Posted by Steve Markowitz on March 21, 2015
It was just six years ago that the world was at the brink of economic Armageddon. The crisis was brought on by the cheap loans made available to borrowers including those rated as subprime with credit scores below 640. The cheap mortgages to those with limited assets helped create a huge bubble in the housing market. When the economy slowed down and home values began to depreciate, many borrowers began to default on the mortgages, which placed at risk major financial institutions worldwide that invested in these bundled mortgages.
Banks and others that owned the collateralized mortgages then required bailouts from the government to stave off failure. This did not eliminate the debt, but merely moved it from the private sector to governments; i.e. taxpayers. In addition, the bailouts inordinately benefited companies and their shareholders who made the imprudent loans. Without the bailouts they would have encountered substantial financial losses.
There is also been a more incipient result of the bailouts of investors who made imprudent loans in the subprime market. Without suffering losses investors have had short memories and in fact they are back at it again in the subprime financing business, once again supported by low interest rate central-bank policies with interest rates worldwide remaining at artificially and historic lows.
Last month, the Wall Street Journal highlighted the growth of subprime loans in an article titled Borrowers Flock to Subprime Loans. Today, subprime loans are not in the housing market, but in consumer goods. The Journal published the following:
- Subprime loans are at the highest level since before the 2008 financial meltdown.
- Approximately 4 out of every 10 loans for autos, credit cards and other personal borrowing in 2014 were in the subprime category.
- During the fourth quarter of 2014, total US household debt increased by over $300 billion.
The Federal Reserve’s low interest rate policies are pushing investors to greater risk as they seek returns. This, coupled with the availability of cheap capital has offered incentives for nontraditional lenders to enter the credit markets. For example some venture backed funds are fueling the growth of subprime lending, such as Lending Tree, Inc., an online auto loan marketplace. These lenders are not regulated and are likely to use leverage and other financial games to pursue even more subprime lending, a repeat of the actions behind the 2008 financial crisis.
Subprime lending is fueling economic unsustainable growth. For example US auto sales topped 16.5 million in 2014, a nearly 6% increase from the previous year and up nearly 60% from 2009. When the inevitable slowdown occurs, an increasing number of subprime borrowers will be unable to repay their loans, a repeat of what led to the 2008.
History has demonstrated that booms and busts, and yes bubbles, are at normal part of economic cycles. However, major macroeconomic bubbles have generally been a once in a generation occurrence that is self-correcting and serves as a reminder to that generation of the pitfalls of imprudent economic behavior. The collapse of 2008 was different with many investors being bailed out and equity markets returning to their highs within a relatively short period of time. This has shortened capitalists’ memory who are now once again making imprudent loans in search of returns. This will lead to another significant downturn in the relatively near future, a probability that investors are ignoring in the belief that when it occurs the government will again come to the rescue. However, this time the government and the Federal Reserve are themselves deep in deep. It remains to be seen how this huge sovereign debt will affect the outcome.
Posted in Bailouts, Bubbles | Tagged: Bailouts, Fed, Federal Reserve, lending, loans, subprime | 1 Comment »
Posted by Steve Markowitz on September 27, 2014
USA Today reported on the growing number of subprime auto loans being made in the United States. Such loans are made to high-risk borrowers with poor credit scores. According to USA Today:
- Since 2009 the number of auto loans made to high risk borrowers with credit scores below 660 has doubled.
- In the past year the repossession rate for automobiles has increased by 70%.
- The amount of interest paid by consumers for auto loans is staggering. For those purchasing automobiles on credit in 2009, an aggregate interest of nearly $26 billion will be paid on those loans.
- In most states more than one half of the consumers have some form of subprime credit.
It is remarkable that only six years after the subprime mortgage fiasco caused a worldwide economic meltdown, similar high- risk loans practices are gaining momentum. In addition, subprime auto loans are being bundled by Wall Street into risky securities and sold to naïve investors.
While the size of the subprime auto loan market is significantly smaller than that of the subprime mortgage loans, a significant amount of failure amongst these loans will damage the overall economy to some extent.
