Power & Market
Government breaks things. Then it often rides in on a white horse promising to “fix” the very things it broke.
In the latest example of government claiming it will solve a problem it created to begin with, President Joe Biden has committed to fixing the rising cost of meat.
Overall, meat prices have climbed 16 percent over the last year. Beef prices are up 20.9 percent. Biden says the problem is a lack of competition in the meatpacking industry.
“Capitalism without competition isn’t capitalism—it’s exploitation,” Biden said.
According to a factsheet released by the Biden administration, four processing companies control 85 percent of the beef market. The largest four firms control 70 percent of the pork market and 54 percent of the poultry market.
The Biden plan is to distribute $1 billion in coronavirus relief funds to help independent meatpackers expand their businesses. According to the AP, the plan would also allocate funding to train workers in the industry and improve conditions. The administration would also issue new rules for meatpackers and labeling requirements for being designated a “Product of USA.”
But a question remains—how did a few big corporations come to dominate the meatpacking industry? Biden and other supporters of federal intervention into the economy would have you believe it’s just the inevitable march of capitalism. Greedy corporations get bigger and bigger and swallow up the “little guy.” If you believe this narrative, high meat prices stem from corporate greed and the inherent evils of the free market.
But it wasn’t “capitalism” or the greedy corporations that caused this consolidation in the meatpacking industry. It was the federal government.
The Wholesome Meat Act of 1967 mandates meat must be slaughtered and processed at a federally inspected slaughterhouse, or in a facility inspected in a state with meat inspection laws at least as strict as federal requirements. Small processors found it difficult if not impossible to meet the federal requirements. The cost was simply too high. Of course, large corporations can bear regulatory costs. As a result, the meat processing industry went through massive consolidation after the enaction of this act.
Since the passage of the Wholesome Meat Act, the number of slaughterhouses dropped from more than 10,000 to 2,766 in 2019. Today, instead of hundreds of companies processing meat, three corporations control virtually the entire industry.
Federal law also prohibits the interstate sale of custom processed meat—meat from an animal slaughtered and processed at a facility where an inspector is not required to be present to observe the slaughtering and conduct an ante mortem and post mortem inspection of the animal.
We constantly hear about supply chain issues due to the coronavirus pandemic. (More accurately, government response to the pandemic.) But the lack of adequate processing capacity due to consolidation was already causing supply issues back in 2015. A report by the Farm-to-Consumer Legal Defense Fund sounded the warning at that time.
“The bottleneck caused by the lack of slaughterhouses has frustrated small livestock operations in getting their products to market and has led to an inability to meet the overall demand for locally produced meat. The 1967 Act has been one of the worst laws ever passed for local food; what’s more, it was known from the beginning that the Act would have the effect it did.”
The impact on small meat processing businesses was apparent within years of the passage of the act. In 1971, the Small Business Administration (SBA) presented a paper to the United States Senate Select Committee on Small Business titled: “The Effects of the Wholesome Meat Act of 1967 upon Small Business—A Study of One Industry’s Economic Problems Resulting from Environmental-Consumer Legislation Prepared by the Small Business Administration.” The paper warned that the cost of compliance would have adverse impacts on small-scale slaughterhouses and packing plants, saying “the Wholesome Meat Act was as much of a disaster for many small meat firms as a hurricane.”
[T]he meat industries are among the more competitive in the American economy. But the Wholesome Meat Act could lead to a significant diminution of competition. How many firms would have to shut down because they could no longer compete due to the new law? … Would the Wholesome Act lead, however unwittingly, to an undesirable increase in concentration in the meat industries? Questions such as these, highly fundamental questions, were barely raised during the legislative process.
It comes as no surprise that these regulations caused a massive consolidation of the meat processing industry. And it’s no surprise that this consolidation has led to supply chain breakdowns. Centralized systems are brittle systems. They lack redundancy. They lack escape valves. They are prone to fail under stress. This is true of supply chains, economies and governments.
In other words, this was entirely predictable.
But now Biden wants to fix what the federal government broke by throwing more money at it.
Here’s an idea: why not just do away with federal control?
