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Posts Tagged ‘government bailout

Credit Crisis Fictional? A Look at the Numbers…

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Among all the drama on TV and in newspapers about credit “disappearing”, all in support of a taxpayer financed bailout, here’s a look at some of the actual numbers, courtesy forbes.com:

U.S. Bank Loans (Billions of Dollars)

Week Ending Wednesday Business (Commercial & Industrial) Real Estate Consumer Interbank (Other Than Fed Funds)
Aug. 13 1,514.5 3,639.4 841.6 77.6
Aug. 20 1,509.1 3,653.3 845.6 75.3
Aug. 27 1,515.1 3,650.6 848.0 76.3
Sept. 3 1,514.8 3,631.3 846.8 77.2
Sept. 10 1,512.0 3,630.3 850.5 74.0
Sept. 17 1,531.2 3,625.2 847.1 72.3
Year Ago:
Aug. 2007 1,311.1 3,498.4 774.0 82.7

As you can see, consumer lending is still going strong, business lending actually increased and even real estate lending is significantly up over last year.

While it makes for good ratings and sells newspapers and serves as a convenient excuse for the growth of governmental economic interventionism, in reality the numbers don’t show any crisis.

You can see the source article here.

Written by westcoastsuccess

October 2, 2008 at 11:51 pm

How McCain Blew His Golden Opportunity…

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In a week of shocking developments, including a defeated bill which sought new government spending in excess of the defense budget (and, in fact, any single item of the general budget), Senator John McCain blew a golden opportunity to put his well advertised but difficult to discern “maverick” reputation on the line on behalf of the majority of american people.

While the Democratic party, and Senator Barack Obama, and President Bush and many Republicans believe artificially increasing the supply of credit by way of government intervention at the expense of more than $7,000 for every taxpayer (and with all the urgency of a stick up artist poking his gun in your ribs and demanding your wallet) is a prudent idea, the bulk of the US population believe otherwise.

They’re right.

Contrary to virtually all media reports, government interventionism led directly to the current “crisis”. Despite this, the only solution proposed revolves around additional government intervention. Media “pundits” notwithstanding, “Main Street” understands the profound hypocrisy at play here. Unfortunately, in an election year featuring one candidate deeply commited to government interventionism and another candidate desperately commited to the idea that a leader should be seen to be doing something, even if that something is the wrong thing, the majority of americans have no one representing their views, or their pocket book.

John McCain has shown a shocking lack of courage in not standing up to the special interests who support the proposed government bailout. These same special interests, who routinely espouse the merits of free enterprise (but only when free enterprise works to their advantage) and are now calling for government intervention on a scale never before seen. John McCain supports their pleas.

There was another path for Mr McCain to take. He could have, for example, told the american people that the solution was for the government to get out of the business of guaranteeing low-quality loans. He could have said that the time for government to subsidize irresponsibility, be it on a personal level or institutionally, has long since passed. He could have made the case that picking the pockets of the people on so-called Main Street to subsidize Wall Street is profoundly un-american. He could even have put forth the (shocking, these days) notion that government is not, in fact, the solution to each and every problem. Instead, he seems to have charted a course intended to appear as “leadership”, but which leaves angry, financially threatened americans with no alternatives among Presidential candidates on the critical issue of a government bailout.

This is an issue with profound implications. Not just for americans today, but also for their children and grand children. In a country which espouses the freedom of the individual above all, but which increasingly proves the concept to be lip service at best, the populace has a choice of a “change agent” or a “maverick”, both of whom lack the courage to plot anything resembling a new course.

Land of the free? Home of the brave? Not anymore…

Main Street Trumps Wall Street: Bailout Fails…

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In a stunning and unexpected vote, the Wall Street bailout bill (with no ultimate price tag attached, and hastily put before the House of Representatives within a week of its conception) was defeated by a vote of 228 to 205.

It appears a majority of Congress listened to the pleas of their constituents, who were overwhelmingly opposed to the bailout – in some cases the phone calls against the oddly-named bill (“To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes”) outnumbered the calls in favor of the bill 200 – 1.

What happens now? Well, for starters, the US markets reacted as expected: the Dow Jones dropped 6.98%; the S&P 500 fell 8.79% and NASDAQ plummeted 9.14%. The hyperbole was in full force all day: the market had its “biggest point drop in history” read one news service’s headline, cleverly avoiding expressing the concept in more meaningful percentage terms (in which case Black Monday – October 28, 1929 – trumps today’s losses: the market fell 13% on that one day. Today’s drop, in percentage terms, does not even make the top 10 worst percentage drops of all time).

What’s more, it’s almost certain additional banks will fail, credit will get even tighter and the economy will contract.

And that’s not a bad thing at all. In fact, it’s necessary, far more necessary than the artificial supply of credit the US government sought to create via the bailout bill.

As we previously wrote, the government-created surplus of credit, dating back to the 1938 creation of Fannie Mae, caused the problem in the first place. We’re not alone in that assertion: in fact, 166 academic economists signed a letter protesting the bailout – you can read Harvard’s Senior Economist Jeffrey A. Miron’s reasoning here. In order for the economy to correct itself, that artificially created excess credit needs to disappear. Who provides credit? Banks, for one. Banks closing down is part of the solution, not the problem.

What about consumer spending, you ask? Well, consider this: it’s often said that consumer spending is the “driver” of the US economy. The only problem with that statement is that it’s completely backwards: a healthy economy drives consumer spending, not the other way around. Think of it this way: it’s not until businesses flourish that more people get paid more salaries and therefore have more money to spend. The populace does not suddenly get more money from nowhere.