The subprime mortgage market and the bubble it created were a result of governmental and Fed policies that included artificially low interest rates. The current subprime auto loan market is being created by similar policies. Once again, artificially low interest rate policies promoted by the Federal Reserve support predatory lending practices to those who should not be given loans. In addition, this low interest rate environment offers fertile ground for the sale of the securitized loan portfolios to investors seeking higher returns through risk.
In addition, the moral hazard has been damaged by the government’s bailouts that saved imprudent lenders and banks from disaster in 2008/2009. These lenders and their investors expect the government to cover their backs during the next meltdown, even if caused by their imprudent lending practices.
Both political parties avoid discussion of debt the damage it causes. This is by political necessity given the ever-expanding debt financing used by the US government. Debt is inappropriate if used to create wealth today at the expense of tomorrow’s economic growth potential. It becomes a tragedy when such debt is promoted by imprudent governmental policies.
Posted in Debt | Tagged: auto, Fed, Interest, loans, subprime | Leave a Comment »
Posted by Steve Markowitz on June 25, 2014
Evidence of bubbles is becoming more apparent by the day. The first-quarter GDP figures were revised downward today by the Commerce Department by 2.9%. Irrespective of this ominous indicator, the stock market went up. These two opposing occurrences in one day indicates that risk fear has evaporated from investors who believe that with ever continuing Federal Reserve lose money policies the market will to rise indefinitely. These investors sound eerily similar to those that invested in the housing bubble in the early 2000’s. It did not and pretty for that group
Equity valuations are not the only bubble that is growing. Another one with dangerous implications for the economy is student loan debt that now exceeds $1 trillion, greater than the total Americans’ credit card debt. This excessive debt has been saddled on younger Americans who are having difficulty finding jobs. It will be a weight on their shoulders for years to come further inhibiting long-term economic growth.
Successful businessman and Dallas Mavericks owner Mark Cuban was interviewed by Inc. Magazine where he correctly stated the dangers of the student loan bubble:
“It’s inevitable at some point there will be a cap on student loan guarantees. And when that happens you’re going to see a repeat of what we saw in the housing market: when easy credit for buying or flipping a house disappeared we saw a collapse in the price housing, and we’re going to see that same collapse in the price of student tuition, and that’s going to lead to colleges going out of business.”
The brief video clip below states a problem, which to a great extent, has been of the making of the US government and its interventions into the student loan program. Not only has the government’s involvement saddled younger Americans with unnecessary debt, but it’s facilitating of this debt has led to significantly increased cost of higher education further exasperating this debt issue. Had student loans not been subsidized and backed by the government, higher educational institutions would have been forced to create more economic ways to educate (serve) their customers, students.
When the higher education bubble pops we can look for a taxpayer bailout that will further inhibit long-term economic growth. As we search for reasons why the current recovery is the most anemic since the Great Depression, we can look at the government interventions and regulations as primary causes.
Posted in Governmental Intervention | Tagged: College, Cuban, GDP, Government, Interventions, loans, Student-debt | 2 Comments »
Posted by Steve Markowitz on March 26, 2012
1Consumer Financial Protection Bureau has released the figures for overall student debt in the United States. The numbers are of concern for the economy. The total student debt now exceeds $1 trillion, 16% higher than estimated by the Federal Reserve just one year ago.
According to the Wall Street Journal, the huge student debt will be a drag on the economy for some time as it will cause potential buyers to delay housing purchases and therefore recovery in the important housing market. The Journal also reports that this debt has soared because of more people going to college to escape the weak economic environment, as well as increased tuition costs.
The student debt is one of many over leveraged aspects of American society. Ironically, some portion of this debt growth can be attributed to government’s intervention into the education market. Through various loan and subsidy programs, the government has made it easier for many Americans to attend universities. At the same time, this assistance allowed colleges and universities to increase tuition much quicker than inflation. The unintended consequence of these student aid programs is not only increased tuition, but another debt bubble. This is another example of why the government needs to stop the senseless market interventions.
