Photo Credit: Official White House Photo by Chuck Kennedy
By Bill Wilson — By Barack Obama’s own estimate, borrowers who take part in his mortgage refinance program could “save about $3,000 a year on their mortgage, by refinancing at historically low interest rates”, as he suggested in his Feb. State of the Union Address.
Later his Administration estimated that as many as 3 million borrowers would be eligible for that particular program, but with interest rates at record lows thanks to Federal Reserve policies pushing rates down through trillions of dollars of asset purchases, millions more Americans are also refinancing their mortgages.
According to Freddie Mac there were about $897 billion in refi’s last year alone, or about 6 million.
If Obama’s program is successful, coupled with the existing annual crop of refi’s, that could bring the annual interest savings nationwide to about $24 billion.
But, as reported by a 2007 Federal Housing Finance Board Office of Supervision report, lower interest rates affects banks’ “reported earnings and book capital by changing: (1) net interest income; (2) the market value of balance sheet instruments accounted for at market value; and (3) other interest sensitive income and expenses.”
So, that could also mean about $24 billion less capital in the financial system on an annual basis.
Which does not sound like much, with over $54 trillion of credit outstanding nationwide.
But when one recalls that financial institutions actually are allowed via government regulation to lend multiples far beyond what they hold in capital, the problem comes into view. Couple that with higher capital requirements imposed by Basel III, and suddenly that $24 billion in destroyed bank capital could mean, say, $240 billion in loans that will not be made in a single year elsewhere in the economy.
So what, you say?
Assuming interest rates stay fairly low for several more years to come, that will begin adding up, perhaps as much as $18 billion in lost interest income every year even after the Obama program is long gone, totaling in hundreds of billions in less lending capacity by financial institutions.
Now, less available capital in the financial system might have been tolerable, if only the housing market had been allowed to truly crater in 2008 without government support. For, while less money would be available to lend, home prices would have been much lower, too. Alas, it was not to be, so now we face the squeeze.
In fact, there is a massive amount of debt coming due in the next few years. S&P reports as much as $30 trillion of corporate debt worldwide will need to be refinanced in the next four years. Writes S&P on the corporate credit crunch coming, “This global wall of nonfinancial corporate debt will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds.”
Add to that another $5.9 trillion of federal debt coming due in the next five years and must be refinanced, as reported recently by Bloomberg News’ Caroline Baum. Plus about $5 trillion in new debt by 2016 as the government borrows at record levels.
All of which could mean a perfect storm of credit tightening is on the horizon — and the Administration’s policies are only exacerbating the situation.
Through government profligacy, through forcing interest rates down, and through his refi programs designed to prop up what remains of the housing bubble and cynically cater to a favored class of voters, Obama may be creating a horrific situation financially nationwide.
In the end, Obama’s policies will restrict private lending and at the same time leave institutions with less capital available to meet up with potential losses on loans, creating more systemic risk in the financial system.
This will all wind up injuring the future ability of businesses and families to seek financing, while posing significant risks to the economy and eventually, leaving taxpayers to clean up the mess in the end. One more thing to thank Obama for in 2012.
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.