Supporters of federal intervention will scream “Safety!” But if the Wholesome Meat Act was really about food safety, it doesn’t even deliver on its own terms.
By concentrating meat processing in relatively few facilities, the likelihood of widespread contamination increases. A single sick cow can infect thousands of pounds of beef in one of these corporate slaughterhouses. In a more diversified, decentralized system, outbreaks generally remain limited to small regions. Farm-to-Consumer Legal Defense report said, “The Wholesome Meat Act has not led to the production of safer meat today; there are more recalls than ever for positive pathogen tests in meat products.” You seldom saw nationwide recalls in the era of diversified meat processing.
More generally, states with “food freedom” laws that allow small producers to sell food outside of the established regulatory structure have not seen increases in foodborne illnesses. According to Forbes, representatives from health departments in Wyoming, North Dakota and Utah reported exactly zero outbreaks of foodborne illnesses connected to a business operating under a food freedom law. Meanwhile, “Last year, the Centers for Disease Control and Prevention investigated and advised the public on 24 multistate outbreaks of foodborne illness, the highest in over a decade, with federally regulated romaine lettuce, chicken salad, and even Honey Smacks Cereal all linked to outbreaks that hospitalized Americans.”
In a sense, Biden is correct—the U.S. needs more players in the meat industry. But the government created the problem and there is zero self-reflection or ownership of responsibility. Only promises to fix what the feds already broke.
Even better, this is despite Hoppe's book—unfortunately not published by the Mises Institute—being priced at over $40 and the fact that there are very few college professors forcing the book on their students. This is a testament to the power of Austro-libertarian thought. The Mises Institute is often attacked by agents of the establishment—ranging from Big Tech to left-wing groups and even some nominally libertarian organizations—because it is our ideas that are uniquely dangerous to the regime. Our scholars' willingness to stand unapologetically in their defense of civilization—just as Ludwig von Mises did in 1930s Vienna—is what makes us a threat.
Going into 2022 in particular, the ideas of the Austrian school have never been more critical.
- When inflation has become a daily kitchen-table issue, it is economists like Bob Murphy, Thorsten Polleit, and Daniel Lacalle that have the answers to deal with the Fed and the dollar seriously.
- When "national divorce" is trending on Twitter, it is Mises Institute scholars like Ryan McMaken and Jeff Deist have been leading voices in defense of political decentralization.
- When tens of millions of Americans recognize that the federal regime is not actually "by the people, for the people," it is intellectuals like Murray Rothbard and Hoppe that provide clarity in understanding that democracy is a facade that empowers a parasitic elite to enrich itself at the expense of the productive class.
Even more important, this is happening at a time when millions of Americans are recognizing the consequences of our government-controlled education system and looking for alternatives. Already, we've seen incredible increased demand in tools like Mises University, Economics for Beginners, and Bob Murphy's textbook Lessons for the Young Economist. We expect even more in 2022.
(Also, if you don't want to drop $40 for Hoppe's Democracy, the Mises Institute has published a free audiobook version—available on all major podcast platforms. This is the sort of content we can offer only because of our incredible donors.)
With one week left in the year, it’s time to take a look at America’s financial system as visualized through various Federal Reserve charts. This is the follow up from 2020: A Visual of the System, published this time last year.
Total Assets - $8.790 trillion
America’s central bank now owns nearly $9 trillion worth of assets, an increase of almost $1.4 trillion for the year. The Fed’s balance sheet might sound official, but it’s more of a euphemism to describe the money creation process more than anything else. Ultimately, the Federal Reserve System created over a trillion dollars and unleashed it into the world, with most going to the purchase of various debt instruments.
Securities Held Outright: U.S. Treasury Securities - $5.650 trillion
An increase of just under $1 trillion in the year, and the Fed remains one of America’s largest debt holders. At year end, US debt stands at $29.4 trillion ($27.5 trillion last year). This leads to an interesting comparison: The national debt increased by approximately $2 trillion versus the Fed’s holding of US debt which increased by approximately $1 trillion.
