The Moment When The San Francisco Fed Finally Figures Out What "Debt" Is

Tyler Durden's picture

The San Fran Fed, in addition to being the lair that hatched the current Fed chairmanwoman, is best know for spending millions in taxpayer funds to "contemplate" such profound topics as:

And let's not forget "San Fran Fed Spends More Money To Justify Colossal Failure At Anticipating Consequences Of Its Actions."

So today, in the latest example of misappropriation of millions in taxpayer "R&D" funds by a Federal Reserve bank, has released a note titled, mysteriously enough, "Mortgaging the Future?" unleashes the following shocker: "Leverage is risky."

* * *

This coming from the institution that monetized $3 trillion in US debt, and whose balance sheet will never be unwound without a global market crash so profound it would likely lead to a global war?

Why yes. That's right.

* * *

So for all those curious to learn just how stupid the Fed is, and desperate for laughter in these centrally-planned times, here are several excerpts of deep intellectual work from what according to many is the most important regional Fed in the US (now that everyone is aware Goldman Sachs is in charge of the NY Fed and is scrambling to limit the vampire squid's domination over the world's most levered hedge fund in the world):

Leverage is risky. Purchasing assets with borrowed money can amplify small movements in prices into extraordinary gains or crippling losses, even default. From the mid-1980s to the Great Recession, an unusually rapid increase in the ratio of credit to GDP, or leverage, across the developed world was overshadowed by an equally unusual decline in inflation rates and output volatility. As such, this period is often called the Great Moderation. However, underneath the apparent calm, leverage continued to build. The pressure mounted up along financial fault lines, and in time struck violently in the form of the 2008 global financial crisis. The aftershocks are still being felt today, as policymakers continue to grapple with the resulting economic damage and discern how best to prevent future financial tremors.


Research by Schularick and Taylor (2012) showed that bank lending in advanced economies quadrupled in the second half of the 20th century, from about 30% of GDP in 1945 to about 120% of GDP right before the 2008 global financial crisis. In newer work, Jordà, Schularick, and Taylor (2014) show that this sharp increase has primarily resulted from the rapid growth of loans secured by real estate. The share of mortgage loans in banks’ total lending portfolios averaged across 17 advanced economies including the United States has roughly doubled over the past century—from about 30% in 1900 to about 60% in 2014. The evolution of this share since 1880 is shown in Figure 1. The most dramatic increase occurred since the mid-1980s.


This Economic Letter explores the channels through which advanced economies have increased their debt and the consequences that this leverage has had for the business cycle. The rapid increase in credit-to-GDP ratios since the mid-1980s was just the final phase of a long historical process. The run-up started at the end of World War II and was shaped by a long boom in mortgage lending. One of the startling revelations has been the outsize role that mortgage lending has played in shaping the pace of recoveries, whether in financial crises or not, a factor that has been underappreciated until now.

And there you have it: nearly a decade after the housing bubble popped, the San Fran Fed, whose president until a year ago was Janet Yellen, has finally figured out that housing bubbles not only are never fixed by defaulting on the bad debt, but simply masked by more, and more, and more housing debt, until the entire capitalist system demands a Fed bailout.

The profound insights continue:

The core business model of banks in advanced economies today resembles that of real estate funds: Banks borrow short-term funds from the public and capital markets to invest in long-term assets linked to real estate. The maturity mismatch between the asset and liability sides of banks’ balance sheets increases their fragility and has helped drive a wave of mortgage securitization in some countries over the past 30 years. However, as the data suggest, the bulk of these loans still remain on bank balance sheets. The standard textbook role of household savings as a main funding source for business investment thus constitutes a much smaller share of banking business today than it was in the 19th and early 20th centuries.

It gets better:

The rise of mortgage lending exceeds what would be expected considering the increase in real estate values over the same time. Rather, it appears to also reflect an increase in household leverage. Although we cannot measure historical loan-to-value ratios directly, household mortgage debt appears to have risen faster than total real estate asset values in many countries including the United States. The resulting record-high leverage ratios can damage household balance sheets and therefore endanger the overall financial system. Figure 2 displays the ratio of household mortgage lending to the value of the total U.S. housing stock over the past 100 years. As the figure shows, that ratio has nearly quadrupled from about 0.15 in 1910 to about 0.5 today.

