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Post I Would Have Turned Down Bernanke's Refinance Application
Created by John Eipper on 10/08/14 1:20 AM

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I Would Have Turned Down Bernanke's Refinance Application (David Duggan, USA, 10/08/14 1:20 am)

In response to John E's question (6 October) as to what loan officer in his right mind would reject former Fed Chairman Ben Bernanke's recent refi mortgage loan application, I would without reservation have done so, independent of any concerns over Bernanke's income prospects, collateral value or his prior refinancings. (In this latter respect, federal officials are not supposed to profit from their knowledge of economic prospects, and his 2011 refinancing on the heels of his 2009 refi, both when he was Fed Chairman, suggests some understanding of future interest rate swings which he almost unilaterally controlled. I have not heard of any investigation by the US Attorney, however.)

Let me explain.

Randy Black correctly notes that Bernanke's $885K home value is within acceptable loan-to-value limits of the $672K brick previously on his principal residence. But years ago before the "financial crisis" largely engineered by Bernanke, bankers used the "quick ratio" to determine whether a borrower was credit-worthy: your mortgage should not exceed three times your annual income, and Bernanke's $200K income was less than 30% of his $672K mortgage. (This is a variant of the saw that your housing costs should not exceed 25% of your income; the 8% difference [between one-fourth and one-third] is to account for taxes, utilities and insurance. As a residential landlord, I use this rubric in weeding out tenant applicants.) Since Bernanke is essentially self-employed now, he doesn't have the employment history to justify a loan outside this ratio.

But on a more fundamental level, the loan officer could have looked to Bernanke's performance in handling the "financial crisis," and determined that he and his bank wanted no part of his fecklessness. As an initial matter, this loan was outside the parameters for the GNMA/FNMA pool, so a private bank would have to book and carry the loan (although it could always lay off some of the risk to another financial institution). When history is written, it will be stated that Bernanke failed to realize that the problem of six years ago was limited to the real estate market and was not systemic in the economy, much like the dot.com turned dot.bomb bust was of 2000 was limited to Silicon Valley.

By viewing the problem as systemic rather than limited, Bernanke injected too much liquidity into the system (remember TARP), propping up non-economically productive sectors like AIG (remember credit default swaps) and rewarding the big banks who got us there with impunity, approving big bonuses for bad behavior. By bailing out some banks and not others, Bernanke played favorites with Wall Street over Main Street banks. The upshot is that the miscreants (Jamie Dimon, are you listening?) are still minding the store, and while interest rates have remained low, the only economic activity is mergers and acquisitions, predicated on shuffling the deck, rather than investing in new plant and equipment. The illusory reduction in the unemployment rate is countered by the record low "labor participation rate." Millions have absented themselves from the labor market and are off the Bureau of Labor Statistics' radar screen.

Everyone's a critic, you say, and what would I have done? 1) Let AIG fail: it was a hedge fund masquerading as an insurance company. Who cares. Insurance companies routinely fail and the world doesn't end. 2) Require every holder of a post-2004 mortgage to write down his asset by 25%, and reduce the mortgagee's required payment by 25%. This would have eliminated the foreclosure crisis that has hobbled whole swaths of housing in Stockton, CA, Cleveland, and the South Side of Chicago. The banks and other institutions that took this haircut would of course cry unfair, but remember, they got us there with their "ninja" loans (no income, no job, no [provable] asset). 3) Keep interest rates at a moderate 3%, rather than reduce them to below the rate of inflation. Nobody's going to lend money if there's no prospect for return, and the only lending going on is to governments which have the taxing power and leveraged buyout artists who can strip the assets to pay the note or plunge the company into bankruptcy and let the court do it for them.

The irony is that Bernanke was supposedly a historian of the "Great Depression," and was keen not to repeat its mistakes. He thought that the Depression was caused by an absence of liquidity, rather than an agricultural production crisis (remember the Dust Bowl) exacerbated by a tariff war (remember Smoot-Hawley). Six years into the most tepid recovery in history, it has taken a loan officer at some bank to realize that Bernanke was a fraud and gave him his come-uppance.

JE comments:  David Duggan's hypothetical decision is based part on mortgage fundamentals and part on payback for Bernanke's role in the crisis.  As a result David has put together an impressive analysis of the 2008 mess and aftermath.  I hope WAISers will send their comments.

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  • Bernanke, and Bernanke on the Great Depression (Robert Whealey, USA 10/12/14 3:41 AM)
    David Duggan (8 October) is sound in exposing the sins of the fraudulent banker Ben Bernanke. He permitted overspeculation in debts of false insurance companies and banks with false notes declared as collateral. But David still has not gotten at the root causes of the world's depression. These were explained by John Maynard Keynes:

    1. Too much global debt, caused by World War I, the German Reparations, the Russian Revolution, the false pride of the British, French and American banks in hanging on to the gold standard of 1914. The French devalued in 1928, the British devalued in 1931 and the US in 1933.

    The Germans devalued in stages--1922, 1928, 1933 and went completely to paper money in 1933. Hitler's reichsmark was declared void by the Big Three in 1945-1948. The new deutsche mark at 4.2 DM to the gold dollar was fixed at the 1914 gold exchange rate.  The new fixed gold-exchanged standard worked from 1949 to 1971, because the US government was willing to refinance a rearmed Germany to help them defend Western Europe from the alleged, possible threat of the USSR. From 1971 the American military spending on the arms race caused the American debts to rise faster than those of the Germans and Japanese.

    In 1989-1991 we have a new ball game of speculation which led to the global crash of 2005-2009.

    We now have China as a potential Great Power. But global warming seems to be destroying the oxygen necessary for the Chinese industrial revolution as fast as the US and EU are destroying the Western half of the globe's weather.

    Vote for peace. War destroys land, labor, capital and human lives.

    JE comments:  Bernanke's studies on the Great Depression led him to inject massive amounts of money into the economy after the 2008 meltdown.  Arguably this act staved off the Second Great Depression (I stress "arguably.")  My question is historical:  why didn't it occur to Hoover to stimulate the economy (provide liquidity) in 1930-'31?  Was it politically impossible to do so?  Was there fear that the United States would descend into hyperinflation, as Germany did ten years earlier?  Or was printing money just not something Americans did?

    Finally, a question for Robert Whealey:  China is in the economic doldrums, but isn't it already a Great Power?

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