The Government Debt Bubble

moneybubble

I’m on a documentary kick right now on Hulu and Netflix. The one I watched last night after work has me really concerned for the future of our economy and the ability of the Federal Reserve to correct the next crisis. Similar to The Big Short, this movie focused on the history of the Fed and the events leading to the most recent crash of the market in 2008. To say the movie, Money for Nothing: Inside the Federal Reserve was eye-opening, is a titanic understatement. Some of the earlier history, both pre-Fed and newly-created-Fed, was new to me and I wasn’t aware of the problems they faced. Our economy is actually so much more fragile than we are all led to think. An independent, or self-described independent, government agency tasked with keeping our economy balanced that is separate from government policy and influence, really doesn’t seem to be working after seeing this movie.

What absolutely floored me, the eye-opening moment, was the near $4 trillion that the Fed pumped into the economy in the form of a bailout for companies like Citigroup, Goldman Sachs, Bear Stearns, Morgan Stanley, and GE. That isn’t a withdraw from a bank account totalling $4 trillion, no, it was a loan to these companies from the Fed that stopped them from collapsing like Lehman Brothers. A loan! It created, in one year, an increase to our national debt of $4 trillion. Banks were saved, investment firms were saved, mortgage companies were saved….. but were they? A loan by the Fed added debt to the economy, any growth or correction from that loan was done with “credit”. For those of you that own homes, you don’t really own the home, you own the debt created at the time of purchase. You don’t actually own your home until you satisfy the debt associated with it. The mortgage company technically owns the home, they hold the deed. The bailout didn’t wipe out the fact that 14 million homes were purchased in 2006-2007, half of which were considered sub-prime. In some cases, companies would provide NINJA loans, aka No Income, No Job, or Assets. Call me crazy, but who in their right mind would actually think that was a GOOD thing to do?

All the economic recovery we’ve experienced since 2008 has been built on the money the Fed has pumped into the economy. The interest rate is currently at 0.5%, making it impossible for people to make any money from savings. A low rate is supposed to make it easier for lenders to, well, actually lend money, but they’re not. Our unemployment rate has gone up following the 2008 crash. We have nothing to show that the improvement is based on anything tangible. Industry is still struggling, we don’t make anything the world wants (for the most part), and consumers are spending money they don’t have and creating more personal debt. The United States, when all forms of debt are counted, is pushing $50 trillion! A staggering number that most people can’t understand let alone visualize in real world comparisons. What is scary though, is that the policies the Fed were using in 1994 and the bailout of Long Term Capital in 1998 created the mechanisms for the 2008 crash to take place. That and an across the board refusal to regulate the Derivatives and Investment Insurance markets. Both of these markets were allowed to run unchecked for more than a decade feeding into a housing market bubble that eventually popped with catastrophic effects.

In the span of 2008-2009, I have had all my credit cards converted from fixed rates to variable rates (none of which I’ve managed to convert back to fixed). I almost lost my house due to job loss and pay cut on a new job compounded by the fact that I had used equity in my home to help offset the cost of adoption in 2006. I nearly went underwater in home price and it took me over a year to get through the ridiculous HARP process. At this point, I see the evidence from this documentary in real life and fear that a bubble so big, so enormous, is about to rip itself apart and take the entire world economy down with it. The system that existed in 2008 is the same system that exists today with very little regulation or legislation to prevent it. You would think that after the dust settled, people would have been brought up on charges, banks would have been broken up, the Glass-Steagall Act of 1933 re-enacted…. something! No, nothing, not a damn thing!. The precedent has been set that if companies make money, they win, if they make mistakes they lose money and the Fed bails them out. Either way, they win. It sucks.

If you watch the movie, you need to let me know if you are willing to take some short-term pain so that the system can be fixed and correct itself to set in motion some long-term prosperity. I’m sure the 1% would have a few choice words for me at this point because it would mean an end to nearly free money with interest rates at 0.5% for them and 4-6% to consumers who borrow from them.  Interest rates leading up to 2007 were 0% by the way, in case you didn’t know.  The problem is that the bubble this time is the debt of the United States Government and the Federal Reserve…. talk about “too big to fail.”