Fiscal Responsibility Starts with Main Street

Two events in the past month have caused me extreme concern that one of our greatest economic errors as a nation is being repeated.

I refer to the five-year anniversary of the Lehman Brothers bankruptcy filing we just observed and to the decision of the Federal Reserve to defer the “tapering” of their gigantic quantitative easing project (tapering refers to slowing down the quantitative easing, and the quantitative easing refers to the act of buying bonds with money that does not exist). The great economic error I refer to is the cult-like mentality surrounding homeownership in our society that brought our entire economic system to its knees in the fall of 2008. Five years later, what exactly have we learned?

I am not one who will say that the economic system is not better off than it was during the peak of the crisis. It is. Bank leverage has been dramatically reduced and significant asset write-downs amongst the American financial institutions have completely recalibrated the balance sheet disaster we faced just five years ago. However, has the underlying mentality on Main Street changed? Has the government’s coddling of the housing market changed? It would seem to me that between Wall Street, Main Street and government policy, the only institution actually behaving and acting differently is Wall Street. You won’t see that uttered in the mainstream press.

In taking three months to flat-out tell the market they were going to begin “tapering” their bond-buying program, the Fed built into the market the expectation that some of the excessively easy monetary policy they were providing would begin to unwind. Then, to the shock of every single market participant and analyst, they announced that they would not begin tapering and provided the most dovish overtone to their present mood we have heard from them yet.

Why? Why would the Fed know that the capital markets were fully prepared to absorb a $10 billion tapering of this bond-buying, and then not even do that? It is not merely my opinion that at some point they have to stop this – it is their opinion! Chairman Ben Bernanke has said so repeatedly. This was a golden opportunity to begin some very, very mild restoration of sound monetary policy. So why would they do this?

Their coddling of the housing market is dumbfounding. I would assume there is extreme pressure from Fannie Mae and related policymakers to sustain the steroids the Fed had injected into the housing market prior to the summer of 2013. The mere expectation of modestly higher rates slowed this momentum enough that I believe the Fed chickened out. This is disappointing, because the Fed knows that the day of reckoning has to come. No “housing recovery” can be considered real when it cannot even sustain the modest tapering of a bizarre Fed bond-buying program.

Five years after the most severe economic crisis since the Great Depression, what has become of the cult of homeownership in American society? Has it been squashed or is it larger than ever? Can you name one political candidate, political party or economic ideology with the courage to speak out against a “real estate recovery”? What is a “real estate recovery”? Intrinsic value needs no prayer for recovery – it just plain happens. When supply and demand are aligned the way they are supposed to, prices move the way their supply-and-demand characteristics dictate.

Today, we do not have people praying for a substantive real estate recovery – we have people praying for their house to go up in value so they can trade it. We do not have a culture, five years after the economy was brought to its knees, looking to repel the culture of debt that created the crisis – we have a movement to give this culture fresh life.

The family value of homeownership is a noble and worthwhile goal, but I see no evidence five years later that Main Street has disposed of its culture of short-termism, speculation, indebtedness and instability for a culture of value, fundamentals and stable community living. The covetousness that destroyed Lehman is the same covetousness that raged throughout Main Street.

I know five years later what effects the crisis has had on Wall Street. Leverage has been reduced and capital raised with reckless abandon. Many of the firms who played such a huge role in the crisis are gone. Can the same be said of Main Street? How we look at the crisis in another five years is not going to depend on what is happening with Wall Street; it will depend on the American culture’s ability to learn the great moral lesson of 2008 – a culture that begins with Main Street.

David L. Bahnsen is a managing director at a large Wall Street firm, where he runs a large wealth management practice. He is a certified financial planner and certified investment management analyst. He and his family reside in Newport Beach.

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