Mortgage Housing Follies

 

Some of us have been sounding this alarm for about 18 years, since the time the Greenspan Fed inflated the housing markets across the board by keeping interest rates too low. Since the inevitable crash in 2008, financial housing policy has doubled and tripled down on this folly to the point where in many areas of the country most homeowners live in houses they could never afford if they had to buy them again.

Recovery in any housing market requires housing prices to find fundamental value by shoring markets up at the margin, helping people who can’t afford their house, and never could, to sell to those who do have the necessary resources. And that doesn’t mean reflating private equity portfolios to become the new landlords of residential housing. Nor does it mean buying up mortgages at full value and then selling them at a deep discount to investors. Bad investments require taking losses and if necessary, going bankrupt.

Widespread housing and land ownership are the foundation of the middle class, and we’re quickly destroying it. We are experiencing Einstein’s definition of insanity.

The Bailout Miscalculation That Could Crash the Economy

When Donald Trump signed the $2 trillion CARES Act rescue on March 27, there was immediate praise across the political spectrum for section 4022, concerning homeowners in distress. Under the rule, anyone with a federally-backed mortgage could now receive instant relief.

Forbearance, the law said:

…shall be granted for up to 180 days, and shall be extended for an additional period of up to 180 days at the request of the borrower.

Essentially, anyone with a federally-backed mortgage was now eligible for a six-month break from home payments. Really it was a year, given that a 180-day extension could be granted “at the request of the borrower.”

It made sense. The burden of having to continue to make home payments during the coronavirus crisis would be crushing for the millions of people put out of work.

If anything, the measure didn’t go far enough, only covering homeowners with federally-backed (a.k.a. “agency”) mortgages. Still, six months or a year of relief from mortgage payments was arguably the most valuable up-front benefit of the entire bailout for ordinary people.

Unfortunately, this portion of the CARES Act was conceived so badly that it birthed a potentially disastrous new issue that could have severe systemic ramifications. “Whoever wrote this bill didn’t have the faintest fucking clue how mortgages work,” is how one financial analyst put it to me.

When homeowners take out mortgages, loans are bundled into pools and turned into securities, which are then sold off to investors, often big institutional players like pension funds.

Once loans are pooled and sold off as securities, the job of collecting home payments from actual people and delivering them to investors in mortgage bonds goes to companies called mortgage servicers. Many of these firms are not banks, and have familiar names like Quicken Loans or Freedom Mortgage.

The mortgage servicing business is relatively uncomplicated – companies are collecting money from one group of people and handing it to another, for a fee – but these infamously sleazy firms still regularly manage to screw it up.

“An industry that is just… not very good,” is the generous description of Richard Cordray, former head of the Consumer Financial Protection Bureau.

Because margins in the mortgage service business are relatively small, these firms try to automate as much as possible. Many use outdated computers and have threadbare staffing policies.

Essentially, they make their money collecting in good economic times from the less complicated homeowner accounts, taking electronic payments and paying little personal attention to loan-holders with issues.

They rely on lines of short-term financing from banks and tend to be cash-poor and almost incompetent by design. If you’ve ever tried to call your servicer (if you even know who it is) and failed to get someone on the phone, that’s no accident — unless you’re paying, these firms don’t much want to hear from you, and they certainly don’t want to pay extra to do it.

Last year, the Financial Stability Oversight Council (FSOC), which includes the heads of the Treasury, the Commodity Futures Trading Commission, the Fed, the aforementioned CFPB and others issued a report claiming mortgage service firms were a systemic threat, because they “rely heavily on short-term funding sources and generally have relatively limited resources to absorb financial shocks.”

For Cordray, who has a book out called Watchdog that chronicles his time heading the CFPB, the worry about mortgage servicers was serious.

“Nonbanks are very thinly capitalized,” he says. “They haven’t been very responsible in building up capital buffers.”

Enter the coronavirus. Even if homeowners themselves weren’t required to make payments under the CARES Act, servicers like Quicken and Freedom still had to keep paying the bondholders every month.

