... mania ran wild this week as saga continues for the greatest bubble ...
The Hemingway Table
Discussion du Jour: US Financial Markets
David Tice
The Prudent Bear Fund
ticed@prodigy.net
October 23, 1999
The Federal Home Loan Bank System
What can we say; it was one tough week for us bears...
... This is a market that
continues to be characterized by dislocated and unhealthy trading
action. As such, the bottom line is that the mania ran wild this week
as the saga continues for the greatest bubble of all time.
On November 13, 1931, in the midst of a crumbling financial system and
an economy having lurched into the Great Depression, President Herbert
Hoover proposed the establishment of a Federal Home Loan Bank System,...
In his memoirs, Hoover wrote, "All depressions unduly lower equity
values and thus jeopardize honest holdings of property that may be under
mortgages. Also, bankruptcy can end the life of an important productive
agency. Beyond this, mortgage foreclosure can bring the greatest of
tragedies to home life."
"These (Federal Home Loan) banks were for the purpose, with the
temporary assistance of the Government, of mobilizing the resources of
building loan, savings banks, and other institutions devoted to home
ownership to enable them to borrow collectively on more favorable terms
from the investor, and to assure to the borrower long-term payments at
more reasonable rates...
... But typical of well-intentioned government
initiatives and programs, they instinctively take on a life of their
own, and as the original charter is outlived, a new one is created.
Today, "the mission of the Federal Home Loan Bank System is to provide
access to housing for all Americans and to improve the quality of their
communities by extending credit through its more than 7,100 member
financial institutions." They do this by borrowing in the capital
markets and using these borrowed funds to make low interest rate loans
to member financial institutions, that then use these funds to make home
loans or purchase mortgage securities. More than half our country's
commercial banks are members of the FHLB.
Today, with the economy booming and an overabundance of inexpensive and
easily obtained mortgage finance available to virtually anyone, it would
appear reasonable to expect that the Federal Home Loan Bank System would
have little role to play. Well, as is all too commonplace throughout our
financial system, the concept of what is "reasonable" is rather
irrelevant. Indeed, for the past year the FHLB has extended credit more
aggressively than ever before...
...Amazingly, the FHLB ended June with $486 billion of total assets,
having tripled in less than 7 years... Clearly, the FHLB system
has been a key player fueling the American credit bubble...
An article in the American Banker stated, "Amid concern that bank
deposits are not growing enough to cover loan demand, bankers are urging
their peers to back legislation that would expand the Federal Home Loan
Bank System." This is outrageous, although it does illustrate how out of
control this all has become. Unbelievably, in the midst of an historic
financial and economic bubble there is a push to make it easier for
banks to access funds from the FHLB; with less stringent collateral
requirements and the ability to fund agricultural, small-business and
community development loans. Interestingly, stagnant bank deposit...
... Well, nothing like a stock market bubble becoming justification for
increasing the role of a government-sponsored lending institution.
... this institution, created after the bursting of the 1920's bubble,
is now a major force fueling the 1990's bubble.
Today, it is most critical to recognize the powerful role now played by
the "Government-Sponsored Enterprises," largely the Federal Home Loan
Bank System, Fannie Mae and Freddie Mac. While their original mandate
was to provide lending to homeowners during a deep credit contraction,
they have evolved to become the dominant institutions providing an
ongoing flow of financial market liquidity, ensuring sufficient fuel is
purveyed to perpetuate a dangerous financial and economic bubble...
And now this year these institutions proceed completely unrestrained
in perpetrating the greatest credit creation fiasco in history. And,
amazingly, no one, including the Federal Reserve, raises an eyebrow.
Sure, credit bubbles provide one wild party as they fuel a stock market
mania and economic boom. Unfortunately, they also work insidiously to
destroy the foundation of financial systems and economies. Moreover, the
greatest damage is rendered at the end of the credit cycle, during what
we refer to as the "terminal" phase of credit excess. It is at that time
that endemic speculation and dangerous economic distortions grow
exponentially along with credit. This "terminal" phase began last year
and continues to this day with the strong support of
Government-Sponsored Enterprises.
If President Hoover were alive today, he would certainly be mortified...
... role now played by the Federal Home Loan Bank System that he himself
created... Hoover stated that he understood clearly that the Federal
Reserve had "deliberately created credit inflation" during the 1920's.
Well, today we replay this momentous policy blunder as Fannie Mae,
Freddie Mac and the Federal Home Loan Bank System assist the mighty
Federal Reserve with history's greatest credit inflation...
... this extraordinary period of bullish propaganda and misinformation.
The Hemingway Table
Discussion du Jour: US Financial Markets
The Federal Home Loan Bank System
David Tice, The Prudent Bear Fund, ticed@prodigy.net, October 23, 1999
Bill Murphy, Chairman
Gold Anti Trust Action (GATA) gata.org
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