‘Helicopter Ben’ Bernanke’s Fed has committed to flooding real estate with an ocean of (legally) counterfeited money by ‘loaning’ it to Fannie Mae and Freddie Mac, the governments’ real estate mortgage cartel leaders. The cartel will thus supply the providers of cheap, high credit-risk mortgages who fund the home buyers who in turn, can’t otherwise buy today since they have poor credit. Fed Floats Election explains: this is a two-fer, it both helps keep real estate prices from dropping further and it helps re-elect the President too, showing him leading a stronger economy. Right.
It does a couple of other things, too. Those not busy smoking something in 2008 remember that government subsidizing mortgage loans to help poor folk with ‘substandard’ credit is what brought down the housing market then, when it turned out that loans to bad credit risks at government gunpoint weren’t going to be repaid. Whoda thunk it? Clearly not Congressman Barney Frank and Senator Chris Dodd, the primary culprits who leaned on the banks to lend the money. So as usual, the Congressfolk are curing this, under Obama this time, by doing it again. Gee, what will that lead to, this time? Our salvation, no doubt…
Another result of this illusory largesse is explained by: The Global Demise of Pension Plans which unkindly points to another of the many reasons ‘TANSTAAFL’ is still believable while Congress, isn’t. There Ain’t No Such Thing As A Free Lunch because so many folk, corporations, governments etc. depend upon interest earned from investments to fund pensions, retirements, banking services etc. When interest rates are forced lower than the market wants, nobody can earn a decent return; when it goes on for a long time, how will pensions, historically funded by bond investments, be paid? Investors are forced into higher risk investments, with higher loss rates, destabilizing the entire market or like the state pension plans, they simply can’t pay the pensions they promised. Banks, unable to earn enough from safely investing your money, have to charge service fees and the cost of living goes up. And so on, as the economic distortion spreads.
Bernanke’s new “Spend it as though you had it” program is to proceed until the Fed decides the economy is recovered enough to need it no longer. Since Bernanke’s financial blood transfusion uses blood ultimately coming from his sick patient, how long will that be?
Dunno…but, note that the minute Helicopter Ben sounds like he’s backing off, the artificially compressed interest rates are going to spring upward to cover the perceived risk built up all this time without normal market compensation from higher rates. The government (and everyone else) will suddenly find they can’t afford the borrowing that’s been keeping all afloat. Deja vu: 1932.
So our Benjy is now between a rocky Zimbabwe inflation and a hard 1932 landing place as he treads his swaying, economic tight rope; as they say in Tokyo banking circles: Rots of Ruck, Benjy! (Well, except that so many Japanese bankers speak better English than a lot of Americans, these days…)