Author: John King, Quacera
Covestor model: QPM Radar
Disclosure: none
The regulators are doing nothing if not causing conflict. Ben Bernanke last week opined that the reason QE1 and 2 are not moving things along as advertised is because loans are not being made. That’s not technically correct but insofar as the money he’s printed has not found his preferred target, he is spot on. But then why would he or anyone else expect a different result? Since WWII the government has used tax policy to push the real estate ideal. Everyone was entitled to have his or her own home. Laudable at that sounds, using the weight of federal regulation and tax policy to put a positive bias on what is certainly an asset market inevitably ends up skewing the results as well.
We had Congress forcing the issue in the 80’s & 90’s by passing laws to use tax funds to shoehorn anyone who could fog a mirror into an ill fitting mortgage. Fran & Fred were allowed, and in many cases forced, to use their balance sheets to provide guarantees where the risk was huge or at best unknown. This led the commercial banks to get in on the game and game they did. All sorts of quasi legal means were concocted to create leverage which added so much overcapacity and finally the whole market collapsed much to the surprise of all the players. Now that the economically unavoidable has happened and trillions are being poured into the rat hole, congress has
passed new and exciting regulations to make sure that it never happens again.
The Federal Reserve accommodated all of this by buying much of the bad paper as the government learned the meaning of bad debt. Shocking to their delicate sensibilities as all of this has been, they nonetheless have proceeded to create a situation wherein confusion reigns. Much has been said about helping the unfortunates who have lost or are losing their homes. After all, they weren’t to know that loan applications were supposed to be truthful. The mortgage rep had hinted to them that “stated income” meant they could fudge a bit. The underwriters decided that down payments and proof of employment were mere formalities because records were not going to be reviewed anyway.
Now the government wants those poor taxpayer bailed banks to discount a portion of mortgages back to a realistic income standard. They want to stop the servicer’s robo-signing foreclosure documents and the lenders are to be made to pay meaningless fines as atonement. This would all be very funny if it wasn’t for the fact that 99% of these loans have Fred & Fran’s guarantee on them so the big contributors to congressional campaigns are in reality off the hook.
So why are the banks reluctant to lend? The money Ben has printed and paid to the dealers for the bad loans and to fund the fiscal deficit is on deposit at the Fed itself. This will allow Ben to disappear the funds without even waving his wand. Also, once chastened by their near death experience, banks likely will be less than keen to lend to anyone involved with a government guarantee. They do not know when Uncle will change his mind or the rules.
They also don’t know when the Fed will raise rates, pull back the funds or the market will drive rates up as the dollar drops. These uncertainties are major factors and since the money came to the banks without strings, it is easy to see why they lend to the hedge funds or buy assets themselves. These alternatives are short term risks that can easily be hedged without the influence of some busybody government regulator looking over their shoulders.
After all, being a banker means finding the best way to garner a bonus. Let the Fed figure out how to deal with lending to people and small businesses. Big banks are too big to fail – or bother with such mundane issues.
