Bloomberg TV aired an interesting special this evening on the last financial crisis. I normally don’t like to watch shows or read articles about the mortgage and housing bubble. I lived it, fought it, and prefer not watching a replay of it. Similar to today, it was a difficult period to be a contrarian and an absolute return investor. Although I didn’t plan on it, I ended up watching the entire show and surprisingly it wasn’t too painful. In fact, I thought it was a good summary of the crisis.
Throughout the special, Bloomberg aired interviews of experts, including Warren Buffett. As usual, he said a lot of things that made sense. However, the quote that caught my attention wasn’t from Warren Buffett, it was from the journalist Thomas Friedman. He said the reason mortgage brokers and bankers gave loans to people who couldn’t pay them back was because they lent on the premise of “I’ll be gone” and “you’ll be gone”. Impersonating a mortgage broker, Mr. Friedman said, “I’ll sell you this mortgage because I’ll be gone.” He then pretended to be a banker and said, “I package a mortgage into a thousand bonds and sell it to someone…and it will be gone.” I thought this was a good description of the mindset of a mortgage broker or banker who knowingly underwrites bad loans. I suspect most imprudent underwriters have no intention of being around when their rotten book of loans unravel. Interestingly, his comments made me think of today’s central bankers.
The Federal Reserve has been accused of delaying the normalization of monetary policy for political reasons. Today Janet Yellen denied these allegations and said the Federal Reserve does not have political motives. Maybe she’s right. Maybe the reason for the consistent delay has nothing to do with politics, but has everything to do with avoiding another 2008-2009 crash on this Fed’s watch. Maybe central bankers are simply like many mortgage brokers and bankers before the financial crisis. Is it possible that they’re delaying raising rates simply because they all want to be gone once normalization hits and asset prices decline? Is it also possible that the Federal Reserve believed all of their asset inflation would have created a sustainable recovery by now? It hasn’t and it appears they’re unsure about what to do next. Is plan B simply to keep assets inflated until someone else takes over?
Bernanke inflated the Fed’s balance sheet and asset prices. He handed his creation to Yellen. Why should we be surprised if Yellen wants to do the same thing – keep things afloat until the next Chairman takes the helm (her term ends February 2018). Donald Trump doesn’t want to wait and has recently been more vocal about his disagreement with Fed policies. I’m sure he’s thinking like a new loan officer would right before joining a distressed bank. He’d prefer the write-downs are incurred before he starts his new job, not after.
Regardless of who becomes the next president, no one wants to be responsible for someone else’s policy mistakes. It’s one big game of inflated asset prices hot potato. Meanwhile some investors still believe the Federal Reserve is data dependent. After eight years of emergency measures, I believe monetary policy is more likely being driven by another version of the “I’ll be gone” and “you’ll be gone” mindset that helped create the last financial crisis. Considering the extraordinary legacy and reputation risks the end of this cycle will bring, it wouldn’t be surprising.