Posted in Education, Governmental Intervention | Tagged: College, Consumer Financial Protection Bureau, Debt, Federal Reserve, loans, student, that, University | Leave a Comment »
Posted by Steve Markowitz on August 31, 2011
This morning President Obama announced that early next month he will go before a joint session of Congress and announce plans for improving the economy with specific reference to the problem of the high unemployment rate in Americans. Past government interventions to address this issue has issues succeeded. Still, it is likely that the President will attempt to offer more of the same type of interventions.
Today there was also disappointing news from California that exemplifies the government’s failure with their interventionist policies. Solyndra, located in Fremont California, announced that it is filing for bankruptcy. This will result in the immediate layoff of 1,100 full-time and temporary employees. Solyndra was one of the green energy companies touted by President Obama who visited their plant in May 2010 and, video below.
While it is sad to see any company fail, the Solyndra affair not only hurt the company’s employees, but US taxpayers as well. This company received taxpayer funds through a $25 billion Department of Energy’s loan-guarantee program focused on the clean technology industry. According to the Wall Street Journal, it received $535 million in guarantees, with most of the loan having been drawn down.
It takes an especially bad business plan to blow through so much money in such a short period of time. Then again, when companies gamble with taxpayer money, good business judgment is often ignored.
The politicians and bureaucrats who decided to invest American taxpayer funds into this failed venture did not do appropriate due diligence. However, the Department of Energy was unapologetic for this multimillion dollar blunder. Today it issued a statement defending the loan to Solyndra stating: “The company was considered extraordinarily innovative as recently as 2010. Solyndra was a victim of the aggressive Chinese solar-manufacturing pricing policies“. According to the Journal, Solyndra’s failed because it’s costs were just too high to compete.
joins other failed solar ventures including Evergreen Solar, Massachusetts and SpectraWatt, New York. These failures are further proof that Progressive politicians cannot will green energy companies into successful ventures. Consumers and the law of supply and demand in the marketplace make this determination.
Making successful venture capital investments, especially in the high-tech world, is a complex and risky business even for the most seasoned venture capitalists. Government agencies run by bureaucrats and politicians are totally without scale in this area. In addition, they are rewarded not by the success of the venture, but how much money they can dole out to special-interest groups. This is a prescription for guaranteed failure.
The Solyndra debacle is but an example of the failure of governmental intervention in the marketplace. It joins the Stimulus Package, Cash for Clunkers, and other government bailouts failure to bring the economy back to health. This history of failure is unlikely to change President Obama’s approach to the economy. He will continue proposing even greater government spending and interventions in the mistaken belief that doubling down on a lost bet will change the results in the next hand.
Posted in Energy, Government Ineptness | Tagged: Bankruptcy, California, Department of Energy, Evergreen Solar, Fremont, Green Energy, Guarantee, loans, Obama, Solyndra, SpectraWatt | 4 Comments »
Posted by Steve Markowitz on August 25, 2011
In October 2008 the United States and much of the world was in the midst of a financial crisis caused by the downturn in the US housing market and the related subprime mortgage mess. This led to the Lehman Brothers bankruptcy that set off worldwide panic and the possibility of a meltdown of other financial institutions.
In an effort to contain the crisis, the Bush Administration came up with TARP (Troubled Asset Relief Program that would allow the US government to purchase up to $700 billion worth of troubled assets. There was a great deal of debate concerning this proposal that amounted to a huge bailout of private financial institutions with taxpayer funds.
TARP was approved by Congress and implemented, but the jury is still out as to its long-term effects. While the program helped stabilize financial institutions in the short-run, it has caused other imbalances in the economy and negatively impacted the moral hazard. The bailed out banks got into trouble because they made imprudent loans. Te government’s main excuse for the bailouts was that they were too big to fail. However, soon after the bailouts banks were back to similar poor business practices that included huge bonuses for their executives.
While the argument can be made that TARP stopped a financial panic, there can be no justification as to why these banks’ shareholders and bondholders were not heavily penalized for investing in poorly managed companies.
As troubling as the TARP bailouts were, at least that program was vetted by Congress and in a somewhat transparent manner. It has been disclosed that an even larger bailout occurred through the Federal Reserve in secret and without oversight or Congressional approval. The scope of this program recently became public, the result of a Freedom of Information Act lawsuit filed by Bloomberg that went all the way to the US Supreme Court. After reviewing over 29,000 Fed supplied documents, Bloomberg concluded the following:
- The Fed bailouts that occurred between August 2007 and April 2010 involved $1.2 trillion in loans to 400 financial institutions and companies.
- About one half of the banks that received these Fed loans were not U.S. based.
- In the fall of 2008, US investment bank Morgan Stanley was near insolvency and barrowed $107 billion from the Fed, nearly three times its total profits during the previous ten years.
- In 2007, Goldman Sachs was the most profitable firm in Wall Street history. Yet in 2008 it barrowed $69 billion from the Fed.
- Other companies that were not primarily financial based also barrowed money from the Fed. This included Ford taking about $7 billion and Toyota getting $4.6 billion. Even General Electric, who was highly profitable in 2010 but paid no U.S. income tax, received about $16 billion from the Fed.
The size of the Fed’s program is staggering. The secret loans were 20 times larger than any previous Fed’s lending program, which occurred shortly after 9/11. However, the most troubling part of the program is the fact that it was hidden from the American public. In justifying its secrecy the Fed claimed that making the loans public would have caused investors to lose confidence in the receiving banks. Since the release of this information and the lack of panic, this claim has been proven bogus. But even more important, so what if there was panic? The public has the right to know what the Fed does with its money. The public also has the right to know the true financial conditions of companies that it might bank with or invest in.
Bailouts by the government and Fed were used for the advantage of some companies and citizens over others. This has no place in capitalism or a free society, nor is allowed under the US Constitution. The government and Fed have spent significant taxpayer funds without transparency or the required Congressional approvals, willful circumvention of the law and Constitution.
Many, especially on the Left, ignore the dangerous slippery slope that the Country is traveling. Their fears are mistakenly focused on those attempting to stop the wild and special-interest spending in Washington. That has allowed the Federal Reserve to debase the U.S. currency, a surreptitious way of increasing the taxes on all Americans.
Posted in Bailouts, Federal Reserve | Tagged: Bailouts, Bloomberg, Congress, Constitution, Fed, Federal Reserve, Ford, Freedom of Information Act, GE, General Electric, Goldman Sachs, Lehman Brothers, loans, Moral Hazard, Morgan Stanley, TARP, Toyota, Troubled Asset Relief Program | 1 Comment »
Posted by Steve Markowitz on July 18, 2010
It hasn’t been two years since the financial meltdown that included the Lehman Brothers’ failure and risky loans are already coming back.
It is generally agreed that the worse financial disaster since the Great Depression was caused by greed and imprudent investments, especially those related to debt financing. Perhaps the biggest example is Wall Street’s use of collateralization to sliced and dice bad mortgages and then selling them to investors as quality investments. This led to an overheating of the housing market, then the popping of the housing bubble, and finally the sup-prime mortgage catastrophe. The rest is history. The world’s financial system was in danger of a systemic breakdown, which caused governments to bail out banks and other intuitions.
While we will never know if the bailouts actually saved us from Armageddon, we do know that they saved many banks and investors from imprudent behavior. This reality has consequences, such as damaging the “moral hazard”. Banks and investors learned that if they bet big enough so as their failure has huge consequences to society, governments will come to their rescue.
Not surprisingly, banks are now going back to similar risky behavior that caused the original meltdown. The Wall Street Journal has reported the following examples:
- A 66-year-old retired phone-company worker in Brooklyn, NY is $33,000 in debt, earns $2,414 a month and filed for bankruptcy in June. Shortly before the filing, she received an offer from Capital One for a credit card even though they sued her in 2006 to recover $4,470 she owed them on a different card. The Capital One offer told the retiree: “At some point we lost you as a customer and we’d like to have you back.”