It might be reasonable to expect a big bank like Wells Fargo or JP Morgan Chase to front six months’ worth of principal and interest payments for millions of borrowers. But these cardboard fly-by-night servicer firms – overgrown collection agencies – don’t have that kind of cash.

How did the worst of these firms react to being told they suddenly had to cover up to a year of home payments? About as you’d expect, by trying to bully homeowners.

Soon after the passage of the CARES Act, reporters like Lisa Epstein at Capitol Forum and David Dayen at the American Prospect started hearing stories that servicers were trying to trick customers into skipping the forbearance program. As David wrote a few weeks ago:

I started hearing from borrowers that they were being told that they could apply for three months forbearance (a deferment of their loan payment), but would have to pay all three months back at the end of the period…

It soon came out that many servicers were telling homeowners that even if they thought they were getting a bailout break, they would still have to make it all up in one balloon payment at the end of the deferral period. This was a straight-out lie, but the motivation was obvious. “They’re trying to get people to pay any way they can,” is how Cordray puts it.

Dayen cited Amerihome Mortgage and Wells Fargo, but other names also started to be associated with the practice. Social media began to fill up with stories from people claiming firms like Mr. CooperBank of America and others were telling them they had to be prepared to make big balloon payments.

Same with the CFPB’s complaint database, which began to be filled with comments like the following, about a firm called NewRez LLC:

If you have 4 months of mortgage payments laying around at the end of the COVID-19 pandemic you will be fine if not good buy [sic] to your house. I understand its a business and they will make a lot of money with I’m sure a government bailout and lots of foreclosures from not helping any american home buyers…

Suddenly regulators and politicians alike were faced with a double-edged dilemma. On the one hand, the poorly-designed CARES Act placed servicers in genuine peril, an issue that left unfixed might break the mortgage markets – not a fun experience for America, as we learned in 2008.

The obvious solution was to use some of the apparently limitless funding ammunition in the Federal Reserve to help servicers maintain their responsibilities. The problem was the firms that needed such help the most were openly swindling homeowners. If there’s such a thing as regulatory blackmail, this was it.

Should the Fed open its war chest and create a “liquidity facility” to help mortgage servicers? If so, how could this be done in a way that didn’t put homeowners at more risk of being burned in some other way?

“This is the script of a heist flick, where homeowners get screwed in the end while servicers get the money,” says Carter Dougherty of Americans for Financial Reform. “If you combine money for servicers with strong consumer protections and a vigorous regulator, then the film could have a happy ending. But I’m not holding my breath.”

In early April, a group of Senators led by Virginia’s Mark Warner sent a letter that pleaded with Treasury Secretary Steven Mnuchin to use some of the $455 billion economic stabilization fund to solve the problem. The letter included a passage that essentially says, “We know these companies suck, but there’s no choice but to bail them out”:

While we understand that some nonbank lenders may have adopted practices that made them particularly susceptible to constraints on their liquidity during a severe downturn, imposing a broad liquidity shock to the entire servicing sector is not the way to go about reform…

The Senators put the problem in perspective, noting that as much as $100 billion in payments might be forborne under the CARES Act. This was a major hit to an industry that last year “had total net profits of less than $10 billion.”

The CARES Act was written in March with such speed that it became law before anyone even had a chance to catch, say, a $90 billion-sized hole in the bailout’s reasoning. Still, when the forbearances began and it started to look like the servicers might fail, there was talk among regulators and members of congress alike of letting failures happen, to teach the idiots a lesson.

But ultimately the Senators on the letter (including also Tim Kaine, Bob Menendez and Jerry Moran) decided this would ultimately be counterproductive, i.e. letting the economy collapse might be an unacceptably high price for the sending of a message to a handful of dirtbag companies.

“The focus now should not be on longer-term reform, but on ensuring that the crisis now unfolding does as little damage to the economy as possible,” is how the letter put it.