Securities Held Outright: Mortgage-Backed Securities (MBS) - $2.650 trillion
Mortgage debt owned by the Fed increased by only half a trillion. While not the largest increase on the balance sheet, $500,000,000,000 is still a lot of money! It’s fair to say that few people understand MBS, fewer know where this money is going, and even fewer can name the prime beneficiaries of this government intervention. Over a decade since the housing crash, this may be another of those indefinite temporary measures.
The MBS balance combined with the US Treasury Security balance means that $8.3 trillion is owed to the Fed. It’s an unfathomable sum of money, and likely the reason an asset reduction strategy by the Fed is seldom discussed. Should a time come when the Fed starts selling securities or letting the balance sheet run-off, i.e., letting securities mature and not buying new ones, drastic changes to interest rates will more than likely occur.
M2 - $21.187 trillion
The money supply increased by nearly $2 trillion from a year ago. The Fed plays a significant role in the money creation process, but commercial banks also have an important role to play. Perhaps an empowering thought for the individual, because each time you make a deposit or withdrawal, or anytime you use a loan to buy anything, from a house, to bitcoin or stocks, you too are contributing to fluctuations in the money supply.
Currency in Circulation - $2.212 trillion
For all the trillion dollar increases to money supply and asset purchases, currency in circulation only increased by $100 billion from this time last year. When compared to the M2 money supply, the actual notes and coins in circulation only amount to 10%. The dollar went digital a very long time ago, existing mostly on computer mainframes and general ledgers.
If enough people went to the bank and demanded their money, it would become quickly apparent that their money is not available.
As 2021 winds down, not much more can be said. There have been no substantial changes to the debt-based money creation mechanism which ensures all goods, services and assets perpetually increase in price. The inevitable boom and bust cycle this monetary expansion causes is still in effect, so it’s only a matter of time, being the when, not the if, the bust happens. Until then, one can try to think of ways to prepare or profit off of making accurate predictions.
Good luck in 2022.
People who know anything at all about the demographic history of the US know that the life expectancy at birth in the United States was significantly lower in the 1940s than it is today. In fact, this is somewhat common knowledge because most people know—or at least suspect—that if you got cancer or had a heart attack or stroke in the 1940s, you would probably die a short time later. Many also know that child mortality was also higher in the mid-twentieth century.
In fact, the life expectancy, according to the CDC, was 65.9 years in 1945, the year World War II ended. In 2020, life expectancy was 77 years.
But you don't exactly have to read textbooks on this sort of thing to have a sense of it. Just talk to your grannie or abuelita who might mention her siblings who died as young children. Yet this sort of common sense is apparently beyond the abilities or skill set of the journalists at The Daily Caller who recently ran a headline stating: "US Life Expectancy Drops To Lowest Level Since Second World War." And lest we think it was just the editor who hurriedly wrote a bad headline, the same mistake is repeated in the first paragraph which reads:
The U.S. life expectancy dropped to its lowest level since World War II in 2020, multiple sources reported.
This "fact" is so obviously wrong it's a wonder that an editor let it go out the door. With a life expectancy of 77 years in 2020, that means US life expectancy did not come within even ten years of modern life expectancy until 1948. In 1948, the life expectancy at birth was 67.2 years. Moreover, this metric didn't crack 70 years until 1961.
Here's what the actual life expectancy at birth has been historically in the United States:And here's how much life expectancy at birth has changed over the last 20 years. It's not much at all thanks to continued thanks continued issues of obesity, drug addiction, diabetes, and suicide:
But perhaps in the age of covid, reporters are willing to believe pretty much anything so long as it makes covid look like the bubonic plague of the 1340s. Indeed, had life expectancy actually fallen to WWII levels in 2020, that would have meant a decline of nearly ten years which would have been the worst since the flu of 1918, when life expectancy fell by 11 years. From 2019 to 2020, the decline was 1.8 years.
