May 5, 2013 – What is the objective behind the goosing of the housing and stock markets?
By The Cerebral Aesthetic Vagabond
It’s clear to anyone who’s moderately attentive that the stock and housing markets are both being artificially stimulated. The U.S. Government is using its housing agencies to push subprime home loans, thus raising house prices, while the Federal Reserve is “printing money,” much of which is finding its way into the stock market and producing all time highs in the various indexes.
Part of this “manipulation” could be attributed to the government’s ongoing efforts to manage peoples’ perception, to convince them that the economy is doing fine and improving, in the hope that the people will rush out and spend, spend, spend, as if the lack of such spending is the reason why the economy is ailing. (Here’s a free tip for government planners: People cannot spend what they do not have, especially unemployed people, even if they have “dropped out” of the labor force and are no longer counted as unemployed.) Another motivation for stimulating these markets, particularly the housing market, is that housing is a cornerstone asset of a vast matrix of financial derivatives and therefore depressed house prices amplify losses as they ripple through this derivative matrix; conversely, rising house prices amplify gains, which by itself would be sufficient motivation to stimulate house prices.
The foregoing observations are straightforward and no secret to anyone, but could there be a sinister plan behind these manipulations as well? I find it intriguing that the actions of the government – promoting subprime loans to boost the housing market – seem to aid the Federal Reserve, while the actions of the latter – boosting stock prices – may eventually aid the government. In perfectly symbiotic (i.e. fascist) fashion, the public and private sectors could be working together, each in pursuit of their own specific goals.
It is well known that the Federal Reserve has taken it upon itself to bail out the banking industry – in theory, the Federal Reserve exists to serve the private sector banks – by purchasing hundreds of billions of dollars worth of “toxic” mortgage backed securities (MBS). Being a private corporation, albeit one that’s often closely allied with the government, I doubt that the Federal Reserve relishes the prospect losing money on those MBS, so the question that arises is, what is the Federal Reserve’s exit strategy with regard to those MBS?
It seems to me that the best strategy would be to boost housing prices, dump the MBS and get the hell out of Dodge. Thus, such a strategy might partially explain why the government is helping to boost housing prices.
The U.S. Government is having a terrible time balancing its books. Its annual budget is in the neighborhood of $4 trillion, whereas tax revenue is in the neighborhood of $2 trillion. As an aside, the official deficit is claimed to be in the neighborhood of $1 trillion, leaving an additional apparent $1 trillion deficit unaccounted for. Interestingly, the national debt seems to increase by about $2 trillion per year, which reinforces the deficit implied by the first simple calculation. The government’s peculiar accounting methodology is not especially relevant to this essay, but it’s fun to poke fun at.
Regardless of whether the deficit is $1 trillion or $2 trillion or even $5 trillion if GAAP accounting methods are used (which requires accounting for “unfunded liabilities”), the fact remains that the U.S. Government has to come up with several trillion dollars a year to finance its budget. Traditionally, the government has been able to issue seemingly endless quantities of debt with which to finance itself, but private sector, and especially foreign government appetite for such debt is waning, which is why the Federal Reserve has been forced to purchase as much as 90% of the U.S. Government’s debt of late. Monetizing the debt in this latter fashion accelerates the debasement of the currency, worsening everybody’s financial picture, including that of the government. So the government is groping for alternative ways to finance itself, one of the most tempting being the multi-trillion dollar pool of retirement savings, particularly 401K plans, which are heavily stuffed with equities. It’s clear that there have been multiple discussions regarding how to go about “confiscating” 401K plans, and the most likely approach would be to substitute government debt in place of equities, which the government could then trade for much needed cash without debasing the currency. Of course, this substitution of government debt for equities would be justified under the guise of “protecting” the public from market volatility or some similar excuse, and like most government programs would begin with a foot in the door (or a nose in the tent if you prefer), with, say, a 10% allocation of funds in government debt, a ratio that could be increased any time the government needed more money.
Such a plan will yield the greatest amount of money the first time it’s employed because the value of everyone’s retirement fund to date is the sum total of many years’ worth of savings, whereas the annual contribution to the total is much smaller. So for such a plan to be effective it’s important that the value of 401K portfolios be as high as possible when the plan is effected, which could partially explain why there is so much pressure to boost stock prices. In addition, boosting stock prices to a peak and then allowing them to “crash” a bit would be precisely the sort of market volatility that would be used to justify substituting government debt for equities, and if the government enacts its confiscation scheme before stock prices fall too much, it can still profit from the scheme while stock prices are relatively high. Using the DOW index as an example, when the DOW was at 8,000 a few years ago, a 10% debt-for-equity substitution would have netted the government the equivalent of 800 DOW points, but if the DOW is pushed to 20,000 and then allowed to “crash” back to 16,000, then a 10% debt-for-equity substitution would net the government the equivalent of 1,600 DOW points, or twice the amount of money.
Of course, this scheme would yield a one-time benefit; after the one-time “jackpot,” additional annual retirement contributions, a fraction of which would presumably be forced into government debt, would generate negligible revenue for the government. Nevertheless, governments and central banks today are all about short-term, “can-kicking” measures, so a one-time benefit like that described above is consistent with recent behavior. Theoretically, once such a confiscation scheme is introduced, the percentage of retirement funds that must be plowed into government debt could be increased whenever necessary, until eventually people have further no incentive to contribute to their retirement funds.
Finally, a government scheme to substitute government debt for equities could even benefit the Federal Reserve because the scheme would create a new “market” for all those government securities that the Federal Reserve has been purchasing and which it would presumably like to dispose of someday.
Governments and corporations do things for a reason, and the reasons are not always what we in the public assume them to be. As President Franklin D. Roosevelt once said,
In politics, nothing happens by accident. If it happens, you can bet it was planned that way.
We are often surprised to discover after it’s too late that an initiative we assumed was benign was anything but. We live in a fascist world – that is, one in which the state and corporations are full-fledged partners – so it should not be the least bit surprising if the U.S. Government and the Federal Reserve were partners in a nefarious plan that serves their interests and not those of the citizens.