Although the letter essentially urged the creation of a new Fed bailout facility to contain the mortgage-servicer ick, that didn’t happen, even after mortgage servicers stepped up lobbying campaigns. In mid-April, a string of news stories appeared in which servicers warned reporters of snowballing market terror – as the New York Times put it, the “strain is expected to intensify” – that would only be solved with a bailout.

No dice. In a repeat of the often-halting, often illogical responses to mushrooming crises of 2008, the first pass at a solution came in the form of a move by the Federal Housing Finance Agency (FHFA), the overseer of Fannie and Freddie.

On April 21, FHFA announced they were coming to the rescue: servicers would no longer need to come up with six months of payments. From now on, it would only be four:

Today’s instruction establishes a four-month advance obligation limit for Fannie Mae scheduled servicing for loans and servicers which is consistent with the current policy at Freddie Mac.

Which was fine, except for one thing: from the standpoint of most of these woefully undercapitalized servicing firms, having to cover four months of payments is not a whole lot easier than covering six. “It still might as well be ten years for these guys,” is how one analyst put it.

Absent an intervention from the Fed, a bunch of these servicing firms will go bust. There will be chaos if even a few disappear. As we found out in 2008, homeowners facing servicer disruptions can immediately be confronted with all sorts of problems, from taxes going unpaid to payments vanishing to incorrect foreclosure proceedings taking place. Such problems can take years to resolve. Service issues helped seriously prolong the last crisis, as I wrote about in 2010.

Also, if your servicer disappears, someone still has to do the grunt work of managing your loan. To make sure your home payments are collected and moved to the right place, some entity will have to acquire what are known as the Mortgage Servicing Rights (MSRs) to your loan.

But MSRs have almost no value in a battered economy, which means it’s likely no big company like a bank will be interested in acquiring them in the event of mass failures, absent some kind of inducement. “They’re not going to want that grief,” is how one hill staffer puts it.

A third problem is that if some of these nonbank servicers go kablooey, a likely scenario would involve their businesses being swallowed up by big banks, perhaps with the aid of incentives tossed in from yet another bailout package.

This would again mirror 2008, in that a regulatory response would worsen the hyper-concentration problem and make big, systemically dangerous banks bigger and more dangerous, again.

As Dougherty says, the simplest solution would be opening a Fed facility to contain the servicer disaster, coupling aid with new measures designed to a) force servicers to keep more money on hand for a rainy day and b) stop screwing homeowners.

But the more likely scenario is just a bailout for now, with a vague promise to reform later. This would lead either to an over-generous rescue of some of our worst companies, or an industry wipeout followed by another power grab by Too Big To Fail banks.

The whole episode is a classic example of how governmental ignorance married to corporate irresponsibility can lead to systemic FUBAR, though we still don’t know how this particular version will play out. As Cordray puts it, it’s not easy to predict where failures in the mortgage servicer industry might lead.

“What’s easy to predict, though,” he says, “is that it will be a mess.”


Yeah, no kidding.

Financial Moral Hazard

If we believe this Houdini act then we have only ourselves to blame.

How Many Bank Bailouts Can America Withstand?

The architects of the 2008 rescues pretend they’ve been vindicated.

Ten years after the financial crisis of 2008, the architects of the bailouts are still describing their taxpayer-backed rescues of certain financial firms as great products which were poorly marketed to the American people. The American people still aren’t buying.

A decade ago, federal regulators were in the midst of a series of unpredictable and inconsistent interventions in the financial marketplace. After rescuing creditors of the investment bank Bear Stearns and providing a partial rescue of its shareholders in March of 2008, the feds then shocked markets six months later by allowing the larger Lehman Brothers to declare bankruptcy. Then regulators immediately swerved again to take over insurer AIG and use it as a vehicle to rescue other financial firms.

Within days legislative drafts were circulating for a new bailout fund that would become the $700 billion Troubled Asset Relief Program. Throughout that fall of 2008 and into 2009, the government continued to roll out novel inventions to support particular players in the financial industry and beyond. Some firms received assistance on better terms than others and of course many firms, especially small ones outside of banking, received no help at all.