In the latest New York Times Book Review Wes Enzinna reviews Michael Shellenberger's San Fransicko: Why Progressives Ruin Cities. Mr. Enzinna, who is critical of the book, acknowledges that one in one hundred of San Francisco's residents is homeless. Nevertheless, not surprisingly for a New York Times book reviewer, he calls the book a failure and claims that Mr. Shellenberger is waging a culture war. He concludes his full page review by claiming that "A proper accounting of California's housing and homeless crisis remains to be written." Although this may not satisfy Mr. Enzinna any more than did the book by Mr. Shellenberger, I know what's wrong with San Francisco. But before I give you the answer, let me tell you a story.
One of my favorite movies is Twelve O'clock High, a World War II story of a hard luck B-17 squadron in England early in the war. The squadron commander is called onto the carpet by the wing commander, his boss, to find out why this squadron isn't achieving its goals as are most of the other B-17 squadrons under his command. He hears a long litany of troubles: bad weather, maintenance problems, sick aircrew, heavy defenses near the target, etc. Finally the squadron commander leaves and the wing commander turns to his adjutant, General Frank Savage, played by star Gregory Peck, who sat quietly during the meeting, and asks his opinion of what's wrong. General Savage says that what's wrong is what's always wrong--poor leadership. The squadron commander is a good guy--personally courageous, caring, etc--but he identifies and empathizes too much with his men. This has led to failure to hit the target, which means that his squadron must expose itself repeatedly to enemy fire to accomplish a job that should require fewer missions. This leads to even more losses and mission failure. The wing commander agrees, fires the squadron commander, and places the adjutant in charge of the squadron. The rest of the movie details the sometimes difficult steps that the new squadron commander must take to fix his squadron. Some crew are relieved of duty and sent home to the States in disgrace. Others are demoted from intermediate command within in the squadron. But some are promoted. Eventually what appears to be a brutal house cleaning plus many other changes leads to success. But the process was not without pathos. Watch the movie and see why.
So, what's wrong with San Francisco? The answer is simple. Leadership. Mr. Enzinna is like the failed squadron commander at the beginning of "Twelve O'clock High". Like many others, he identifies and empathizes with the homeless and rationalizes the failures of San Francisco's leaders to deal with the problem as something caused by a lack of a "proper accounting". But San Francisco is no different than other, more successful, American cities of its size. Geographically it sits in one of the most hospitable parts of the country. It lacks for nothing in the way of resources, of which untold millions have been lavished upon it. The growing homeless have been tolerated, much to the chagrin of the other ninety-nine out of a hundred residents . Therefore, San Francisco needs to change leaders. In "San Fransicko" Mr. Shellenberger may not be offering the policy answers that will work, but he's pointing out the obvious; i.e., current leadership will not solve San Francisco's homeless problem. New leadership is required. Notice that, like the wing commander mentioned above, I do not deign to know what policies will work. I just know that the past and current leaders have failed and that new leadership is needed. There is no other option.
The change process probably will not please everyone. Nevertheless, as General Frank Savage says, the problem is always the leader.
There is a circulating meme illustrating the mainstream media bias towards the current wave of (price) inflation. Inflation is first and foremost an economic issue. When it comes to unilaterally increasing the prices of all goods and services, and creating asset bubbles, increasing the money supply is the best way to achieve this. Yet the media shows little understanding here. Links to the articles are included below:
The Washington Post article positions the inflation narrative as a partisan issue, referring to the Republican party:
They’re citing the specter of “Bidenflation” to derail the progressive agenda.
When inflation is considered from an Austrian economic standpoint, no targeted amount of annual inflation is deemed necessary, no matter which political party is in power. The word Bidenflation could easily have been Trumpflation if Trump presided over the same inflationist policies. Currency debasement might mean one has more money in their pocket. But if that money buys less, it can hardly be called a sound economic policy.
The Forbes article uses quotes, stats and charts all geared towards telling us to not worry about inflation, saying:
The 2021 Inflation Scare is another in a series of false alarms going back several decades. It may not quite qualify as Fake News, but it is close.
Calling concerns over inflation as fake news also doesn’t qualify as an economic argument. Looking back several months later, the article turned out to be a bad prediction and was hardly informative.
