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Location: St. Louis, Missouri, United States

Saturday, May 12, 2012

Beware Geeks bearing Gifts; Obama's Revolutionary Mortgage Policy

Timothy Birdnow

Historic low mortgage rates, coupled with budget-busting government debt and Obama's refinance programs, is acting to destroy the money-lending market in America, perhaps extending the economic malaise for decades, according to Bill Wilson, President of Americans for Limited Government.

From the article:

"Assuming interest rates stay fairly low for several more years to come, that will begin adding up, perhaps as much as $18 billion in lost interest income every year even after the Obama program is long gone, totaling in hundreds of billions in less lending capacity by financial institutions.

Now, less available capital in the financial system might have been tolerable, if only the housing market had been allowed to truly crater in 2008 without government support. For, while less money would be available to lend, home prices would have been much lower, too. Alas, it was not to be, so now we face the squeeze.

In fact, there is a massive amount of debt coming due in the next few years. S&P reports as much as $30 trillion of corporate debt worldwide will need to be refinanced in the next four years. Writes S&P on the corporate credit crunch coming, “This global wall of nonfinancial corporate debt will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds.”

Add to that another $5.9 trillion of federal debt coming due in the next five years and must be refinanced, as reported recently by Bloomberg News’ Caroline Baum. Plus about $5 trillion in new debt by 2016 as the government borrows at record levels.

All of which could mean a perfect storm of credit tightening is on the horizon — and the Administration’s policies are only exacerbating the situation."

End excerpt.

This is interesting because Bank of America is offering a sweetheart deal to customers who are hopelessly behind on their mortgages.

How, one must ask, will reducing the principle owed by borrowers return the economy to health? It will take pressure off the select few chosen for the program (and I have little doubt that those chosen will tend to be strong supporters of Barack Hussein Obama, as this is part of the "settlement" imposed by the Regime for "illegal" foreclosures) but at the expense of the lending market - a market that is in dire difficulties. Nobody is going to lend if there is no profit to be made. Profit is, in the end, the reason one takes finanacial risks, and lending money to private individuals is always a risk. That risk has been proven unprofitable by this deal for Bank of America, as they now must modify loans, in short, they have to eat the losses. Why would they lend to those who need it?

Why will anyone lend when interest rates are so low and public debt so high? The dangers of losing what interest you do make to taxes or the hidden tax of inflation are too great. Bear in mind that if you lend a dollar at 3% and the inflation rate is 5% the dollar you get back is worth less than the one you lent. You LOSE money!  Better to shelter it in some fashion whereby it doesn't earn but manages to hold value - such as investing in gold or whatnot. High government debt threatens profit to lenders.

During the later 19th and early 20th centuries deflation was the problem. When currency deflates it is worth more, giving it greater buying power. This hurts borrowers, because they are giving back a more valuable dollar to the bank than they borrowed. It was particularly destructive to the farm economy of the times, because farming requires yearly loans to get the ball rolling, to buy seed, fertilizer, equipment. Farmers paid this back in the fall after harvest, but in a deflationary period it meant they lost money as they paid a more valuable dollar back to the bank than they borrowed.

They wanted inflation. That is why William Jennings Bryan gave his famous "Cross of Gold" speech in 1896 in Chicago (where else?). Bryan was the champion of "free silver" which meant that he wanted the U.S. to coin unlimited amounts of money with silver, or print money with silver as backing. The U.S. was on the gold standard, meaning that a dollar was backed by X amount of gold, and you could actually go to the government and redeem your dollar for that amount of gold. It gave the paper dollar some real worth. Bryan and the free silver people wanted inflation, and to get it were willing to dillute the value of paper money by using a bimetallic standard, with silver - a much more common metal - acting as backing for currency. Indeed, silver could be made into coins and put into the economy along with gold coins, which were somewhat common back then. A bimetallic standard would greatly increase the money supply, making money worth less. This would be a huge boon to borrowers, who would pay the banks with dollars worth less than what they borrowed. It also benefitted wage earners, who under deflation received pay cuts on a regular basis; it would give them raises instead.

Inflation was one of the engines of labor unionism; the unions were able to flourish because they could get raises for their members. They could get raises for their members because money was worth less and less after inflation became the norm.

The unions prospered, but at the expense of the non-union workers.

But inflation raises the prices of goods (whereas deflation dropped them) and eventually those prices rose faster than wages. By the 1970's you had an out-of-control spiral with prices crushing the average family while wages grew, but not as fast. It was a death spiral.

Ronald Reagan got us on a sound economic footing, and got inflation under control (he understood inflation was a money issue, and tied to government printing of unbacked currency.)  Before Reagan you had such brilliance as Gerald Ford's WIN buttons - whip inflation now! He believed, or at least wanted the public to believe, that inflation was the fault of consumers and corporations. Keynesian economists have always taught that inflation is due to consumptive drives rather than monetary policy.

At any rate, today government is spending huge sums of capital and paying for those sums by borrowing from China and Japan and elsewhere, then paying off those interest-bearing debts by printing extra money, money without any backing. Inflation. As before, it's good for the borrower - for now, but bad for the overall economy. Banks aren't in the business of losing money, and we shouldn't want them to, because they are the engine that drives prosperity. If they lose - and all government policy is geared to that eventuality these days - they will not lend, and if they do not lend the economy cannot grow. You have stagflation, that horrible souvenier from the Carter Administration (which the Keynesians believed was impossible until Carter managed to achieve it). Stagflation is a stagnant economy with high inflation. We are zooming toward that terrible state..

There are only a couple of possible outcomes at this juncture. Either we correct course with another Ronald Reagan, or we follow this through to the end. We've seen how it ends; look at Argentina, where inflation rates were in the triple digits at one point. Or look at Weimar Germany, where one had to take a wheelbarrow full of cash to buy a loaf of bread. There were pay breaks during the day, and the workers ran out to the nearest store to buy SOMETHING so their money would not go to waste, as by the next break that afternoon it would be worth even less. Eventually that led to collapse, and gave Germany the Nazi tyranny. (It did allow Germany to pay off all of her crushing war debt.)

The outcome would mean the end of the America we know. America would sink into banana republican status, and prosperity would mean a job in the mines or on the docks like the bad old days.

It is no coincidence that Obama, a man from the Chicago political machine, from the home of the CPUSA, is pursuing such policies; he promised fundamental change, and to get it will have to follow this exact course. This is no accident.

There is a point of no return, and we are dangerously close to that line. Mr. Obama must go if we are to survive this. 

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