This page has been archived and commenting is disabled.
Meet The World's Largest Subprime Debtor
As Mises Canada's David Howden introduces,
Do you have a friend who consistently borrows 30% of his income each year, is currently in debt about six times her annual income, and wanted to take advantage of short-term interest rates so that he needs to renegotiate with his banker about once every six years? Well, if Uncle Sam is your friend you do!
* * *
Lehman Brothers filed for Chapter 11 bankruptcy protection six years ago this month. The event has become famous as the spark that ignited the global financial crisis. Since that date, millions have lost their jobs and livelihoods, and countless others have seen their futures evaporate before their eyes, sometimes permanently.
At the heart of the crisis of 2008 was a common cause acknowledged by almost all commentators. Borrowers now infamously known as “subprime” (or more politely, “non-prime”) were the main reason behind the meltdown. As financial institutions extended loans to those with less than stable means to repay their debts, the foundation of the financial world was destabilized.
Six years on and these subprime debtors are largely a relic of the past. That fact notwithstanding, there is a new threat lurking in the global financial arena. This one borrower is far larger than all the previous subprime characters combined, and poses a far more dangerous hazard to the financial stability of nearly all (if not all) of the world’s citizens. I am speaking, of course, of the United States government.
Subprime borrowers are defined by FICO scores which are largely inapplicable to sovereign nations. We can instead look at the type of loans that these borrowers took on to understand how precarious the United States federal government’s finances are.
To simplify matters greatly, consider three types of loans that made debt attractive to subprime borrowers. The first was the adjustable rate mortgage. After a short period at a low introductory teaser rate, the interest rate would reset higher. Second was the interest only loan. Borrowers could take out a sum of money and for a period not worry about paying down the principal. An extreme form of the interest only loan is the final type: the negative amortization loan. In this case, not only does the payment not reduce the principal of the loan, it doesn’t even cover all the accrued interest! The effect is that each month that goes by, the borrower slips further in debt as interest deferral is added to the principal to be repaid.
In the wake of the crisis, a lot of commentators focused on two measures of the government’s financial stability. The first was its debt to GDP level, which was added to on a yearly basis by its deficit (also expressed as a percentage of GDP). At its nadir in 2010, the federal government ran a budget deficit of nearly 10 percent of GDP (the highest since World War II). As of today, the federal debt level (ignoring unfunded liabilities such as Social Security or Medicare) amounts to 102 percent of GDP.
While these numbers are indeed high, they really understate the problem. After all, the denominator in both cases is the total income of the whole United States, not just that of the government.
To get a better feel for these figures, consider how much the federal government borrows as a percentage of its income (the sum of its tax receipts).
Figure 1: Net federal government borrowing as a percentage of federal tax revenue (percent). Source: St. Louis Federal Reserve Economic Data
In figure 1 we can see that not only does the federal government often finance itself with debt, but it does so by borrowing a lot relative to its income. In 2009 it borrowed 85 percent as much as it was able to raise through taxes! While commentators praise the government for getting its budget deficits under control and down to a more “reasonable” level of 4 percent of GDP, we can see that it still needs to borrow more than 20 percent of its income to keep its operations afloat.
Of course, this is just the yearly deficit. Turning our attention to the cumulative effects of this in terms of the gross federal debt outstanding we can see that the situation is even more precarious.
Figure 2: Gross federal debt as a percentage of federal tax revenue (percent). Source: St. Louis Federal Reserve Economic Data
As of last year, the gross amount of debt owed by the federal government was about 5.5 times its tax receipts. That would be equivalent to someone earning $30,000 a year owing $165,000. Somehow people are up in arms about students graduating with an average of $30,000 in debt and landing a measly $30,000 a year job, but few want to face the realization that the federal government is in five times worse shape.
The federal government is in worse financial state than is commonly recognized, but few would call it a subprime debtor, right? Let’s look at the type of borrowing the government does and you can make up your own mind.
Many subprime borrowers were caught when they borrowed for short periods only to see their interest charges increase when their adjustable rate mortgages reset higher.
