We tend to think of the Federal Reserve Chairman as an omnipotent deity, but at his Wednesday afternoon press conference Ben Bernanke admitted even he's somewhat bewildered as to the economy's continued lethargy in spite of historic government intervention. "Some of these headwinds may be stronger and more persistent than we thought," Bernanke told reporters. "We don't have a precise read on why this slower pace of growth is persisting," he said, leaving open the possibility for further monetary efforts to spur expansion, including more bond purchases and continued ultra-low rates.
President Barack Obama and other politicians are pushing for more infrastructure spending more than two years after the first $800 billion stimulus was passed, regardless of the fact Obama has since admitted that there's "no such thing as shovel-ready projects."
It's almost as if Washington envisions the economy not as a complex network of billions of voluntary, mutually beneficial relationships, but as a lawn mower which could be forced to run smoothly if only they'd yank hard enough on the starter cord.
Amid government's rush to "do something," we forget that, on a percentage basis, the nation's most productive years, those in which the U.S. overtook Great Britain to become the world's leading economic power, occurred prior to the creation of the Federal Reserve in 1913. What many lawmakers and regulators are not considering here is the strong possibility that the stimulus and intervention have had a deleterious effect.
Nowhere, perhaps, is that more evident than in real estate and mortgage finance, which before the preoccupation with make-work projects and "nefarious" speculators was seen as the essential obstacle to national prosperity.
Two separate administrations have unveiled literally dozens of housing plans including (but not limited to) the Hope for Homeowners Act, the Housing Assistance Tax Act, the Helping Families Save Their Homes Act, FHA Secure, the Hope Now Alliance and the Homeowner Affordability and Stability Plan. Just this past week officials announced the $1 billion Emergency Homeowner's Loan Program, which will provide interest-free loans to homeowners that need not be paid back if they stay current on payments for 5 years.
This array of programs is in addition to the nationalization of Fannie Mae and Freddie Mac, which along with the Federal Housing Administration now stand behind nine out of 10 new residential mortgages. Those steps have "crowded out the private sector, leaving investors with fewer loans to buy and either hold or pool into securities that don't have government guarantees," according to a recent Wall Street Journal analysis.
Despite the hundreds of billions of dollars spent trying to right the real estate crisis, home prices continue to slide and foreclosures keep rising. And while the lending and securitization markets that the government hasn't cornered -- such as those for commercial real estate, auto and credit-card loans -- have all seen their volume rebound, residential mortgages, over which the government now holds a near de facto monopoly, remain in "paralysis."
One day our esteemed centralized planners might consider the unthinkable: That the government effort to remedy the economy is exactly what's ailing it.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund.