Part IV: The bubble bust aftermath
Published 7:00 am Wednesday, March 18, 2015
Since December, 2008, the three phases of quantitative easing have finally been successful in creating a degree of economic recovery in the stock market and housing industry sectors. The stock market has soared to record heights as late as Friday, February 13, 2015, with the Dow Jones Industrial Average closing at 18,019.35.
The housing sector has improved somewhat, but not as prolific as the stock market. Government programs that support housing through the government sponsored enterprises such as Ginnie Mae, Fannie Mae, Freddie Mac and others reduced credit standards at year-end because the housing recovery was slipping. Ginnie Mae is the only GSE whose securities are secured by the government.
Let’s look below the surface to see how this progress was ignited. The government has purchased as much as $85 billion of U.S. Treasury bonds, notes, and bills per month with half of the money. The other half of money that month bought home mortgage loans that were issued by the GSE’s. Both sets of securities were purchased from dealer banks that carry that special designation from the federal government. We will explain that in a future column. These dealer banks present the government with quotes for security sales and the government purchases the lowest priced packages.
The original owners of the treasury bonds, bills, and notes purchased by the government are now holding the cash proceeds from the sale. So these investors look around for something to buy with this cash on hand. Remember, the government has driven interest rates down to 2.5 percent (near 0 percent) so wouldn’t you know, the best investment available just happens to be the stock market. So they invest their newly acquired cash in the stock market.
This same scenario applies to the mortgage backed loans. Mortgage backed bondholders sell existing bond packages to the government. The government pays them cash and the GSE’s now are ready to generate new mortgage loans with the proceeds of their sale. Their cash goes right back into their sector of the economy.
But wait, the question becomes “is this recovery sustainable to continue as pre-2008, or will the government have to resort to more quantitative easing”? No one knows for certain, but consider the following line of thought.
The increased activity in these two sectors of the economy was the result of the government’s efforts to increase demand by artificial means. To remain sustainable, this increased demand should have come from the market place, not the government.
I believe there will be a fourth phase of quantitative easing and possibly others. The metrics are just not present to support good times ahead.
There will be a lag time of several months, possibly six months, before we know. I truly hope I am wrong on this.
My plan is to cover several other topics that might help the average citizen understand the happenings of our economy: the Federal Reserve System, money printing, dealer banks, and the “biggest, baddest”, nightmare of all: our national, or sovereign, debt.
These topics will end the summary review of the 2008 meltdown. Next, we will deal with the “storm clouds” gathering over the global economy. The possible future global economic tsunami has the potential of consequences much more severe than those of the 2008 financial meltdown. Take heed of 2 Chronicles 7:14.
By Aaron Russell.