CNBC didn’t make as bold of a prediction about inflation, but misunderstands it, making it sound like inflation is something the Fed controls at the push of a button:
The Fed likes to keep inflation around 2% but said it is willing to tolerate even higher readings if the longer-term average stays around that level and the economy has not yet achieved full and inclusive employment.
Citing the arbitrary 2% inflation target is one thing, but the second half of the quote delivers a barrage of talking points, referring to both inclusivity and the dual mandate trade-off (of inflation and unemployment). Strange because the St. Louis Fed noted there is no correlation between the two, calling it a: Cloud of Points.
The pinnacle of absurdity is achieved by MSNBC. The quote from the meme is taken from a tweet made for the article: How Covid became the unlikely hero of our inflation crisis.
FOX News covered the story, saying:
Critics blasted the column after MSNBC shared it on Twitter writing "Why the inflation we're seeing now is a good thing."
Understandably, MSNBC went on damage control, deleting the tweet and replacing it with this:
Despite the original tweet being deleted, the article offers an incredible display of mental gymnastics:
Even though millions of Americans lost their jobs, enhanced unemployment benefits and stimulus payments left many of them better off, not worse. And the stock market, after initially falling, boomed.
The result of all this was that Americans ended 2020 $13.5 trillion richer than they were at the beginning of the year. Most of that wealth increase went, of course, to the already wealthy. But lower-income households benefited, too.
It’s difficult to argue with someone who claims Covid is the unsung hero, or that Americans are better because of it. And even though MSNBC has since scrubbed the tweet from existence, its memory will continue to live on in cyberspace through a clown meme.
Unfortunately, the mainstream media continues to show lack of a basic understanding with the cause and effects of monetary expansion, spinning inflation to meet its narrative using fallacies or economic dogma. The meme is more clever than kitsch, but who are the real clowns? Or is the entire State apparatus just one big circus at this point?
Is the problem the Federal Reserve who puts these ideas in the minds of the people? Or is it the mainstream news outlets that employ authors who know very little about economics? The Fed says one thing. The media questions nothing. And mainstream academia stays silent on everything. Congress and Wall Street are all that’s left and they are laughing all the way to the bank.
As Americans transition into 2022, many people will consider making New Year’s resolutions. If history is any guide, however, little of their focus will be on addressing the cognitive dissonance between personal resolutions to be good and do good for others and the many political resolutions to harm others to feather one’s own nest that always attract substantial support. Such reflection might benefit us by improving both our personal and political behavior. So perhaps what we could use are new years’ resolutions to recommit ourselves to wisdom we seem to have forgotten.
A good example comes from Leonard Read’s “To Each His Own,” written over a half century ago in his Accent on the Right. Its focus was that the biggest problems that arise with government, as well as some of the biggest problems we face as individuals, trace back to violating the commandments not to covet and not to steal, because coveting provides the impetus for seeking to benefit ourselves at others’ expense and stealing is the action triggered by that covetousness.
The prevention of such violations is a central task of government, which can advance the general welfare by more effectively protecting all of our property from invasions by others, which better enables all the voluntary relationships property rights make possible. This is illustrated by the few enumerated functions of our federal government (e.g., national defense is protection of you and your property from foreigners), as well as the traditional functions of state and local governments (e.g., police, courts and prisons provide similar protection from your neighbors’ violations). But unfortunately, government has become a supposedly “respectable” way to violate what its job is to defend.
Consider Leonard Read’s insights into the importance of those two commandments for the existence of, or advances in, real civilization.
THOU shalt not steal! To know that stealing is wrong…implies knowledge of an alternative that is right…to each his own, usually referred to as private ownership. The ancient taboo against stealing presupposes that an individual has a right to the fruits of his own labor.
Recognizing as evil the taking of that which belongs to another certainly antedated The Decalogue by many centuries.
There is every reason to believe that the observance of this taboo, this respect for the principle of private ownership, marked the dawn of civilization. Whether this thou-shalt-not is honored or breached primarily determines the rise or fall of civilization.
True, “thou shalt not covet” is even more basic than “thou shalt not steal”; if no one coveted the possessions of another, there would be no thievery.
