When will “more debt” not be the answer?
- 13.10.2008
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Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.
Not all that much seems to have come from the G7+ meeting this past weekend. We somehow expected more than: “The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.
In its statement the Fed said:
“In order to provide broad access to liquidity and funding to financial institutions, the Bank of England, the European Central Bank, the Federal Reserve, the Bank of Japan, and the Swiss National Bank are jointly announcing further measures to improve liquidity in short-term U.S. dollar funding markets.
To assist in the expansion of these operations, the Federal Open Market Committee has authorized increases in the sizes of its temporary swap facilities with the BoE, the ECB, and the SNB, so that these central banks can provide U.S. dollar funding in quantities sufficient to meet demand.”
And just in the nick of time, we observe, this being options expiration week.
Sunday night Bloomberg reported that the “Royal Bank of Scotland, HBOS Set to be Taken Over by Government. U.K. Prime Minister Gordon Brown’s government is set to buy majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc to contain the worst financial crisis since the 1930s, two people familiar with the matter said.
The government will also name representatives to the boards of RBS, Britain’s fourth-biggest bank, and HBOS, its largest mortgage lender, and will work closely with the management on issues including executive pay, the people said. They spoke on condition of anonymity because the information is confidential.
This comes on the heels of Saturday’s announcement, “Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
In addition, “Adding underperforming assets to Fannie and Freddie’s combined $1.52 trillion mortgage portfolios would come at a time when the two mortgage-finance companies already hold as much as $210 billion of bad debt that may be eligible itself for the Treasury’s relief program, their regulator said Oct. 5.”
We can’t help but notice that so far, not one of these increased-debt-related schemes has had any positive effect on the markets or the worldwide economy; just the opposite, in fact. Since the beginning of the year, the Federal Reserve has added more than $2.7 trillion, yes trillion, to its balance sheet, some of it in the form of guarantees and some of it against swaps of worthless mortgage-related securities.
The engine that drives the US economy and, therefore, the world economy, is the US consumer. The US consumer is tapped out due to maxed-out credit cards, maxed-out or withdrawn HELOCs reflecting underwater mortgages, no savings and, the last nail in the coffin, increasing unemployment.
The economy is in serious decline and there are few credit-worthy borrowers left. More debt couldn’t possibly remedy this situation.