Figure 3: Weighted average maturity of federal debt outstanding (months). Source: United States Treasury Department
In figure 3 we can see that the average maturity of debt was about 5.5 years as of last year. Nearly half of its outstanding debt is due within three years, and a full two-thirds needs to be repaid within five. This may not be as short-term as some other debtors, but it’s not exactly a fixed rate mortgage either. On the other hand, it is troubling because the Federal Reserve has dedicated itself explicitly to a policy of fostering higher inflation. Accompanying this higher inflation will be increased interest rates, and a new problem for the government to “solve” as it is forced to borrow at higher interest rates.
What about interest-only, or negative-amortization loans? As we can see in figure 4, for the last decade (at least) the Treasury has underpaid its annual interest expense by about $200 billion per year. Last year that amounted to about 5 percent of its total tax receipts. This amount is added to the principal outstanding each year to increase the gross level of indebtedness of the federal government.
Figure 4: Federal Interest Expense and Payments ($bn.) Source: St. Louis Federal Reserve Economic Data and United States Department of the Treasury
Of course, this is not a strict example of a negative amortization loan. However, it has the same effect in the end, with the only difference being that the Treasury borrows money each year and incurs more interest in order to pay off the interest on its existing debt.
The United States government not only borrows in the same way that those destabilizing subprime lenders did six years ago, it does so on a much larger scale. Back in 2008, there were almost $15 trillion of mortgages outstanding (around 100 percent of 2008 US GDP). Many, if not most of these, were not subprime. By comparison, there is about $2 trillion more than this amount in federal debt today, the majority of which is repaid under conditions similar to those troublesome subprime borrowers. To make matters worse, since not all the nation’s income is the government’s, this amounts to more than 5.5 times the relevant tax base that it can repay it with. (Of course, unlike subprime borrowers who lost their jobs and income during the recession, the federal government can unilaterally increase its income by raising or introducing new taxes. I don’t think many want to see this option pursued.)
I will end by answering a troubling question: who lends this money to the federal government? After all, if the federal government’s “subprime” borrowing debacle goes down like the private one did six short years ago, it would be nice to know who to point the finger at. Banks and other financial institutions received the lion’s share of the blame for their part in so-called predatory lending of money to those who couldn’t repay, but who is lending to the government?
Lots of “little people” own a few T-bills, but they pale in comparison to the Federal Reserve.
Before the crisis, the Fed kept its Treasury purchases fairly steady and low relative to the total issuance (around 6-7 percent until 2007). Despite some early shedding of Treasuries early in the crisis in lieu of lower quality mortgage-backed securities and federal agency debt (something Philipp Bagus and I called “qualitative easing” at the time, see here (pdf) and here (pdf) and here), by 2010 over half of all Treasury debt was bought by the Fed. Even today, while talk of tapering QE abounds, the Fed is still responsible for over 40 percent of the federal government debt.
The federal government’s finances were not always so shoddy. While it is convenient to blame Congress for the present situation, it takes two to tango. The will to spend was apparent in the government, but the Fed provided the means.
Six years ago financial institutions were demonized as subprime borrowers who could not repay their loans. If the federal government turns out to be just another subprime debtor, we should expect the blame to be placed on the Federal Reserve for fostering such a situation and allowing it to persist for so long.
»
- 12064 reads
- Printer-friendly version
- Send to friend
- advertisements -
actually - it wasn't really the subprime borrowers - it was the ratings agencies being in bed with the banks to rate shit as gold, and fuck wad econ majors thinking they could distribute and basically extinguish risk with swaps.
Oh, and massive overleveraging and fraud from home value assessments all the way up.
but yeah - let's all blame the working poor who didn't understand their mortgages, and not the banks that did.
USA ! USA ! USA !
It's amazing, the USD can buy more silver and gold than ever, this is the Autumn Flash Sale, get yer eagles, thanks Yellen!
please the poor rating agency are tiny making a mere fraction of corrupt mega banks. The mega banks have bought off everyone....half Obama cabinet are either from or going to wall street. The Dodd & Frank protection of a fannie mae that backed 80% of mortgages.... is a much bigger culprit. Just look at the goverment debt. The ratings agency are a tiny adviser body that few pay attention to. I don't buy that they are at fault one bit. The FED has sold it soul and will just keep getting worse and worse. Remember Tim G....was head of the New York FED the top bank regulator....who now earns a 8 digit salary for being a complete fuckup....that enabled the destruction!!!!
I don't buy that they are at fault one bit
Well, then, you're a complete fucking idiot.
