It is remarkable that here we are in 2013, and not a day goes by without another headline regarding the return of subprime lending. The FDIC is kind enough to offer a definition of what subprime means. In a nutshell, it is a reference to credit characteristics associated with individual borrowers with poor credit profiles. Essentially borrowers whose past credit history dictates that they offer a much higher default risk than the normal borrower. The recession that slammed the United States no less than five years ago, eventually spilling over into the entire world, was in large part caused by subprime loans tied to US housing. With the recession still clear as day in the rear-view mirror, it becomes more apparent every minute that no lessons were learned from past mistakes.
Spend 10 minutes to read some of the headlines in just the last few months regarding the return of subprime lending. Headlines abound about the return of subprime auto loans, student loans, home loans, and even the big daddy of them all the securitized loans. It is not just that these loans are being made again, but that they are made with the same reckless abandonment that caused the last recession.
These articles are almost part and parcel the exact type of articles that were written in the immediate aftermath of the recession. The difference is that directly after the recession, these types of articles were used to highlight where the breakdown in the financial system occurred. Today, these articles are just informative in nature. Financial websites ringing the warning bell will have no impact. Until the President, Congress, and the Federal Reserve come to grips with the real world impact of their policies it is just a matter of time before the lemmings lead us off the cliff again.
It is a sad state of affair when just yesterday, you have a headline that the Obama administration is pushing for banks to loosen their mortgage lending standards. I have a news flash for the Obama administration: the US government backed mortgage entities such as the FHA will already underwrite almost any person with a pulse. All it takes is a downpayment of 3.5% and a credit score of 580 and you can get an FHA loan. How much more loose do the mortgage standards need to be? It is a complete fallacy that getting a mortgage today is difficult for someone with even subpar credit.
Why This Credit Bubble Will Be Different
When George W. Bush left office in the middle of the last recession the national debt stood at over $10.5 Trillion. 5 years later, the debt balance has ballooned to over $16 Trillion. In that same period of time, the Federal Reserve balance sheet has popped from $1 Trillion to over $3 Trillion and is still growing.
Over the last 5 years, the rich have gotten richer, and the poor have gotten poorer. The number of people in the US relying on food stamps to feed their families has exploded by 70% over the last 5 years. Job growth is anemic compared to other post recession periods of recovery.
The Federal Reserve has already embarked on QE infinity to prop up financial markets with cheap money. In return, companies desperate for yield are taking the same risks that drove the country into the last recession. Only this time, the precedent exists that if you take large enough risks the government will be there to save the day.
The problem today, compared to 5 years ago, is that the levered up US Government and Federal Reserve are in a far worse position to blunt the effects of the next credit bubble to pop.
The concept is not simple nor is it overly alarmist. Only the catalyst for the next crisis has changed. The last recession was caused by elected officials in Washington. They force fed policy down the throats of banks to lend to those, whom all things considered, would not previously have been considered credit worthy. This crisis will be caused by unelected officials, 12 in particular. The similarities are the same only the stakes are much higher. Whereas the US Government had the Federal Reserve to bail them out, there will be no white knight capable of saving the Federal Reserve from the latest subprime crisis they are creating.