And better:

Where did this rise in mortgage lending come from? In the United States, large-scale government interventions into housing markets developed after the Great Depression. Although much of this legislation was explicitly designed to control high-risk finance, such as the Glass-Steagall Act of 1933, other policies made basic forms of finance more accessible to the general public. In 1932, the Federal Home Loan Bank System was established to pass along favorable, government-backed interest rates to mortgage borrowers. The Federal Housing Authority (FHA) was created in 1934 to insure banks and other private mortgage lenders. President Roosevelt created The Federal National Mortgage Association, known as Fannie Mae, in 1938 to expand the secondary mortgage market by securitizing mortgages implicitly backed by the government and invest in FHA-insured loans.

Wow, you don't say!?

It is natural to wonder how the postwar democratization of leverage has affected the larger economy.

Yes, it is. It's very natural. Please inform us.

Many studies have pointed to debt overhang as a possible cause for slow recoveries from financial crises (for example, Cerra and Saxena 2008; Reinhart and Rogoff 2009; Bordo and Haubrich, 2010; Mian and Sufi 2010, 2014; and Jordà, Schularick, and Taylor 2011, 2013). New data uncovered in Jordà, Schularick, and Taylor (2014) open the door to a new intriguing question: Are all forms of bank lending—particularly mortgage lending—equally relevant in understanding these business cycle dynamics? We investigate this question using data on 17 advanced economies since 1870. The coverage across time and borders captures about 200 different recessions, one-quarter of which are linked to a financial crisis.

Wait, you mean record amounts of debt may be ungood... no ... don't say that.... Unpossible.

Figure 3 confirms several well-known results and provides some new ones. First, recessions associated with financial crises are deeper and last longer, no matter the era. Second, it was harder to recover from any type of recession in the pre-WWII era than it was later. The typical postwar recession lasted about a year. After two years, GDP per capita had grown back to its original level and continued to grow for the next three years. Financial crisis recessions lasted one year longer and only returned to the original level by year five.

And the moment where the lightbulb starts to go off:

More interesting in Figure 3 are the two alternative scenarios in which credit in the expansion grows above average. A credit boom, whether in mortgage or nonmortgage lending, makes the recession slightly worse in the prewar period, especially when associated with a financial crisis. But in the postwar period an above average mortgage-lending boom unequivocally makes both financial and normal recessions worse. By year five GDP per capita can fall considerably, as much as 3 percentage points lower than it would have otherwise been. In contrast, booms in nonmortgage credit have virtually no effect on the shape of the recession in the same postwar period.


Why the difference? At this point we can only speculate. A mortgage boom gone bust is typically followed by rapid household deleveraging, which tends to depress overall demand as borrowers shift away from consumption toward saving. This has been one of the most visible features of the slow U.S. recovery from the global financial crisis (Mian and Sufi 2014).

Yes, the Fed almost figured out why over the past 30 years, every housing collapse has been promptly met, and offset, with an even bigger bubble to cover it up, because - in what is a shocking revelation to the San Fran Fed, the US economy simply can't handle a drop in home prices.

Actually, in retrospect all of the above, which for the longest time we were debating whether it is nothing but some thinly veiled joke, is serious "research", makes sense, as does the "epiphany" - after all, the fact that this is all "startling" news to the Fed explains the clip below in which the then future Fed Chairman would say such idiotic things in July 2005 as:

"I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis."

And the glorious conclusion of this study which cost Americans somewhere in the neighborhood of $50-100K (in debt):

The vast expansion of bank lending after World War II is one of the most extraordinary developments in the history of modern finance and macroeconomics. Our research suggests that the explosion of credit has played a more important role in shaping the business cycle than has been appreciated up to now. A growing consensus along these lines has renewed interest in revisiting the assumptions about cyclical macroprudential policy (for example, Aikman, Haldane, and Nelson 2014). Much of the recent expansion in bank lending took place through real estate lending, and this particular component of the credit mix appears to have the most relevant macroeconomic effects. A natural inference is that economic policy needs to adapt to this new reality.

And there, ladies and gentlemen, it is - the moment of glorious epiphany when the San Fran Fed finally figures out what debt actually means.

