The Gift That Keeps On Giving
Have you gotten your boatload of free money yet? If not, you better get started fast because the era of free money eventually must end. All you need to get started is access to the Federal Reserve’s so-called “borrowing window” and you can make a killing by grabbing a load of dough at a cost of almost nothing, and then lending it out to some unsuspecting sucker to buy a house, a car, or some fun toys. Say you borrow $10 million just for fun, you could earn interest of anywhere from $300,000 to over $600,000 with very little trouble. Now wouldn’t a little shot like that help pay down your student loans, credit cards or go on vacation to someplace cool like Wally World? We aren’t talking about a one-time deal either. This opportunity has been going on for over three years.
With your FICO score below 600, you say this dream is impossible? Well worse credit scores than yours have been feeding at the free money trough for quite a while now and guess what? Their FICO scores have actually improved. Bless the work of the United States Federal Reserve. They have truly wrought miracles.
For those fortunates that are not devotees of C-span, what we are talking about is this: the Feds program known as Quantitative Easing, of which there have been two versions thus far, and the likelihood of a further edition. A word of caution before going further: the next edition of free money may not be entirely free. It may be only cheaper than cheap. Word about this got out this week and it made a lot of people nervous. After all, when you’ve been pigging out at the trough of free money for a long time, it hurts to leave even a nickel tip.
The basic concept was born in the financial crisis of 2007-2008. The program involves dropping interest rates on loans to big banks to near zero while simultaneously pumping as much cold hard cash into the economy as possible. These days the Fed is buying up government debt to the tune of about $85 billion each month.
Quantitative Easing, or QE for short, rescued the financial system and prevented the economy from falling into a true depression. There is no arguing that it was a necessity. After all, what good is an economy if it is in a depression? Today banks are generally as healthy as they have been in a long while. There are a few other positive events that deserve note as well. The moribund housing industry is showing life, both for first-time buyers with pristine credit scores as well as high-end buyers looking for a place to park their dough. The stock market became more attractive than nominal bond returns, resulting in a more than doubling of the Dow Industrial Average since the 2008 low, including an amazing 17% gain in the first five months of 2013!
This near-perfect state has only two minor drawbacks. The first and totally inconsequential drawback is that neither you nor I have access to the Fed Window. That access is restricted, otherwise we would all be better off, not just the largest financial institutions. And, after all, we urgently need these institutions. Somebody has to charge us $30 a month to hold our money.
The second minor drawback is that nothing is perfect. It is known as the law of unintended consequences, and it is part of every law and government program ever created. On May 30th, Ray Boshara and William Emmons, two distinguished economists at the St. Louis Federal Reserve Bank, released a report on the unintended consequences. It holds some real truth for former middle-class Americans like you and me. The truth is that Quantitative Easing has been a charity for the rich while still leaving the rest of us seriously lagging. Here are some of their findings:
The average U.S. household has a long way to go to recover the wealth it lost to the recession. The typical household has regained less than half its wealth, the analysis says. A separate Federal Reserve report in March calculated that Americans as a whole had regained 91 percent of their losses. Is somebody here lying? If both of these are true, it only means that the wealth recovery has been disproportionate to the wealthy. We believe both are true and here is why.
Nearly two-thirds of the increase in household wealth since 2009 is due to rising stock prices, Boshara and Emmons note. Stock indexes reached record highs this month. Those gains disproportionately benefit affluent households: About 80 percent of stocks are held by the wealthiest 10 percent of the population.
For middle- and lower-income households, home values represent the biggest chunk of total wealth. And home prices remain about 30 percent below their peak, even after jumping nearly 11 percent in the past year. And what about the affordability of our homes? Obviously, affordability is a matter both of the cost of your home and your ability to pay the mortgage. Here is what the guys in St. Louis found about that.
Household wealth plunged $16 trillion from the third quarter of 2007 through the first quarter of 2009. By the final three months of 2012, American households as a group had regained $14.7 trillion. However, the number of U.S. households grew 3.8 million to 115 million from the third quarter of 2007 through the final three months of last year. As a result, the rebound in wealth has been spread across more people, thus reducing the average wealth for each household. In addition, though inflation has averaged just 2 percent over the past five years, it’s eroded some of the purchasing power of Americans’ regained wealth.
An interesting side bar to the report had to do with consumer spending. To nobody’s surprise, spending, the traditional fuel of economic recoveries, has been weak for some time. This is historically unusual given the fact that surveys of consumer confidence have been noting multi-year highs. What our guys in St. Louis showed was that people may stay hunkered down in their spending even when things improve. Their statistics showed that, for every 1% decline in spending during an economic recession, an equal rebound in income results in only 3/10% increase in spending. To most of us that have experienced the real impact of the current middle-class depression, this is not shocking news. In fact, it may not even be news. However, this behavior pattern has important implications for further middle-income wealth recovery. Unfortunately, the implications are not rosy.
Bernanke Tells It Like It Is
Federal Reserve chairmen are not typically known to be forthright characters. Former Chairman Alan Greenspan was a master of the non sequitur. But Ben Bernanke has been a champion of Federal Reserve transparency. His term is set to expire in 2014 and it is unlikely that he will choose to lobby for a third term. Thus Ben is in a position to be even more open as the days of his tenure whittle down. If former President Bush were asked, he might refer to Bernanke as a truth teller.
Bernanke appeared before Congress May 29 and clearly laid the blame for our current lackluster economy in the lap of Congress. Using terms like golden age of debt reduction referring to the combination of government spending cutbacks and payroll tax increases which began earlier this year. Yet these very actions have caused the Congressional Budget Office to lower estimates of the 2012 federal deficit by 41% to a mere $642 billion dollars, which is in the longer term best interest of all income brackets.
The real problem with the spending cuts (politely dubbed “the sequester”) is that government has little experience and no expertise in carrying them out effectively. From the very beginning, the political influence in the process has screamed loudly. We all remember the FAA cutting back air traffic controllers. Hungry to get their share of the publicity, the White House suspended public tours of the mansion, and even the President himself decided to take an annual pay cut of $20,000. When you consider he hasn’t paid rent in over four years and probably paid for a meal or flown commercial since 2005, 20 Gs a year is truly chump change. It’s all window dressing with no substance behind it.
The New York Times recently took on the President for his apparent hypocrisy. While noting that the trillion dollar federal deficit saved $20,000, the cost of running Air Force One was a staggering $180,000 per hour, and went on to list the multiple trips the President spent aboard Air Force One traveling to fundraising events in his home town of Chicago, vacations to Hawaii, Martha’s Vineyard, and Palm Beach to play golf with Tiger Woods. Personally, I would have been just as happy to bump into the Pres back in economy class during one of those air traffic controller cutbacks! To be fair, these are just two recent easy targets to attack. Washington has a near monopoly on monetary hypocrisy. There are only 50 other locations that come close. Guess the states where these are located.
The point is that our government is behaving poorly and maybe stupidly as well. The United States is the world leader in technology. Every year our universities turn out world-class business school students, engineers and similar professionals. The US economy that is managed by these types of individuals has become so streamlined that we have reached an efficiency level never before seen. How is it that our government can lag so badly? Your suggestions and solutions are welcome. Write me. Congress and The White House are too busy fighting one another.