In the fall of 2008, Ben Bernanke chaired the Federal Reserve, Timothy Geithner ran the New York Fed and Hank Paulson served as U.S. Treasury secretary. Looking back now, the three bailout buddies have lately been congratulating themselves for doing a dirty but important job. They recently wrote in the New York Times:

Many of the actions necessary to stem the crisis, including the provision of loans and capital to financial institutions, were controversial and unpopular. To us, as to the public, the responses often seemed unjust, helping some of the very people and firms who had caused the damage. Those reactions are completely understandable, particularly since the economic pain from the panic was devastating for many.

The paradox of any financial crisis is that the policies necessary to stop it are always politically unpopular. But if that unpopularity delays or prevents a strong response, the costs to the economy become greater. We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next fire from becoming a conflagration.

The authors say that their actions saved the United States and the world from catastrophe, but of course this claim cannot be tested. We’ll never get to run the alternative experiment in which investors and executives all have to live with the consequences of their investments. But Stanford economist John Taylor has made the case that massive ad hoc federal interventions were among the causes of the conflagration. On the fifth anniversary of the crisis he noted that in 2008 markets deteriorated as the government was taking a more active role in the financial economy, which may have contributed to a sense of panic:

…the S&P 500 was higher on September 19—following a week of trading after the Lehman Brothers bankruptcy—than it was on September 12, the Friday before the bankruptcy. This indicates that some policy steps taken after September 19 worsened the problem… Note that the stock market crash started at the time TARP was being rolled out… When former Treasury Secretary Hank Paulson appeared on CNBC on the fifth anniversary of the Lehman Brothers failure, he said that the markets tanked, and he came to the rescue; effectively, the TARP saved us. Appearing on the same show minutes later, former Wells Fargo chairman and CEO Dick Kovacevich—observing the same facts in the same time—said that the TARP… made things worse.

CNBC reported at the time on its Kovacevich interview:

TARP caused the crisis to get “much greater,” he added.

“Shortly after TARP, the stock market fell by 40 percent,” he continued. “And the banking industry stocks fell by 80 percent. How can anyone say that TARP increased the confidence level of an industry, when its stock market valuation fell by 80 percent.”

Perhaps the argument can never be resolved. What is known but is conveniently left out of the Times op-ed is an acknowledgment of the role that regulators played in creating the crisis by encouraging financial firms to invest in mortgage debt, to operate with high leverage and to expect help in a crisis. The Times piece includes no mention of Mr. Bernanke and his Fed colleagues holding interest rates too low for too long, or the massive risks at Citigroup overseen by Mr. Geithner’s New York Fed, or the mortgage bets at AIG approved by the Office of Thrift Supervision at Mr. Paulson’s Treasury Department.

Foolish regulators creating bad incentives was nothing new, though Beltway blunders had rarely if ever occurred on such a scale. What was of course most shocking for many Americans in 2008 was observing so many of their tax dollars flowing into the coffers of large financial institutions. For months both the financial economy and the real economy suffered as Washington continued its ad hoc experiments favoring one type of firm or another.

In 2009 markets began to recover and, thanks in no small part to years of monetary expansion by the Federal Reserve, stock investors enjoyed a long boom. But when it comes to economic growth and wages for the average worker there was no such boom, just an era of discouraged Americans leaving the labor force. And by keeping interest rates near zero for years, the Fed punished savers and enabled an historic binge of government borrowing.

badnewsforsavers

That federal borrowing binge was also enabled by the rescue programs. The basic problem was that once Washington said yes to bailing out large financial houses, politicians could hardly say no to anyone else. It was no coincidence that just months after enacting the $700 billion TARP, lawmakers enacted an $800 billion stimulus plan. So began the era of trillion-dollar annual deficits. Since the fall of 2008, federal debt has more than doubled and now stands at more than $21 trillion.

mtdebt

The expansion of government also included record-setting levels of regulation, which limited economic growth. A financial economy heavily distorted by federal housing policy was cast as the free market that failed, and decision-making affecting every industry was further concentrated in Washington.

