people from being able to get back on their feet.
QE-III does nothing that stops this outrageous abuse. Indeed, QE-III can force mortgage rates to zero, but so long as banks continue their predatory practices, there will be no change on behalf of a significant cohort of the otherwise credit-worthy public.
No one seems to understand this, or if they do, they don’t care.
The same is true with corporations. Corporate America has never been so flush. Regulatory and policy uncertainty is what keeps them from deploying capital. If you were a business owner right now, looking at the implementation of Obamacare regulations/costs, a cascade of new financial and environmental regulations, the federal fiscal cliff that could lead to new, higher taxes, not to mention the sovereign debt crisis in Europe and the slow down in China, would you invest now? A new QE-III will make no difference to them.
Of course, for a privileged few, a new round of easing will mean a new round of profits as money managers make their arbitraged percentages. See the stock market rally on Friday as evidence. For the rest of us, there will be little impact.
Indeed, for those Americans that save, or more importantly, for those who are retired who are trying to stay afloat with the help of investments with a decent interest rate, the Fed’s policy is a financial penalty that artificially manipulates interest rates, pushing them down to a point where no one can get a decent return on investment in traditional investment vehicles.
And there are other downsides. Inflation right now is just under the two percent target that the Fed had established. A new round of easing could finally trigger the inflationary pressures/expectations that have long been predicted with so much money floating around, and Fed efforts at retrenchment at that point – by raising interest rates – could impact any nascent, organic economic recovery.
Thus, as currently envisioned, QE-III is the wrong policy, at the wrong time, with the wrong intention and likely the wrong impact.
However, if making a real difference is Bernanke’s goal, there is something he could do. The Fed could structure an easing program that would reward those financial institutions that took concrete steps to write down mortgages with companion FICO waivers (so that credit is not affected). This would ease the pain on banks, making it cheaper for tfinancial institutions to restructure loans with qualified borrowers, cushioning balance sheets.
A large-scale program to deal with the $700 billion in negative equity woulud have enormous impact on the private market, would create credibility and transparency in the mortgage industry, stabilize payments for at risk borrowers, and create new capital formation through securitizing mortgages, but this time without the sub-primes and other financial magician tricks that made the old CDO and MBS’ so risky.
Credit worthy borrowers who benefited from restructed mortgages would have financial certainty, homes would become long term investment vehicles again, and household debt, a key driver in the anemic recovery, would be removed, leading to a flow of new capital available to spend and invest. Indeed, these are only a few of the advantages. Go ask a builder how such a program would catalylize the housing construction industry overnight?
For all the benefits, don’t hold your breath.
The banks will never allow it.
That is the great pity of current public policy.