We all eagerly look forward to part 2: the moment when the Fed figures out it monetized $4 trillion in US debt to delay the cataclysmic collapse of the western financial system.

usability (animated gif) (150x107)

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bigdumbnugly's picture

some poster here beat 'em to this avatar by anout two years

stocktivity's picture

Greece has debt figured out -


Greece to Germany - "You have to lend us more money today so we can pay a part of the money back to you that you lent us a while back."


Germany to Greece - "No problem...but you have to really, really, really pay us back this time"  "Are you ok with this arrangement?"


Greece to Germany - "Ummm...yeah...sure thing."


knukles's picture

Germany to Greece. - "Great!  We're indebted to you!"

Kprime's picture

Greece to Germany - "Ummm...yeah...sure thing.",  But, uhhhhhh, we may have to borrow a bit more.  "Are you ok with this arrangement?"

Germany to Greece, "Heil Hitler, here's your reparations check, spend it wisely"

Note: Use of this salute is currently a criminal offense in Germany, the Czech Republic, Slovakia and Austria.[3] In Switzerland and Sweden, it is an illegal expression if used for propagating Nazi ideology.

We frown on free speech.  In the US we call this "Hate Crimes".  We will drone you, but not your property because we plan to size it.  You know like Hitler.

Does this sound remotely familiar:

The Final Solution reached its height just as Germany’s military fortunes began to ebb. Severe wartime privations, ever-mounting death tolls, growing anxiety about the fate of loved ones engaged in a savage and increasingly desperate struggle on an ever-retreating Eastern Front, the disintegration of everyday life caused by an ever-intensifying Allied bombing offensive against Germany’s cities—all crimped human empathy, to say nothing of collective action.

So, obviously, did fear. Throughout his history, Evans has chronicled the corrosive effects on German society of the Nazis’ network of surveillance and intimidation. In this latest volume, he perceptively highlights the effectiveness of the Nazi state’s coercive methods of winning and sustaining popular compliance, and the constrictions thus imposed on even the most innocuous individual action.

The_Small_Lebowski's picture

Id say that put one big smile on your smashed up face!


jmeyer's picture

The problem with the readers ( of ZH ) is that are SOOOOO angry. Channel your hate in to something other than YOUR HEADS !!

DetectiveStern's picture

That GIF has been doing the rounds for 10 years +

Thirst Mutilator's picture

Yeah, cause I remember 'feeling that' right around the time Al Gore was winning a PEACE PRIZE for global warming...

knukles's picture

Al Gore ...  Gee.  Where have I heard that hypocrisy before?
Every last kid graduating from the CA State University system has been indoctrinated with AGW. 

one_hundred's picture
one_hundred (not verified) bigdumbnugly Mar 23, 2015 11:05 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...

LawsofPhysics's picture

The main problem being that credit/money creation has not be attached to real collateral or risk for quite some time now!!!!

Global weimar motherfuckers!!!!

tick tock...

NoDebt's picture

"The mismatch between the asset and liability sides of banks’ balance sheets increases their fragility and has helped drive a wave of mortgage securitization in some countries over the past 30 years. However, as the data suggest, the bulk of these loans still remain on bank balance sheets"

Hence the need to utilize mark-to-unicorn accounting and have the Fed step in to buy these "assets" out of bank balance sheets.  Otherwise we might be faced with a real problem like real risk and real collateral could rear their ugly head and piss in the banker punch bowl.

I bet right about now everyone is SO glad we bailed those motherfuckers out in 08-09.  It was such a great idea we'll probably do it again in the next few years.

quasimodo's picture

Captian Obvious! Paging Captain Obvious!

Gambit's picture

Seriously! As a student and practitioner of finance, the more I delved into this world the more I realized the Kabuki Theater it has become.  These experts, with an exception of very few, through the use of eccoteric laguage purposely complicate the subject as a means to seem smarter than they really are.  Which makes it very easy for me to fuck with them as they are all taught one school of thought and can not think critically. 

"Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius -- and a lot of courage -- to move in the opposite direction."


These bastards really are intelligent fools!

ILLILLILLI's picture

You need to conflate the predominant paradigm until it is undecipherable and it conflagrates.

ali-ali-al-qomfri's picture

spray some windex on that and it will be like new

captainkid's picture

i could not agree wit you more. I acctually laugh when i think of my college education in econ. I graduated from a "good" school only to hit the streets and learn that i didn't want to be a scum bag.

hahaha. buy stock with both hands i'm sure everything will keep going up forever!!! haha

mortgage you home to buy a hot tech ipo with no profits at 10x its book value haha

Jethro's picture

Well Jesus H. Christ... The Fed retards stopped licking the windows of the short bus long enough to stumble on a truth.