Messrs. Bernanke, Geithner and Paulson make the case that they saved the financial system but failed to sell the public on the value of their interventions. It’s a sale that can never be made. Even if the bailouts hadn’t led to an era of diminished opportunity and skyrocketing federal debt, Americans would have resisted the idea that our system requires occasional instant welfare programs for wealthy recipients chosen by un-elected wise men.

The bailout buddies are now urging the creation of more authorities for regulators to stage future bailouts. The Trump administration should do the opposite, so that bank investors finally understand they will get no help in a crisis.

This column isn’t sure how many bailouts of financiers the American political system can withstand but is certain that such efforts will never be welcomed by non-financiers.

***

housing2

Why…

…Aren’t Presidential Candidates Talking About the Federal Reserve?

Yes, why? Much of our economic and financial lives are being guided by an unelected board of Federal Reserve governors who have been flying blind for about 8 years now…manipulating interest rates and asset markets to what end? Nobody seems to know, except to try to prevent a financial reckoning for previous misguided policies. A less charitable interpretation is the financial industry’s desire to keep the casino open as the only game in town.

By Jordan Haedtler

In an election fueled by populist anger and dominated by talk of economic insecurity, why aren’t any of the presidential candidates talking about the Federal Reserve?

After nearly a decade of high unemployment, severe racial and gender disparities and wage stagnation, voters are heading to the ballot box in pursuit of a fairer economy with less rampant inequality. In California and New York, low-wage workers are celebrating historic agreements to raise the minimum wage to $15 per hour. And the economy and jobs consistently rank among the top concerns expressed by voters of all political stripes.

One government institution reigns supreme in its ability to influence wages, jobs and overall economic growth, yet leading candidates for president have barely discussed it at all. The Federal Reserve is the most important economic policymaking institution in the country, and it is critical that voters hear how candidates plan to reform and interact with the Fed.

Related: The Federal Reserve Bank, Explained [Well, kind of.]

The Fed too often epitomizes the problems with our economy and democracy over which voters are voicing frustration: Commercial banks literally own much of the Fed and are using it to enrich themselves at the expense of the American working and middle class. When Wall Street recklessness crashed the economy in 2008, American families paid the price.

At the time, JP Morgan Chase CEO Jamie Dimon sat on the board of the New York Federal Reserve Bank, which stepped in during the crisis to save Dimon’s firm and so many other banks on the verge of collapse. Although the Fed’s actions helped Wall Street recover, that recovery never translated to Main Street, where jobs and wage growth stagnated.

Commercial banks should not govern the very institution that oversees them. It’s a scandal that continues to threaten the Fed’s credibility. An analysis conducted earlier this year by my parent organization, The Center for Popular Democracy, showed that employees of financial firms continue to hold key posts at regional Federal Reserve banks and that leadership throughout the Federal Reserve System remains overwhelmingly white and male and draws disproportionately from the corporate and financial world.

Yellen-and-Rate-Hike-cartoon

When the Fed voted in December to raise interest rates for the first time in nearly a decade, the decision was largely driven by regional Bank presidents — the very policymakers who are chosen by corporate and financial interests. In 2015, the Fed filled three vacant regional president position, and all three were filled with individuals with strong ties to Goldman Sachs; next year, 4 of the 5 regional presidents voting on monetary policy will be former Goldman Sachs insiders. Can we trust these blue-chip bankers to address working Americans’ concerns?

