More than a year after the federal government's intervention into the financial services sector, what is the shape of the industry? This week, MortgageOrb speaks with Charles K. Rowley, general director of The Locke Institute and Duncan Black Professor of economics at George Mason University, Fairfax, Va., on whether Washington's efforts were helpful or hurtful. Rowley is also the co-author (with Nathanael Smith) of ‘Economic Contractions in the United States: A Failure of Government,’ a new book published by The Locke Institute.
Q: How do you see the financial services industry and the housing market today?
Rowley: Some of the very large banks – Bank of America, Citigroup, Wells Fargo and GMAC – are in a dreadful condition, almost certainly worse than the stress tests suggest, if mark-to-market accounting were strictly imposed. Several other large banks that passed the stress tests are in worse shape than is acknowledged. They will be very slow to enter the housing market again in the short run, if they are sensible.
A lot of the smaller banks that played by the rules and did not get into subprime mortgages are in much better shape. The bankrupting of the failing large banks would have sped up the emergence of sound banks and limited long-term damage at the price of a sharper short-term upheaval.
The housing market is still in bad shape. There were some 3.5 million foreclosures in 2009, and more are on the way. But that is not the problem. The foreclosures are healthy because the housing market is recovering from a serious bubble. The faster the process goes, the better for the long-term viability of the industry.
Q: How would you rate the federal government's efforts in this area?
Rowley: The federal government's intervention in the mortgage banking industry hurt the industry significantly. Insolvent banks should have been bankrupted, allowing accounts protected under the Federal Deposit Insurance Corp. to shift to healthy existing or new banks. This would have valued the toxic assets appropriately – pretty much at zero – clearing them from the ledger that currently overhangs the industry.
Bank failures are the good side of the coin. Propping up the banks that deserved to fail is the bad side of the coin.
Fannie Mae and Freddie Mac, as well as the Federal Housing Administration (FHA), should have been shut down, forcing mortgage lenders be held fully responsible for their loans. These actions would have eliminated a lot of moral hazard for the future and taken the mortgage business back to the much saner period before derivatives, subprime lending, reverse redlining and all the other excesses of the past decade emerged.
Q: Many people in mortgage banking have viewed the FHA in a positive light. Why do you believe that the agency should be closed?
Rowley: The FHA is a disgrace. Foreclosures on its loans are running at the same level as those involving subprime loans. It is responding to President Obama's pressure to engage in reverse redlining mortgages, basically replacing the private-sector banks that have withdrawn from the subprime market. It will be bailed out in 2010, as Obama further reaches into his policy of socializing the financial sector.
Q: What do you see as the near-term future for Fannie Mae and Freddie Mac?
Rowley: Those two disgraces should have been liquidated in late 2008. They will stumble on making unbelievable losses as part of Obama's long march to socialism.
Q: What do you see for the economy in 2010?
Rowley: For 2010, I expect a very sluggish recovery because of the growing federal debt. I expect a serious deterioration in the dollar as international reserve currency, triggering interest rate rises that will induce a second recession. This would have been avoided if Bush and Obama and the Congress had balanced the federal budget through the crisis and refrained from bailouts.