- An Illinois couple received six credit card offers since emerging from bankruptcy in June even though they still $73,000 in student loans.
- Credit-card issuers offered 84.8 million cards to subprime borrowers in the first half of 2010, almost double last year’s rate.
- 8% of new car loans in the latest quarter were to borrowers with the lowest credit scores, up from 6.2% in the previous year.
- AmeriCredit, a Subprime auto lender, informed investors that loan originations could be $900 million in the fourth quarter, over four-times the previous year’s volume.
- Fannie Mae, perhaps the largest villain in the subprime mortgage meltdown, is also back at it. Fannie was seized by the U.S. government in 2008 to avert failure. Fannie launched an initiative in January that allows some first-time home buyers to get a mortgage with as little as $1,000 down.
While it is too early to determine if increased loan activities to those with questionable credit worthiness will lead to another meltdown, it doesn’t feel right. The government intervened in markets and saved investors who made poor decisions from paying the bill. Now those same people are back with similar behavior. It doesn’t take a PhD in economics to know this is not good.
An appropriate closing paragraph to this posting is Fannie Mae’s response to questions about their $1,000 down mortgage offering. There justification for these mortgages is that Fannie faces limited risk because these mortgages then go through state agencies that have solid histories. This justification sounds suspiciously similar to the pitch that Wall Street gave for the collateralized mortgages that were then highly rated by bond rating agencies.
Posted in Bailouts, Fannie Mae, Moral Hazard | Tagged: AmeriCredit, Bailouts, Bankruptcy, Collateralized Debt, Credit, Fannie Mae, Great Depression, Housing Bubble, Lehman Brothers, loans, Moral Hazard, Risk, Subprime Mortgages, Wall Street | Leave a Comment »
Posted by Steve Markowitz on April 21, 2010
Allentown, Pennsylvania is a typical mid-sized American city facing the challenges of the ongoing recession. We have been through it before being the subject of the Billy Joel’s hit song “Allentown” in 1982 that made famous a previous downturn. While the local steel mills did shut down Billy, the area rebuilt itself into a technology center and then a hub for distribution. This time the rebuilding effort is being spearheaded by the Federal government instead of locally.
The city’s newspaper, The Morning Call, has reported on the how the government’s Stimulus money has been used locally. It reports of the approximately100 local companies approved for no-fee small-business loans under the American Recovery and Reinvestment Act. Major benefactors of these special loans are listed below. Names have been left out since this Blog does not want to bring publicity to those who took the loans, only the knuckleheads that made these policies.
- Local Brewery – $89,000
- Local Fitness Club – $1,009,000
- Local Salon and Spa – $907,000
- Local Weather Company – $750,000
- Local Employment Agency – $100,000
- Local Home Improvement Company – $30,000
- Local Laundromat – $1,750,000
- Local Internet Apparel Retailer – $506,000
- Local Auto Parts Retailer – $170,000
Note the lack of manufacturers in the list. While spas, fitness centers and retailers are fine enterprises that can make their owners a good living, they cannot create the type of long-term jobs this country was built on and will require to be successful going forward. This downturn has shown the weakness of depending almost solely on service jobs.
As John Fleming, team leader in the SBA’s Philadelphia office was quoted in The Morning Call: ”We can help a bank say ‘yes’ when they would normally say ‘no”’. What a sad piece of honesty. If these business were solid investments, commercial banks would make the loans without government backing. The government is in essence forcing risky loans that would not be made using purely prudent business judgment. More to the point, wasn’t it excessive and risky debt that got us into this mess in the first place? Only the Progressives in government would double-down on that bet!
Posted in Banks, economics, Governmental Intervention, Stimulus Program | Tagged: Allentown, American Recovery and Reinvestment Act, Brewery, health Club, John Fleming, loans, Manufacturers, Retailer, SBA, Service, Spa, Stimulus, The Morning Call | 1 Comment »