The ratings agencies did play a huge role in the CDS market, not even understanding what it was; few did. But to think that I, as a McDonald's burger flipper can get a loan for 375,000 to buy a house is somewhere in the realm of reality is mind numbing to me. You make it sound as if the borrower bears no blame in this process. To that I would only say, if something seems too good to be true, it most likely is.
Federal lending legislation also played a huge - if not the key - role in this whole mess. Forcing banks to lend to people who clearly could not afford to pay the money back. NINJA mortgages, snatched up en masse by fannie and freddie, it's truly disgusting. There were many alarms sounded at the SEC by responsible money people who tried to get them SEC to do something... anything, to protect the tax payers from the impending destruction written on the wall. The SEC did nothing. So who is really at fault here? There's plenty to go around...
FEDERALIZED CONTROL FRAUD.
LARCENY AS MONETARY POLICY.
Does all this mean deflation first, then hyper-inflation, as Bill Bonner said?
Banks understand lending but not leverage.
Wall Street understands leverage but not lending.
Somewhere in the middle is "the Federal Government" and "recovery."
And "Get to work Federal Reserve!"
I believe it was the Clinton yrs that brought on that little gig as well as expanding unsecured debt. I remember a call I got about that time telling me that i needed my biz to take credit cards and that congres was going to pass a law I had to
Arrest the FED. Don't let them get away.
Just End it....
Or at least toilet paper it on Devil's Night, eh???
I was actually a lot more worried BEFORE I read this article. Look, only borrowing 20% of tax revenue - back in line with norms, avg maturity of debt getting back to normal levels. Based on this, the ponzi has plenty of life left in it - maybe not the economy or the future for the average guy, but the system as a whole looks like it's made it through the storm. No sarcasm, these fuckers have pulled it off, stolen the country from the middle classes, implemented a full-on security state to prevent dissent, and established perpetually rising asset prices as the norm for the 'few that matter'. Fuck...
Crazy Al you got it again and are so unfortunately accurate. The only saving grace may be massive discontent amongst the middle class and .....you're right we are so screwed.
C'mon Janet, let's prove the economy is golden and raise those rates.
I dare you. End QE and put the prime rate at 5% and pay savers.
They don't need to raise rates - nobody important gets hurt if they leave rates low forever, and there's no limit on the amount of debt that's sustainable now - look - $ up, markets up, volatility non-existent, rates down/bond prices up, this truly is the best of all possible worlds - I should change my handle to Pangloss.
there's a limit.... it's becoming clearer and clearer that the US will default... buying US gov debt is dumber and dumber, and relatively dumber and dumber.
I man, if the Fed can keep "buying" to monetize... then why aren't progressives demanding each of us be cut a 100k check - since there are "no limits"?
I will say - surely - this shell game can perhaps continue longer than the more cynical amongst us were prepared to imagine.
But what happens if there's a sudden spike in oil prices?
Yeah I'm rambling. I hear you though, Huxstable.
"C'mon Janet, let's prove the economy is golden and raise those rates.
I dare you. End QE and put the prime rate at 5% and pay savers. "
EXACTLY. +1
Do yo u like green eggs and ham,
Uncle Sam I am...
Uncle Sam is dead. Long live Uncle Sugar and his FSA!
The biggest sub-prime borrowers eventually become the world's biggest defaulters.
That will happen only when the world wakes up.
In the meantime, the US can do what it likes with printing, warring and whoring.
And who do they renegotiate those terms with why the Federal Reserve. Specifically the shareholders in the Federal Reserve Banks who the central bankers work for making sure they get their 6% dividend payment on their shares.
Those are real owners of the United States of America.
For a starting point.
http://www.save-a-patriot.org/files/view/whofed.html
Federal Reserve Directors: A Study of Corporate and Banking InfluencePublished 1976
Chart 1 reveals the linear connection between the Rothschilds and the Bank of England, and the London banking houses which ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Act was drafted, who directed the subsequent successful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914. These firms had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council in 1914. In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as in New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control.
...
Think anything really has changed much since 1976 besides new subsidy firms and consolidations as far as owners goes.
Excellent.
Sometimes the "canards" are true - it's largely Jewish bankers that own the right to print the dollar. I suspect that they arent "Zionists" at all.
Of course, in a sense, it doesn't matter, the ethnicity or faith of the guy robbing you.