To refrain from stealing is the genesis of civilizations!...First, civilizations rise and fall with the rise and fall of individual freedom. Second, individual freedom rises and falls to the degree that private ownership--the absence of stealing--is respected and adhered to. Individual freedom is out of the question wherever and whenever private ownership does not prevail!
Creative outbursts--the mark of civilization--bear a direct correlation with increase in individual freedom.
This private ownership thesis rests, fundamentally, on [the] assumption…that one person has as much right to his life as any other. If an individual has a right to his life, it logically follows that he has an equal right to sustain his life, the sustenance of life being the fruit of one’s own labor or what can be obtained for it in peaceful exchange.
Not to steal is to respect life; it is to endorse and to hold sacrosanct the institution of private ownership.
No civilization could be born without the observance of this taboo. The institution of private ownership--to each his own--has spawned all civilizations!
Were [thievery] the general practice, we would quickly descend into another dark age. A resort to law would be useless; the gendarmerie also would be thieves!
While the institution of private ownership has been given lip service over the centuries, by the people and governments alike, actual observance has been more of form than of substance.
Few among us understand that private ownership can be universally endorsed in principle and completely obliterated in practice. Nor is it widely understood that the forcible taking of income, beyond that required for the principled functions of government, has the same eroding effects on private ownership as stealing. Legalizing the compulsory transfer of control still amounts to the destruction of private ownership.
Realize that individual freedom and, thus, the flowering of civilization are possible only where private ownership prevails. Merely imagine owning absolutely nothing required for your own livelihood. Your life would be in the hands of others.
Leonard Read saw the twin sins of coveting and theft as the greatest threats to real civilization. The latter, motivated by the former, undermines the fundamental basis of the voluntary arrangements that create civilization--private property. As a result, he recognized that the essential function of government was to maintain the principle of “to each his own,” and that any time government fails to defend that principle from others’ invasions, or itself commits such infringements, it impedes rather than advances civilization. That is “a fundamental maxim for civilized men,” reflected in the unalienable rights of our Declaration of Independence, a “new world” resolution that was to define American government. Supporting that far older resolution, increasingly violated rather than followed, would make an excellent resolution for the new year.
Should the government subsidize buying houses that cost $1.2 million? The answer is obviously no. But the government is going to do it anyway through Fannie Mae and Freddie Mac. The Federal Housing Finance Authority (FHFA) has just increased the size of mortgage loans Fannie and Freddie can buy (the “conforming loan limit”) to $970,080 in “high cost areas.” With a 20% down payment, that means loans for the purchase of houses with a price up to $1,212,600.
Similarly, the Federal Housing Administration (FHA) will be subsidizing houses costing up to $1,011,250. That’s the house price with a FHA mortgage at its increased “high cost” limit of $970,800 and a 4% down payment.
The regular Fannie and Freddie loan limit will become $647,200, which with a 20% down payment means a house costing $809,000. The median U.S. price sold in June 2021 was $310,000. A house selling for $809,000 is in the top 7% in the country. One selling for $1,212,600 is in the top 3%. To take North Carolina for example, where house prices are less exaggerated, an $809,000 house is in the top 2%. For FHA loans, the regular limit will become $420,680, or a house costing over $438,000 with a 4% down payment—41% above the national median sales price.
Average citizens who own ordinary houses may think it makes no sense for the government to support people who buy, lenders that lend on, and builders that build such high-priced houses, not to mention the Wall Street firms that deal in the resulting government-backed mortgage securities. They’re right.
Fannie and Freddie, which continue to enjoy an effective guarantee from the U.S. Treasury, will now be putting the taxpayers on the hook for the risks of financing these houses. Through clever financial lawyering, it’s not legally a guarantee, but everyone involved knows it really is a guarantee, and the taxpayers really are on the hook for Fannie and Freddie, whose massive $7 trillion in assets have only 1% capital to back them. FHA, which is fully guaranteed by the Treasury, has in addition well over a trillion dollars in loans it has insured.
