Michael at ClickBroker discusses the kinds of changes our economy needs, for instance, moving from being consumer-driven to producing something of inherent value.
Fed Running Out of Credit Worthy Consumers
The Federal Reserve has stated unambiguously that it wants to boost the economy by putting more money into the strongest hands. The Fed only wants to extend credit to consumers who can handle it, giving the best borrowers lower mortgage rates and freer unsecured credit. Even without cash-out refinancing, the Fed believes that consumers will spend more by lowering their mortgage payments. But what happens when the Fed runs out of strong hands? How will they boost consumer spending?
On Tuesday President Obama showed some enlightenment. During his midday economic speech, the President said that we have to move from a nation of consumers to a nation of producers, implying the strong hands have to move from spending to saving and investing. Aside from the alchemy of converting the financial “masters of the universe” to scientists and engineers, we were given little guidance.
Trouble is the President was speaking of the future and in the present no policies are shifting away from a consumer dominated economy. All incentives, including the eminent hyper inflation are leading to the continuation of the same economic model of the last 60 years. This model that has become more consumer oriented with each passing decade. Despite the President’s rhetoric, “it is never the right time” to change the economic model.
Getting back to the Fed, all guns are pointed to the shadow banking system to boost consumer spending. Amongst the incomprehensible multitude of Fed and Treasury programs there exists the purchase of GSE MBS and securitizations of auto and credit card loans. Wells Fargo (WFC) and Bank of America (BAC) have created a temporary jubilation with their Fed driven profits from mortgage refinancing.
Like all Ponzi schemes this too will come to an end when the pool of qualified borrowers is exhausted. Retail spending is also likely to continue to fall along with housing prices. People buying houses with artificially low interest rates are likely to lose money unless they receive a substantial discount on their purchase price.
The Wall Street Journal’s “Banks Ramp Up Foreclosures” reports that Bank of America, Citigroup (C), JP Morgan (JPM) and Wells Fargo have ended their mortgage foreclosure moratoriums and are once again separating the weak from the strong. President Obama’s foreclosure mitigation initiatives will only benefit homeowners strong enough to actually pay their mortgages. Foreclosure avalanche two is just beginning.
Let’s hope the Fed’s next move is not to actually lower lending standards to increase its pool of consumers. Or better yet let’s believe that President Obama really wants to turn America into a country that makes stuff. In "US Needs to Convert from a Consumer to an Industrial Economy", I must have had a premonition of the President’s intent. Unfortunately, we just might have to waste a few more trillion dollars on the way to get there.
Disclosure: Author is long BAC, C and WFC.