But we should all be on board for being able to speak the truth to banking power.
For fuck's sake - the fact that Americans can't even find out who owns the banks that make up the FRS that skims an easy 6% is mind-boggling.
Crazy.
http://www.law.cornell.edu/uscode/text/12/chapter-3/subchapter-VI
http://www.law.cornell.edu/uscode/text/12/281
No Federal reserve bank shall commence business with a subscribed capital less than $4,000,000.
http://www.law.cornell.edu/uscode/text/12/287
The capital stock of each Federal reserve bank shall be divided into shares of $100 each. (Aka $100 dollar bills).... If you wanted to keep track of who owns want using shadow accounting you do it using serial numbers on the bills while letting the actual bills circulate at any time.
http://www.law.cornell.edu/uscode/text/12/282
Every national banking association within each Federal reserve district shall be required to subscribe to the capital stock of the Federal reserve bank for that district in a sum equal to six per centum of the paid-up capital stock and surplus of such bank, one-sixth of the subscription to be payable on call of the Board of Governors of the Federal Reserve System, one-sixth within three months and one-sixth within six months thereafter, and the remainder of the subscription, or any part thereof, shall be subject to call when deemed necessary by the Board, said payments to be in gold or gold certificates.
http://www.law.cornell.edu/uscode/text/12/241
The Board of Governors of the Federal Reserve System (hereinafter referred to as the “Board”) shall be composed of seven members, to be appointed by the President, by and with the advice and consent of the Senate,
...
In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.
...
Why do you think money is so prevalent in the political process aka special interests puppets ultimately appoint those the puppet master wants on the board.....
http://www.law.cornell.edu/uscode/text/12/283
No individual, copartnership, or corporation other than a member bank of its district shall be permitted to subscribe for or to hold at any time more than $25,000 par value of stock in any Federal reserve bank. Such stock shall be known as public stock...
...
http://www.law.cornell.edu/uscode/text/12/289
a) Dividends and surplus funds of reserve banks
(1) Stockholder dividends(A) In general
After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock. (B) Dividend cumulative
The entitlement to dividends under subparagraph (A) shall be cumulative. (2) Deposit of net earnings in surplus fund
That portion of net earnings of each Federal reserve bank which remains after dividend claims under paragraph (1)(A) have been fully met shall be deposited in the surplus fund of the bank.
I bought some series EE bonds back in the early 80's. The government guaranteed a minimum of 9.5% on them. When I turned them in the bank only gave me 6%. (The going interest rate had dropped in the interim). When I asked why, they said, "It' the government, they can do anything they want." I have never bought a T bond since and NEVER will if I live to be a thousand years old!
Why does it start as a her then turn into a he?
Oh..okay. well now that we know....we shld be all set.
Thanks for settin this straight
During this election period, I am sure you will have your political parties and citizens running as a rep or senator explain the debt/deficit/interest outlays to their voters and offer a solution.
You are wrong TrustWho, the democrats will tell the women the republicans are going to take away your ability to have protected sex and republicans will call democrats liars.
OK, Go VOTE. Why?
Walmart is opening a checking bank. Would Walmart or Alibaba provide cheaper loans from the US TREasury at the discount window?
Hey Jack Ma- Hong Kong Dollar is backed by the US Federal Reserve- you're just passing the savings onto us.
Heck if you're gonna be a bank - go all the way! Just gather enough of other people's assets in order to be deemed "too large to fail"; then you qualify as a "bank holding company"!
Amazon, you're next. Then comes TD Ameritrade pauperhouse (Petrelli is a cheapass)- Squatterhouse provides T5 accounts and ATM functions, they can join in too!
Minecraft can be a bank too! And Entertainment Partners. Kashkari TARP dude used to work on telescopes- the rocket scientists can create M2 out of thin sheets of lysergic acid diethylamide or any other version of tainted alkoloid hallucinogen.
ANYBODY can be a bank.
The trouble with Google is that it's probably more solvent than the US government, and the US government hates competition.
So does anyone else sees that "credit pooles" will become debt swamps"!? And anyone involved in it will sink to the bottom!
2019 is the tipping point. By the numbers we are printing interest on interest and numerically, purely printing. GDP contribution margin on borrowed funds systemically negative as is the tax collected to pay interest on debt vs incremental GDP created. IMF CBO etc...