Only that’s exactly what happened: starting with the creation of Fannie, then Freddie, and exacerbated by Alan Greenspan’s monetary policy, people suddenly did get money from nowhere. Well, almost nowhere: in fact, it was the artificial guaranteeing of substandard mortgages by Fannie and Freddie that sealed the otherwise impossible (in a free market) deal. If the economy is only growing because people are spending more, there’s something fundamentally wrong with the economy – the entire flow of money is inverted.

To correct that inversion, consumer spending has to become re-tethered to income, rather than being a function of artificially inflated equity increases in real estate, against which people borrow to provide for their spending.

Expect all things which fall into the “optional” category of spending to be very hard hit. These include luxury items, entertainment, dining out, gambling, vacations, perfumes, novelty items, etc. Obviously stocks in companies which provide such things will also be particularly hard hit.

Expect oil prices to drop, as the people of the world’s largest oil consuming country tighten their belts.

Expect vehicle sales, in particular, to plummet under a triple whammy of high fuel prices, a cash (and credit) strapped consumer base and an inability of automakers to secure necessary credit when they need to invest in building smaller autos.

Expect this to last for a while.

But also expect that it will not last nearly as long as it would have, had the politicians gotten away with pouring gasoline on the fire by manipulating the supply of credit via the bailout bill. There’s at least $700 billion dollars out there to be invested which would otherwise have gone to buy the Treasury bills sold to finance the bailout.

And the people on Main Street are off the hook for at least $5,000 (but probably much more) in future tax obligations, which would have made recovery all the more difficult.

And a giant bureaucracy attempting to arrive at a “fair price” for assets which the market says are near worthless didn’t spring up to further confuse a market place already uncertain of the underlying value of assets.

And that means there’s a light at the end of the tunnel after all…

Written by westcoastsuccess

September 29, 2008 at 5:54 pm

What Really Led to the Credit Crisis?

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While the US government tries to put a $1 trillion (yes, you read that right: trillion) bailout package together, and Mr. Barack Obama and others in favour of governmental economic interventionism call for greater regulation (without any specifics), there is plenty of discussion as to what got the economy to this perilous state.

The answer is very simple: risk has been divorced from financial underwriting decisions.

At the very heart of the current crisis are the so-called “sub-prime” mortgages. The banks who offered these mortgages faced no downside in the event a mortgage defaults. That not only makes for imprudent lending decisions, it rewards them.

Here’s why: a customer comes into a bank and requests a mortgage, the payments for which he or she can’t really afford. If the bank bears the loss in the event of a default, logic dictates the banker will very carefully scrutinize the customer’s finances and ability to repay the mortgage. Doing otherwise puts the bank at risk, so the mortgage application is diligently underwritten.

But that’s not the way the process actually worked.

Instead, the banker approved the mortgage application and issued the loan. The mortgage, meanwhile, was immediately sold to Fannie Mae or Freddie Mac. Fannie or Freddie guaranteed the mortgage against default, bundled it with other mortgages, and sent it to Wall St., where the bundle of (now guaranteed) mortgages was sold to investors as Asset Backed Commercial Paper.

On the surface, you have a winning combination: investors get a chance to invest in a product backed by real assets and with a guarantee against default. Banks get paid up front for the sale of the mortgage. The original customer gets to buy a house he or she never thought possible to afford. No one loses. The bank doesn’t care if the borrower ultimately defaults: it has cleverly divorced itself from the consequences of poor underwriting decisions. The investor who bought the ABCP doesn’t care much either: his or her investment is guaranteed against default by Freddie Mac and Fannie Mae who, it’s very widely believed, would never be allowed to collapse (which has since proven to be true). Even the borrower doesn’t care: the value of the house is sure to go up, building equity against which he or she can further borrow to buy that boat and big screen TV he or she has always wanted.

Except for one overlooked detail: the entire scheme is predicated upon housing prices never going down.

What might have prevented such a scheme from ever materializing? That’s easy: the linchpin of the whole dubious set up is Freddie Mac and Fannie Mae. That’s the point at which underwriting became divorced from risk. Without Freddie and Fannie guaranteeing the mortgages against default, the investors buying the ABCPs would have been confronted with the actual downside potential. That, obviously, makes them far less attactive investments, and acts as a natural braking mechanism against an oversupply of credit. With less money flowing back to the banks, the motivation to put ever more risky mortgages on the books is removed: the riskier any particular mortgage is, the less valuable it is when the bank sells it.

Suddenly, that same customer applying for a mortgage on a home he or she cannot possibly afford is confronted with a banker shaking his head and suggesting a far more modest mortgage, the payments for which the customer can actually afford to service.

How did Freddie and Fannie get into a position of causing such a mess? President Roosevelt, as part of his “New Deal” economic interventionism, created Fannie in 1938 specifically to cause an increase in liquidity for mortgages. That liquidity, exactly 70 years later, led directly to the current crisis.

And where does that leave us today? With the US government proposing a taxpayer financed $1 trillion bailout for the purpose of increasing lending liquidity. And removing, again, financial underwriting decisions from the consequences of those same decisions.

Take a moment to have a chat with your grandchildren: tell them the economic sky is going to fall yet again within the next 70 years. Tell them we’re sorry for causing it, but it seemed like a great idea at the time…