Caveman93's picture

When currency creation is only by debt, yeah you'll have some problems at some point in time. 

Even worse is usery. There will never be enough currency printed to cover the interest payments. 

Math is pretty simple actually.

LawsofPhysics's picture

Yep, doesn't change the fact that them people are going to insist that their paper claims on real goods and services must be honored.

Fuck em, eat the fuckers...

striped-pad's picture

Even worse is usery. There will never be enough currency printed to cover the interest payments.

Actually, it turns out that there is no stability problem when interest is charged. See my example and diagram.

Hubbs's picture

Hey! You stole head banger's avatar! ( I thought it was pretty cool-it matches my frustration with computers-especially with Apple).)


(My avatar was stolen from Karl Denninger. I couldn't get the rest of it to play. The guy self immolates and disappears into a crisp. Can any readers give a clue how to get mine "to dance"?)

ILLILLILLI's picture

That's lost on a whole generation (or two)...

ILLILLILLI's picture

Hubbs...go here and then right-click on the animation. Click 'save as' then upload that file for your avatar.

pashley1411's picture

The Fed is a fully owned subsidiary of The Onion.    The Onion recently and stealthily took over the universe, known and unknown, in a deal with the devil; details of which are still being revealed.     One point was that The Fed losses all sense of humor.

Automatic Choke's picture

ding ding ding ding ding !!!!


pashley1411 wins the daily prize.  Fed owned by the Onion, indeed.  


That explains so much.    Now I gotta go get yet ANOTHER new keyboard, having spit coffee all over this one.



Hohum's picture

Leverage isn't risky.  There is no risk at all.  The Fed told us so.

vnct's picture

leverage isn't risky if you plan to QE-infinity and never repay debt.

kchrisc's picture

Remember: They are always lying, even when espousing the truth.

If they are resorting to the truth, they are lying about something else. Look for the lie.

The banksters need to repay us.

Dragon HAwk's picture

I've been smelling a little bit of Shift the Blame lately ...

kchrisc's picture

"I've been smelling a little bit of Shift the Blame lately ..."

I do too, but I believe it to really be a setup.

They plan to pull the plug on the dollar, hence the artificial boost in the dollar, making it easier for the connected and Amongst to bail. They will then lay it all at the FedRes' feet, and then roll-out the SDR backed fiat-ponzi. They will NOT allow their thefts to be diminished by their inflation.

"The dollar was only backed by one violence-puppet, the DC US, but our new and improved fiat-ponzi is backed by several. That's 'more better.' Isn't it?!"

The banksters need to repay us.


Don't Debt on Me!

Seasmoke's picture

We let the idiots take control. How pathetic are we !!

kchrisc's picture

Nothing says that we can't take back control.

I checked with Jefferson, and he said:

"But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security."

Well, there you go. Can't argue with that.

The banksters need to repay us.


The Four Rs
Rejection: Stop Paying. Stop Playing. Stop Obeying.
Revolution: It is inevitable, so prepare, as they are.
Retribution: The guilty must answer for their crimes against the American people and the Constitution. No “truth and reconciliation,” but “trial and Retribution.”
Restoration: Restore the American people, country and Constitutional republic.

Hohum's picture

Things were better when certain Nouns were capitalized.

Kprime's picture

You want the Nouns?    YOU CAN"T HANDLE THE NOUNS!

lunaticfringe's picture

Rebellion to tyranny is obedience to God.


BringOnTheAsteroid's picture

Oh, I don't know. How about "spending all day bitching and moaning on an Internet forum while doing absolutely nothing constructive" pathetic.

lunaticfringe's picture

Exactly. That is the same question I asked myself. What I can do? How about citizen arrests? They havent taken that right away yet.


kchrisc's picture

"We all eagerly look forward to part 2: the moment when the Fed figures out it monetized $4 trillion in US debt to delay the cataclysmic collapse of the western financial system."

The guillotines eagerly await the "cataclysmic collapse" as well.

The banksters need to repay us.


The guillotines' favorite song: