For nearly a decade, Americans acted as though taking on more debt posed no problem. After all, they owned real estate, and all the experts told them that real-estate prices always go up. The mightiest magnates of finance acted as if they believed this stupid story–I say stupid because the merest child might easily have confirmed that real-estate prices have always risen and fallen cyclically and that real-estate booms have often been the precursors of financial crashes and economic recessions. But things are always different this time, are they not? At least, all the experts say so, just as they said so during the past however many booms, each of which was said to have heralded a “new era.” So, we can hardly blame the nearly destitute wannabe homeowner who signed up for the mortgage proffered to him by the agent of one of those Wall Street moguls. After all, the borrower put nothing down, made interest-only payments at a low teaser rate, and cheerfully anticipated seamlessly refinancing the loan when the time came for the interest rate to be adjusted upward. Couldn’t lose, eh?
Moreover, you could use your house as the basis for a line of credit and live high on the hog while you waited for your house to appreciate as surely as the sun rises in the east.
Thus, real estate loans at all commercial banks increased from January 2002 to January 2009 by 110 percent, and the banks’ total consumer credit outstanding increased during the same period by 37 percent. Household credit-market debt outstanding rose between the first quarter of 2002 and the third quarter of 2008 by 77 percent. Got the picture? The country was, and remains, awash in debt. Of course, these huge increases in real-estate and consumer debt would not have been possible had the Fed not engineered a great increase in the money and credit coursing through the system: thus, the money stock (M2) increased from January 2002 to January 2009 by 51 percent. Greenspan and Bernanke, you gotta love ’em–real good-time Charlies.
It was paradise, or as close to paradise as we’re likely to come in this vale of tears, but it was a fool’s paradise, which has long since become obvious to anybody with more than half a wit. Once the real-estate prices turned around and headed south, everything pyramided on top of them began to crumble–mortgages, mortgage-backed securities, real-estate-related derivatives of various sorts, credit default swaps, bank balance sheets, big investment banks, stock prices (especially financials), interbank lending, you name it. About the only things that have risen appreciably in the past year or more are fear and despair. (The smart money has taken a long position in them.)
Now, before we lose our focus, allow me to remind you that this whole sad story is a tale of excessive debt. If householders, banks, businesses, and, of course, governments at every level had not become so outrageously overleveraged, the piper would not be in a position, as he is now, to demand such extreme payment. But debt and more debt and still more debt formed the stairsteps by which the U.S. economy (and others) ascended to the dizzying heights from which the world is now in the process of plunging.
But never fear: our government will save the day. Or so it promises us. Especially since last September, the Fed and the Treasury have scarcely stopped for a decent night’s sleep. They have frantically seized upon one “plan” after another (God save us from the central planners!) to “thaw the frozen credit markets,” to “prevent the credit-market meltdown,” to restore the flow of credit to one and all–”in short, to make sure that we do not reduce our excessive, unsustainable indebtedness, but instead resume our all-out borrowing whether it is prudent to do so or not, and for most individuals and businesses at present, it most emphatically is not.
This morning’s New York Timesannounces the latest installment in this cavalcade of cuckoo crisis-fighting, something called the Term Asset-Backed Securities Loan Facility, or TALF. The headline reads: “U.S. Tries a Trillion-Dollar Key for Locked Lending.” The article explains that
The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.
The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.
The program . . . does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.
Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.
Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.
In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy F. Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion.
Well, there you have it. If you can imagine anything more idiotic in the present circumstances, your imagination is more powerful than mine.
I have this recurring nightmare in which Tim Geithner is lying in a dark corner of a saloon. His bosom buddy Ben Bernanke comes in, sees him lying there in a heap and rushes to his side. He finds his comrade breathing heavily and reeking of a warehouse worth of booze. He shouts for help: “Bartender, get over here quick. Bring this man a whiskey. And make it a double!”
Into such hands has fate delivered us. May God have mercy on our souls.