Welcome to Banking Update, a roundup of articles and news from around the internet. The Federal Reserve’s political moves threaten its independence, loan modification companies prey on vulnerable homeowners, the big banks refuse to disclose their risk on derivatives, consumers want to be bailed out for foolish financial decisions, loss of confidence in governments grow and broke cities are shutting off the lights. On to the links.
Fed Chairman Ben Bernanke’s obsession with re-inflating the housing bubble is threatening the political independence of the Federal Reserve. The Wall Street Journal argues that the Fed’s active campaign to involve the government ever more deeply in the housing markets involve political questions that should be resolved by elected officials rather than an allegedly independent central bank.
These columns have defended the independence of the Federal Reserve from attacks on the right and left, but after last week the central bank is on its own. It’s impossible to defend the Fed’s rank electioneering as it lobbies for more political and taxpayer intervention in the housing market—just in time for the election campaign.
This extraordinary political intrusion came in the form of a 26-page paper that the Fed sent to Capitol Hill last Wednesday, without invitation, graciously offering what Chairman Ben Bernanke called a “framework” for “thinking about certain issues and tradeoffs.” He was underselling his document. The paper is a clear attempt to provide intellectual cover for politicians to spend more taxpayer money to support housing prices.
As America’s central bank, the Fed is responsible for monetary policy and bank regulation.
It is a far different matter to tell Congress and the executive branch that they ought to rescue homeowners who borrowed more than they can afford to repay, or strong-arm banks to loosen credit standards for borrowers, or further entrench government-sponsored enterprises (Fan and Fred) that have already cost taxpayers $142 billion in losses. These are core political questions that belong to elected officials.
We recently attempted to add up the number of housing-support programs that the federal government has implemented since prices began to fall five years ago. We counted 16. Maybe Washington should do nothing for a change, let foreclosures take their natural course, allow the surplus supply of houses to clear, and see if that works. It can’t do any worse.
Beyond the policy errors, the larger issue is the political independence of the Fed itself. Its Board of Governors is now dominated by Obama appointees who share the interventionist designs of their colleagues in the White House.
Criminal con artists operating as “loan modification companies” continue to rip people off. According to the Loan Modification Scam Prevention Network, there have been 20,000 consumer complaints since March 2010 from consumers reporting that they were deceived into paying money for useless loan modification work. Criminal loan mod organizations prey on vulnerable homeowners who are tricked into believing that their homes can be saved from foreclosure. Consumer who believe that they are victims of a loan mod scam operation should contact preventloanscams.org.
The ironic part of the “loan modification” scams is that consumers having difficulty paying the mortgage can obtain free counseling and help from a qualified HUD-approved housing counselor.
The biggest banks in the United States have written trillions of dollars of credit default swaps on European sovereign debt and regulators have no idea of what the potential loss exposure is. The SEC is urging banks to release comprehensive data on derivatives so that investors can evaluate the risk of each banking institution. The SEC is right to request that this information be released but it is likely to be of no value to bank investors. Regulators and the banks themselves have no idea of the true risk since they are unable to evaluate the ultimate credit worthiness of counter parties that they have bought offsetting derivative positions from (see Casino Banks Make $518 Billion Bet On Sovereign Debt).
Foolish consumers who took on debt that they should have known they could not pay back seek to be made whole by “the government”. Was every debt burdened consumer “tricked” by ruthless banks into borrowing, or does the individual have a responsibility to be financially responsible? The New York Times argues that losses should not be socialized and that “You’re Responsible For Your Own Behavior”.
The power of the investment-banking cartel has grown even stronger since the financial crash of 2008. Only 17 firms dominate banking and investment and their profits and revenues have grown since 2008 even as the economic wealth of most Americans has been shattered by job losses and declines in home prices, stocks and wages.
Loss of confidence in governments has grown exponentially. After bailing out everyone in sight during the financial crisis and taking on unmanageable debt loads, the solvency of numerous governments (including the U.S.) is now in doubt.
Massive debt loads and shrinking revenues have resulted in cutbacks of government services. Some cities are literally shutting off the lights.
That’s it for today. Have a great day!