By pushing more government-sponsored loans, Fannie, Freddie, its government conservator, the FHFA, and sister agency, the FHA, are feeding the already runaway house price inflation. House prices are now 48% over their 2006 Housing Bubble peak. In October, they were up 15.8% from the year before. As the government helps push house prices up, houses grow less and less affordable for new families, and low-income families in particular, who are trying to climb onto the rungs of the homeownership ladder.
As distinguished housing economist Ernest Fisher pointed out in 1975:
[T]he tendency for costs and prices to absorb the amounts made available to prospective purchasers or renters has plagued government programs since…1934. Close examination of these tendencies indicates that promises of extending the loan-to-value ratio of the mortgage and extending its term so as to make home purchase ‘possible for lower income prospective purchasers’ may bring greater profits and wages to builders, building suppliers, and building labor rather than assisting lower-income households.
The reason the FHFA is raising the Fannie and Freddie loan-size limits by 18%, is that its House Price Index is up 18% over the last year. FHA’s limit automatically goes up in lock step with these changes. These increases are procyclical acts. They feed the house price increases, rather than acting to moderate them, as a countercyclical policy would do. Procyclical government policies by definition make financial cycles worse and hurt low-income families, the originally intended beneficiaries.
The contrasting countercyclical objective was memorably expressed by William McChesney Martin, the longest-serving Chairman of the Federal Reserve Board. In office from 1951 to 1970, under five U.S. presidents, Martin gave us the most famous of all central banking metaphors. The Federal Reserve, he said in 1955, “is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
Long after the current housing price party has gotten not only warmed up, but positively tipsy, the Federal Reserve of 2021 has, instead of removing the punch bowl, been spiking the punch. It has done this by, in addition to keeping short term rates at historically low levels, buying hundreds of billions of dollars of mortgage securities, thus keeping mortgage rates abnormally low, and continuing to heat up the party further.
In fact, the government has been spiking the housing party punch in three ways. First is the Federal Reserve’s purchases of mortgage securities, which have bloated its mortgage portfolio to a massive $2.6 trillion, or about 24% of all U.S. residential mortgages outstanding.
Second, the government through Fannie and Freddie runs up the leverage in the housing finance system, making it riskier. This is true of both leverage of income and leverage of the asset price. It is also true of FHA lending. Graph 1 shows how Fannie and Freddie’s large loans have a much higher proportion of high debt-to-income (DTI) ratios than large private sector loans do. In other words, Fannie and Freddie tend to lend more against income, a key risk factor.
Graph 1: Percent of loans over 43% DTI ratio
Fannie and Freddie also make a greater proportion of large loans with low down payments, or high loan-to-value (LTV) ratios, than do corresponding private markets. Graph 2 shows the percent of their large loans with LTVs of 90% or more—that is, with down payments of 10% or less—another key risk factor.
Graph 2: Share of loans with LTV ratios over 90%
Now—on top of all that– the FHFA, by upping the loan sizes for Fannie and Freddie, is bringing to the party a bigger punch bowl. That the size limit for Fannie and Freddie is very important in mortgage loan behavior, we can see from how their large loans bunch right at the limit, as shown by Graph 3.
Graph 3: Distribution of loans relative to limit
The third spiking of the house price punch bowl consists of the government’s huge payments and subsidies in reaction to the pandemic. A portion of this poorly targeted deficit spending money made its way into housing markets to bid up prices.
A key housing finance issue is the differential impact of house price inflation on lower-income households. AEI Housing Center research has demonstrated how the spiked punch bowl has inflated the cost of lower-priced houses more than others. This research shows that rapid price increases crowd out low-income potential home buyers in housing markets. Thus, as Ernest Fisher observed nearly 50 years ago, government policies that make for rapid house price inflation constrain the ability to become homeowners of the very group the government professes to help.
In general, what a robust housing finance system needs is less government subsidy and distortion, not more. The question of upping the size of Fannie and Freddie loans, and correspondingly those of the FHA, is part of a larger picture of what the overall policy for them should be. Should we favor making their subsidized, market distorting, taxpayer guaranteed activities even bigger than the combined $8 trillion they are already? Should they become even more dominant than they are now? Or should the government’s dominance of the sector and its risk be systematically reduced? That would be a movement toward a mortgage sector that is more like a market and less like a political machine.