Yet despite the enormous power it wields and the glaring problems it continues to exemplify, the Fed has received little attention this election cycle. As noted by Reuters last week, two of the remaining candidates for president, Hillary Clinton and John Kasich, have been mute on what they would do about the central bank. Donald Trump’s sporadic statements about the Fed have been characteristically short on details, prompting former Minneapolis Federal Reserve Bank President Narayana Kocherlakota to call for Clinton, Trump and all presidential candidates to clarify exactly how they plan to oversee the Fed’s management of the economy. Ted Cruz has piped up about the Fed on a few occasions, although his vocal endorsement of “sound money” and other policies that contributed to the Great Depression warrant clarification. [One expects that none of the candidates really understand the arcana of central banking and prefer to leave well enough alone.]

The most detailed Fed reform proposal from a presidential candidate to date was a December New York Times op-ed in which Bernie Sanders wrote that “an institution that was created to serve all Americans has been hijacked by the very bankers it regulates,” and urged vital reforms to the Fed’s governance structure.

On Monday, Dartmouth economist Andy Levin, a 20-year Fed staffer and former senior adviser to Fed Chair Janet Yellen and her predecessor Ben Bernanke, unveiled a bold proposal to reform the Federal Reserve and make it a truly transparent, publicly accountable institution that responds to the needs of working families. [That’s pretty vague, as the interests of all are best served by a monetary policy that insures the stability of the price level and value of the currency as a unit of exchange and store of value. Employment growth is best addressed through fiscal policy.]

The New York primary provides a perfect opportunity for the remaining presidential candidates to tell us what they think about the Federal Reserve. Candidates in both parties should specify whether they support Levin’s proposals, and if not, articulate their preferred approach for our federal government’s most opaque but essential institution.

As Trump, Cruz and Kasich gear up for a potentially decisive primary, they would do well to respond to the many calls for clarity on the Fed. And on Thursday night, Sanders and Clinton will have the chance to clarify their stances on the Fed when they debate in Brooklyn, just a few miles away from Wall Street and the global financial epicenter that is the New York Federal Reserve Bank.

As New York voters get ready to decide which of the remaining candidates would make the best president, they will be asking themselves which candidate will better handle the economy. The candidates’ positions on the Fed must be part of the equation.

Over Fed

Debate? What Debate?

I can’t imagine a more sophomoric attempt at moderating a Presidential primary debate than what occurred last night under the direction of CNBC. Apparently there was no clear winner as much as an overwhelmingly clear loser: CNBC. One wonders when the media elites will address the real challenges and issues the American polity faces. I won’t hold my breath.

The last fiscally responsible adult we had in public service in Washington was Paul Volcker, and he was a Democrat. And elites wonder why the average American is fed up with national politics. Kudos to Cruz.

David Stockman eviscerates the pathetic performance in his blog reposted below:

The Fed’s elephantine $4.5 trillion balance sheet represents the greatest fiscal fraud ever conceived.

The fact is, the monetary madness in the Eccles Building is destroying free market capitalism by systematically and massively falsifying the prices of financial assets, and fueling a relentless, debilitating accumulation of debt throughout the warp and woof of the American economy and the rest of the world; and it’s simultaneously extinguishing political democracy by deeply subsidizing our crushing $19 trillion national debt.

Yet not one of three moderators during the entire two hour period asked a question about the elephant in the room.

The Debate: GOP Candidates Elevated, CNBC Eviscerated

by  • October 29, 2015

Well now. We actually got our money’s worth last night.

Almost with out exception the GOP candidates conveyed a compelling message that the state is not our savior, while the CNBC moderators spent the night fumbling with fantasy football and inanities about which vitamin supplements Ben Carson has used or endorsed.

But this was about more than tone. The interaction between the candidates and the CNBC moderators revealed the yawning gap between the bubble world at the intersection of Washington and Wall Street and the hard scrabble reality of economic stagnation and political alienation on main street America.

Yes, the CNBC moderators engaged in a deplorable display of gotcha journalism punctuated by a snarky self-righteousness that was downright offensive. John Harwood is surely secretly on the payroll of the Democratic National Committee and it was more than obvious why Becky Quick excels at serving tea to blathering old fools like Warren Buffett.

So they deserved the Cruz missile that came flying at them mid-way through the debate.

