Time To Drain The Fed Swamp

The Panic of 2008 is widely misunderstood.  Part of this is due to the fact that financial issues are complicated.  How many people, after all, know what “mark to market accounting” is?  Part of it is due to politics.  Government policies encouraged home ownership by lowering lending standards, leading to NINA (“No Income No Assets”) loans.  At one time home prices were rising so fast that people believed that no matter what they paid for a house they could always sell it for more.

A thought-provoking article by Brian Wesbury of First Trust expands on this issue.

 Time To Drain The Fed Swamp

The Panic of 2008 was damaging in more ways than people think. Yes, there were dramatic losses for investors and homeowners, but these markets have recovered. What hasn’t gone back to normal is the size and scope of Washington DC, especially the Federal Reserve. It’s time for that to change.

D.C. institutions got away with blaming the crisis on the private sector, and used this narrative to grow their influence, budgets, and size. They also created the narrative that government saved the US economy, but that is highly questionable.

Without going too much in depth, one thing no one talks about is that Fannie Mae and Freddie Mac, at the direction of HUD, were forced to buy subprime loans in order to meet politically-driven, social policy objectives. In 2007, they owned 76% of all subprime paper (See Peter Wallison: Hidden in Plain Sight).

At the same time, the real reason the crisis spread so rapidly and expanded so greatly was not derivatives, but mark-to-market accounting.

It wasn’t government that saved the economy. Quantitative Easing was started in September 2008. TARP was passed on October 3, 2008. Yet, for the next five months markets continued to implode, the economy plummeted and private money did not flow to private banks.

On March 9, 2009, with the announcement that insanely rigid mark-to-market accounting rules would be changed, the markets stopped falling, the economy turned toward growth and private investors started investing in banks. All this happened immediately when the accounting rule was changed. No longer could these crazy rules wipe out bank capital by marking down asset values despite little to no change in cash flows. Changing this rule was the key to recovery, not QE, TARP or “stress tests.”

The Fed, and supporters of government intervention, ignore all these facts. They never address them. Why? First, institutions protect themselves even if it’s at the expense of the truth. Second, human nature doesn’t like to admit mistakes. Third, Washington DC always uses crises to grow. Admitting that their policies haven’t worked would lead to a smaller government with less power.

The Fed has become massive. Its balance sheet is nearly 25% of GDP. Never before has it been this large. And yet, the economy has grown relatively slowly. Back in the 1980s and 1990s, with a much smaller Fed balance sheet, the economy grew far more rapidly.

So how do you drain the Fed? By not appointing anyone that is already waiting in D.C.’s revolving door of career elites. We need someone willing to challenge Fed and D.C. orthodoxy. If we had our pick to fill the chair and vice chair positions (with Stanley Fischer announcing his departure) we would be focused on the likes of John Taylor, Peter Wallison, or Bill Isaac.

They would bring new blood to the Fed and hold it to account for its mistakes. It’s time for the Fed to own up and stop defending the nonsensical story that government, and not entrepreneurs, saved the US economy. Ben Bernanke and Janet Yellen have never fracked a well or written an App. We need a government that is willing to support the private sector and stop acting as if the “swamp” itself creates wealth.

Why Your Home is a Poor Investment

A couple we know moved to a new house recently.  They sold their old for a little more than twice the price they originally paid.  Doubling your money sounds like a great deal, right?

Not so fast.

To determine if the house was a good investment we need to make some calculations.  They originally bought their old home about 33 years ago.  That means that the return on their investment was just 2.4% per year.  To put it in perspective, 33 years ago CD rates were around 10%.  Viewed strictly from an investment perspective, they could have made a better return on their money if they had bought a CD.  And that’s to say nothing of maintenance and upkeep, costs not associated with CDs.

On the other hand, you can’t live in a CD.

How about investing that money in the stock market?  Over that same period the S&P 500 grew 8.5% annually.  That means that every $100 invested in the market 33 years ago would have grown to $1476!

The reason that so many people think that their home is their best investment is that they don’t sell their home very often.  As a result, they look at what they paid and what they sold it for.  If they held it for many years, it usually looks like a big number, and it is. But when viewed strictly as an investment, the annual growth rate is small compared to the alternatives.

As we alluded to earlier, home ownership also involves many other expenses.  There are property taxes and insurance.  Homeowners know that repairs and maintenance are expensive and never ending.  After all of the expenses are taken into account, the real return on home ownership may be even less that our earlier calculation.

But a home is much more than an investment.  It’s a place to live, a place to raise a family, a place to call your own.  A home is a refuge from the rest of the world.  The alternative is renting, wherein you often have more flexibility and are not on the hook for all of the repairs and maintenance.  But it also means that your monthly payment to your landlord is not going into equity that home ownership provides.

We are homeowners and advocates of home ownership.  The point of evaluating the true value of the home as an investment is to bring reality to the financial aspects of home ownership. It’s also a warning against investing too much of our resources in the family home, making many people “home poor.”