'..The technology Bubble was rather obvious, although the greatest associated excesses were more generally contained (i.e. Internet/technology stocks, telecom debt, California incomes and real estate). The mortgage finance Bubble was much less conspicuous until the arrival of the more egregious late-cycle price and construction excesses. Few appreciated how Trillions of new mortgage debt were inflating incomes, spending, and corporate profits, while covertly distorting the economic structure. Today, it seems that virtually no one recognizes how Government Finance Bubble excesses inflate incomes, spending, profits, state & local government receipts, and equities and bond prices .. Today, our policymakers are using government finance to inflate system Credit and price levels, and are again willing to tolerate excesses that will only become more unwieldy over the life of this latest Bubble. '<blockquote>'Truth be told, Fannie, Freddie, and the American taxpayer and economy will remain highly exposed to mortgage Credit risks for many years to come. While GSE mortgage holdings (and balance sheets) have been somewhat reduced, exposure to mortgages they’ve insured remains at near-record levels. Fannie’s “Total Book of Business” (mortgages held in the portfolio and MBS insured) ended June at $3.183 TN, little changed for 2012 and down only about 2% from the March 2010 high. Across town at Freddie Mac, total mortgage exposure remains above $2.0 TN, down only 10% from record highs. It is also worth noting that FHA guarantees have increased dramatically since the 2008 crisis to exceed $1.0 TN. I’ve argued that there will be “no exit” from Federal Reserve “easy money,” and there will similarly be “no exit” from federal control over mortgage Credit.
The virtual nationalization of U.S. mortgage Credit in concert with incredible monetary stimulus has ensured the ongoing availability of inexpensive mortgage Credit. Fannie, Freddie and the FHA – key players in the Mortgage Finance Bubble – are today important participants in the Government Finance Bubble. There will be huge future costs, but for now housing and the economy enjoy the stimulus. And while mortgage Credit in aggregate remains stagnant, there are indications of typical problematic excesses spurred by mispriced finance.
I have posited that today’s Bubble is the latest in a series of Fed-accommodated bouts of Credit and speculative excess. And as each successive Bubble grows larger and more systemic, the effects actually become less conspicuous. The technology Bubble was rather obvious, although the greatest associated excesses were more generally contained (i.e. Internet/technology stocks, telecom debt, California incomes and real estate). The mortgage finance Bubble was much less conspicuous until the arrival of the more egregious late-cycle price and construction excesses. Few appreciated how Trillions of new mortgage debt were inflating incomes, spending, and corporate profits, while covertly distorting the economic structure. Today, it seems that virtually no one recognizes how Government Finance Bubble excesses inflate incomes, spending, profits, state & local government receipts, and equities and bond prices.
In the five years 2003 through 2007, total mortgage debt increased about $6.2 TN, or almost 75%. This historic Credit expansion saw National Income inflate $3.0 TN, or 32%, to $12.4 TN, with Total Compensation increasing 29% to $7.9 TN. Corporate profits (before tax) surged 128% to $1.74 TN. The 2009 recession saw a one-year 3.7% decline in National Income, a 3.2% fall in Total Compensation, and a 22% drop in profits. But unprecedented Washington stimulus was immediately forthcoming.
In the 15 quarters June 30, 2008 to March 31, 2012, Treasury debt increased almost $5.6 TN, or 106%, to $10.828 TN. This massive inflation of government Credit, in concert with Federal Reserve rate cuts and monetization, reflated system price levels that in 2009 had commenced a problematic downward spiral. Indeed, National Income jumped 4.5% in 2011 to a record $13.421 TN, after increasing 5.7% in 2010. After gaining 4.0% in 2010 and 3.3% in 2011, Total Compensation has also grown to record levels. Corporate profits have inflated to record levels after increasing 25% in 2010 and another 4% in 2011. As bullish analysts extrapolate corporate profit growth, U.S. stock prices appear “cheap” after doubling from 2009 lows.
The key has been that overall system Credit resumed its historic expansion. While down from 2007’s 8.4% growth rate, U.S. Non-Financial Credit still increased 5.9% in 2008, 3.1% in 2009, 4.1% in 2010 and 3.6% in 2011. It didn’t really matter that the vast majority of 2009-2011 growth originated from Treasury debt. Massive Washington stimulus was able to sustain inflated price levels throughout much of the economy – perhaps not home prices, but definitely system incomes, spending, GDP, and profits, while state & local receipts bounced back to, and in many case surpassed, pre-crisis levels.
There was a school of thought coming out of the bursting of the technology Bubble that a jump in mortgage Credit growth was necessary to help ward off dangerous deflationary forces. And, predictably, once the mortgage finance Bubble gained momentum no one was willing to take away the punchbowl. Today, our policymakers are using government finance to inflate system Credit and price levels, and are again willing to tolerate excesses that will only become more unwieldy over the life of this latest Bubble. Somehow, the Fed’s biggest concern is the timing of its next spike to the punchbowl.'
- Doug Noland,
The Winding Down of Fannie and Freddie? August 17, 2012</blockquote>
Context<blockquote>
'..a private law society..' versus '..a “great band of robbers,”..''..fiat inflation is a powerhouse of social, economic, cultural, and spiritual destruction.' - Jörg Guido Hülsmann
'Ethical problems of production .. the production of money.''..the current monetary system, based on credit expansion .. “manic-depressive” behavior..''The true nature of the current crisis is not that of a currency..'<blockquote>