At that point the Senator from Texas had had enough, especially from Carl Quintanilla. The latter has spend years on CNBC commentating about the “market”, but wouldn’t know honest capitalism is if slapped him upside the head, and has apparently never meet a Washington intervention that he didn’t cheer on as something to help the stock averages go higher:

Let me say something at the outset. The questions that have been asked so far in this debate illustrate why the American people don’t trust the media. This is not a cage match. And if you look at the questions—Donald Trump, are you a comic book villain? Ben Carson, can you do math?… Marco Rubio, why don’t you resign? Jeb Bush, why have your numbers fallen? How about talking about substantive issues?”

Nor did the Texas Senator let up:

“Carl, I’m not finished yet. The contrast with the Democratic debate, where every thought and question from the media was ‘Which of you is more handsome and wise?”

As one pundit put it afterwards, “given the grievous injuries inflicted on Team CNBC”  by Cruz and the rest of the candidates, the only thing left to do was “to shoot the wounded”.

Actually, there is rather more. Last night was billed as a debate on domestic issues and the economy and CNBC is the communications medium of record about the daily comings and goings of the US economy and the financial markets at its center. Yet not one of three moderators during the entire two hour period asked a question about the elephant in the room.

They had to bring in from the sidelines the intrepid Rick Santelli to even get the Federal Reserve on the table. Its almost as if the CNBC commentators work on the set of the Truman Show and have no clue that it’s all make believe.

In the alternative, call this condition Bubble Blindness. It’s a contagious ideological disease that afflicts the entire corridor from Wall Street to Washington, and CNBC is the infected host that propagates it.

The fact is, the monetary madness in the Eccles Building is destroying free market capitalism by systematically and massively falsifying the prices of financial assets, and fueling a relentless, debilitating accumulation of debt throughout the warp and woof of the American economy and the rest of the world; and it’s simultaneously extinguishing political democracy by deeply subsidizing our crushing $19 trillion national debt.

The GOP politicians appropriately sputtered last night about the bipartisan beltway scam rammed through the House yesterday by Johnny Lawnchair, but they were given no opportunity by their clueless moderators to explore exactly why this kind of taxpayer betrayal happens over and over.

Well, there is a simple answer. The Fed’s elephantine $4.5 trillion balance sheet represents the greatest fiscal fraud ever conceived. Last year it paid the Treasury approximately $100 billion in absolutely phony profits scalped from its massive trove of Treasury debt and quasi-government GSE paper.

That is, over time Uncle Sam has purchased $4.5 trillion worth of real economic resources——in the form of goods, services, salaries and transfer payments——from the US economy, which were paid for with IOUs. These obligations to be redeemed in equivalent goods and services were eventually purchased by the Fed, but with merely fiat credits it conjured out of thin air.

And then the monetary charlatans behind the curtain at the Fed send back to the US treasury the coupons earned on these airballs, causing the politicians to think the national debt is no problem; and that they can buy aircraft carriers and GS-15 salaries indefinitely while booking a “profit” on their borrowings.

Folks, this is just plain madness. Back 1989 when the real median household income first hit its current level of about $54,000, this entire monetization scam would have been considered beyond the pale by even the inhabitants of the Eccles Building, and most certainly by everyone else in Washington——from the US Treasury to the Congressional budget committees to the summer interns in the Rayburn Building.

But after 25 years of central bank induced financialization of the US economy, there has developed a cult of the stock market and a Wall Street regime of relentless financial gambling in the guise of “investment”. Consequently, the massive aritificial inflation of financial asset values is not even recognized by CNBC and its fellow travelers in the main stream financial press—to say nothing of the gleeful punters who inhabit the casino.

But here’s the thing. How did the real median household income stagnant at $54,000 while the real value of the S&P 500 soared by nearly 4X? market cap of US debt and equity issues soared from 200% to 540% of GDP, and now weigh in a $93 trillion?