In short, what about the future of the government mortgage complex, especially Fannie and Freddie: Should they be even bigger or smaller? We vote for smaller.
How might this be done? As a good example, Senator Patrick Toomey, the Ranking Member of the Senate Banking Committee, has introduced a bill that would eliminate Fannie and Freddie’s ability to subsidize loans on investment properties, a very apt proposal. It will not advance with the current configuration of the Congress, but it’s the right idea. Similarly, it would make sense to stop Fannie and Freddie from subsidizing cash-out refis, mortgages that increase the debt on the house. Another basic idea, often proposed historically, but of course never implemented, would be to reduce, not increase, the maximum size of the loans Fannie and Freddie can buy, and by extension, FHA can insure.
In the meantime, the house price party rolls on. How will it end after all the spiked punch? Doubtless with a hangover.
This December’s Federal Open Market Committee (FOMC) meeting might be the last time we get to hear a Q&A session from Chair Powell this year. The Q&A is televised, with the transcript presented on the central bank's website, and continues to provide invaluable knowledge into the mind of one of the most powerful men in America. Of all the quotes Powell gave us this year, the one below stands as one of the best. Said near the conclusion of the December meeting, on p.26 of the transcript reads:
What I'm saying is there's a sense among some that you wanted inflation, this is what you wanted, how do you like it, you know?
It’s recommended to read the entire one-page dialogue that accompanies the above quote, if nothing else to see first hand how discombobulated answers are preferred over honest ones.
Powell responded to a reporter asking him what he meant earlier when the Chair said they were not getting the inflation the Fed anticipated. The reporter asked if the inflation is a result of all the stimulus.
After responding that inflation is what some people wanted, Powell followed with (excuse his grammar):
And the truth is, this is not the inflation that we were -- that what we were talking about in the framework was inflation that comes from a tight labor market, right?
He doesn’t make clear what exactly the right type of inflation is. Then the speech digresses line after line of muddled half-thoughts between inflation and employment from there. It’s sad to say, but his explanations are not coherent. For the sake of brevity, the quotes aren’t included. But he ends with defending the Fed’s actions for the benefit of the country. As explained:
And what's coming out now is, you know, really strong growth, really strong demand, high incomes, and all that kind of thing. You know, people will judge in 25 years whether we overdid it or not but, you know, the reality is, we are where we are. And, you know, we think our policy is the right one for the situation that we're in.
For the record. Powell is completely wrong, or lying.
Inflation is like socialism; anyone who understands it does not want it. The only people who thought (price) inflation would make the country a more hospitable place are those who mistakenly believe inflation means growth. It’s the rationalization of currency debasement as national policy which continues to permeate amongst central bankers, those on television, and in academia.
On behalf of the overwhelming majority of people not considered “rich,” no one wants the prices of everything they purchase to perpetually increase year over year, whether it’s food, rent, medicine, transportation, clothes, or college tuition.
This gets worse because Powell shows an understanding of this entirely. In his opening remarks he says:
We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation.
He acknowledges how price increases on essentials to life, such as food, pose a burden on certain members of society. So far so good… except rather than expanding on this idea he immediately follows with:
We are committed to our price stability goal.
Unfazed by his previous sentence, the harm inflation causes is secondary to the benefit that comes when price stability is obtained at last.
He’s completely wrong here as well. Until the Fed gets over its fear of deflation, there will be no price stability. There will only be perpetual and compounding effects of inflation, which is ironic, because that’s the exact opposite of price stability.
As the year comes to a close, there is enough information to anticipate how this ends. The Fed’s new asset purchases are expected to decrease to zero by March of next year. Interest rates should increase some time after. If the Fed stops further asset purchases and the government somehow reigns in spending, such as stopping stimulus checks or other free money giveaways, then we can hope price increases will slow down. And that’s if, and only if, everything goes according to plan. If a new virus mutation or some other external event poses a threat to the economy, don’t be surprised if the Fed abandons its plans to take on a more accommodative stance once again.