Real Median Household Income Vs. Inflation Adjusted S&P 500 - Click to enlarge

Likewise, how did the aggregate “market cap” of US debt and business equity soar from 200% to 540% of GDP when main street living standards were not rising at all? Could it be that something rotten and deformed has been injected into the very financial bloodstream of American capitalism—-something which the CNBC cheerleaders dare not acknowledge or even allow conservative politicians to explore in a public forum?

Total Marketable Securities and GDP - Click to enlarge

Worse still, this entire Fed-driven regime of Bubble Finance has inculcated in the casino and its media megaphones the insidious notion that the arms and agencies of government exist for one purpose above all others. Namely, to do “whatever it takes” to keep the bubble inflated and the stock market averages rising—–preferably every single day the market is open.

There was no more dramatic demonstration of that proposition than after the Wall Street meltdown in September 2008 when the as yet un-house broken GOP had had the courage to vote down TARP.

But when they were dragged back into the House chambers by Goldman Sachs and its plenipotentiaries in the US Treasury, the message was unmistakable. On one side of the CNBC screen was the House electronic voting board and on the other side was the second-by-second path of the S&P 500.  And delivering the voice-over narrative were the same clowns who could not even mention the Fed last night. The US Congress not dare to vote down TARP again, they fulminated.

It obviously didn’t. Yet right then and there the conservative opposition was broken, and the present statist regime of Bubble Finance was off to the races.

During the coming decade the nation will be battered and shattered by a monumental fiscal crisis and the bankruptcy of the bogus “trust funds” which now pay out upwards of $2 trillion per year to 70 million citizens. At length, the bearers of pitchforks and torches descending on Washington will surely ask how this all happened.

But they will not need to look much beyond last night’s debate for the answers. The nation’s fiscal process has been literally shutdown by the Fed and the Wall Street gamblers and media cheerleaders who insouciantly and relentlessly demand of Washington that it do “whatever it takes” to keep the bubble inflated.

As a result, we have had the absurdity of 82 months of ZIRP and a orgy of public debt monetization that has driven the weighted average cost of the Federal debt to a mere 1.75%.  And when a few courageous remnants of fiscal sanity like Senators Cruz and Rand Paul have had the courage to resist still another increase in the public debt ceiling, they have been treated as pariahs by Wall Street and the kind of snarky financial media types on display last night.

The fact is, the President has clear constitutional powers to prioritize spending in the absence of an increase in the debt ceiling. That is, he can pay the interest on the debt, keep the Veterans hospitals open, send out the social security checks and prioritize any other category of spending that he chooses from the current inflow of tax revenues, and for as long as it takes to legislate an honest fiscal retrenchment.

Needless to say, that would create howls of pain from the Federal vendors who wouldn’t get paid, the state and local governments which would have to wait for their grant payments and the Federal employees who would be put on furlough.

But that is not the reason that Mitch McConnell and Johnny Lawnchair have capitulated every time a debt ceiling crisis has reached the boiling point. That kind of action-forcing circumstance was managed by Washington innumerable times in the pre-Bubble Finance world, including upwards of a dozen times during my time in the Reagan White House.

But back then no one thought that Wall Street would have a hissy fit if the government shutdown for a few days or if the fiscal gravy train was temporarily put on hold; nor did politicians much care if it did.

My goodness. Paul Volcker had taught Wall Street a thing or two about the requisites of financial discipline in any event.

No, what is different now is that the establishment GOP politicians are petrified of a stock market collapse, and have been brow-beaten into the false belief that a government shutdown will create severe political costs.

Baloney. Even the totally botched affair in October 2013 created no lasting damage—-as attested to by the GOP sweep in the 2014 elections.

At the end of the day, all the hyperventilation about the political costs of a government shutdown or the forced prioritization of spending in the absence of a debt ceiling increase is pure Wall Street propaganda; and its an untruth amplified and repeated endlessly, loudly and often hysterically by its financial media handmaidens.

At least last night some GOP politicians gave it back to them good and hard.

Maybe there is some hope for release from the destructive pall of Bubble Finance, after all.