Monthly Archives: April 2015

“Some Fed officials also see considerable costs in tolerating more inflation. Stanley Fischer, the Fed’s vice chairman, said at a separate I.M.F. event this month that it was important to keep inflation low enough so that people did not need to pay it any attention. At 2 percent annual inflation, a dollar loses half its value in about 36 years; at 4 percent inflation it takes about 18 years…

…“When you start getting up to 4 percent inflation you begin to see signs of indexation coming back and a whole host of the inefficiencies and distortions,” Mr. Fischer said. A 4 percent target, he concluded, would be “a mistake.””, Binyamin Appelbaum, “2% Inflation Rate Target Is Questioned as Fed Policy Panel Prepares to Meet”, New York Times, April 29, 2015

“Quite unbelievably, in this NY Times article, Fed Vice Chairman Fisher essentially makes Ron Paul’s point about monetary inflation, created by central bankers, causing market inefficiencies (malinvestment I assume?) and distortions. This article should scare the hell out of anyone who owns bonds (especially with the 10-year at only a 2% nominal yield!!!!) and might cause people to run to gold or other hard assets like other commodities, homes, land, vintage autos, art, etc. Maybe the significant rise in value of many of these assets, which once again seem to be approaching bubble levels, is more rational than we think given the inflation risks? Isn’t there really only one reason to seriously consider monetary inflation rates higher than 2% (which Mr. Fisher points out, already causes bonds denominated in dollars to lose 50% of their value every 36 years!!!)? Isn’t it because the government wants to reduce (essentially devalue in real terms) its and others massive debts ($18 trillion or so for the U.S. government), at the expense of creditors? When might these creditors “wake up and smell the coffee?””, Mike Perry, former Chairman and CEO, IndyMac Bank

2% Inflation Rate Target Is Questioned as Fed Policy Panel Prepares to Meet


Printing plates for making $1 bills. The Fed is preparing to start raising its benchmark interest rate later this year. Credit Mark Wilson/Getty Images

WASHINGTON — The cardinal rule of central banking, in the United States and in most other industrial nations, is that annual inflation should run around 2 percent.

But as the Federal Reserve prepares to start raising its benchmark interest rate later this year to keep future inflation from exceeding that pace, it is facing persistent questions about the wisdom of the rule and the possible benefits of significantly increasing its target.

Higher inflation could disrupt economic activity, but it also would enhance the Fed’s power to stimulate the economy during recessions. And some experts say the struggles of the Fed and other central banks to provide enough stimulus since the Great Recession suggest they could use more room for maneuvering.

“Most developed countries’ central banks have experienced difficulty in providing sufficient monetary stimulus to spur a robust recovery in their economies,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a recent speech in London. “This may imply that inflation targets have been set too low.”

As the Fed’s policy-making committee concludes a two-day meeting in Washington on Wednesday, officials were expected to discuss how much longer the central bank should hold its benchmark rate near zero, as it had done since December 2008. Officials had planned to start raising rates between June and September, but growth has fallen short of the Fed’s expectations this year, which could delay the liftoff.

Inflation has mostly remained well below the 2 percent target since the global economic downturn. The Fed’s preferred measure, published by the Bureau of Economic Analysis, rose just 1.4 percent during the 12 months ending in February.

But Fed officials want to start raising rates in anticipation of stronger growth and faster inflation. William C. Dudley, the president of the Federal Reserve Bank of New York, said last week that “hopefully” the Fed would make its first move this year.

There is little prospect that any major central bank will raise its inflation target in the foreseeable future. Two percent is a global standard and the official line — in Japanese, German and English — is that it was carefully chosen, and that the stability of the target is a virtue in its own right.

There is also considerable political opposition to higher inflation. Some conservative economists and politicians argue that central banks should aim to keep inflation well below 2 percent.

But the broaching of the inflation targeting issue by Mr. Rosengren and other prominent officials — including Olivier Blanchard, chief economist of the International Monetary Fund — suggests an emerging willingness among policy makers to revisit an issue that for more than a generation has been treated as all but written in stone.

The case for raising the 2 percent target rests on the counterintuitive idea that moderate inflation is a good thing, helping to grease the wheels of commerce and prevent an outright fall in prices. This is widely accepted by economists. It is the reason that central banks aim for a modest inflation rate, rather than keeping prices at the same level from year to year. The question is, How much?

Central banks influence economic growth by raising and lowering borrowing costs. Higher costs crimp risk-taking; lower costs stimulate expansion. Those costs, expressed as interest rates, combine the price of money with an additional increment to compensate for inflation. Higher inflation means rates will run higher in normal times, allowing the Fed to make larger cuts during periods of duress.

In recent decades, as inflation generally declined, the Fed has had less room to make cuts. The Fed, for example, cut rates by 6.75 percentage points beginning in 1989, and by 5.5 points beginning in 2001. On the eve of the crisis in 2007, the Fed’s benchmark rate stood at 5.25 percent. The Fed rapidly reduced that rate almost to zero — but that did not provide enough stimulus on its own to revive the economy.

Laurence Ball, an economist at Johns Hopkins University, proposed in a 2013 paper that central banks should adopt 4 percent inflation targets. The benefits of avoiding a return to the so-called zero lower bound, he said, outweighed the potential economic disruption.

“A 2 percent inflation target is too low,” he wrote. “It is not clear what target is ideal, but 4 percent is a reasonable guess, in part because the United States has lived comfortably with that inflation rate in the past.”

The case for a higher target has been strengthened in recent years by a global decline in borrowing costs, which might be offset by higher inflation.

In April 2012, Fed officials predicted that the benchmark rate would return to about 4.2 percent after the economy had recovered. In the Fed’s most recent predictions, in March, the average estimate was that the rate would reach 3.7 percent.

And some economists regard even those estimates as optimistic. Lawrence H. Summers, the former Treasury secretary, argues that the developed world may have entered a period of “secular stagnation” in which borrowing costs are unlikely to rise significantly above current levels because of chronic lack of demand.

John Williams, president of the Federal Reserve Bank of San Francisco, said in an interview this month that if Mr. Summers was correct, it might become necessary for the Fed to consider raising its 2 percent target.

“If you really thought that’s the world we’re in because of the demographics or productivity growth — if that’s really what our future holds — I think that’s just a reality that you need to think about monetary policy and its ability to achieve goals,” Mr. Williams said.

But Mr. Williams, like most central bankers, is not yet ready to do so.

He said the Fed had demonstrated in recent years that it retained considerable power to stimulate growth even after cutting rates nearly to zero through bond purchases and by announcing that it intended to keep rates near zero for an extended period.

David Lipton, the senior American official at the I.M.F., said recently that the crucial lesson was that central banks needed to take such measures more quickly. “It isn’t necessarily that you ought to be at 3 or 4, it’s that when you’re at 2 you’re just much more careful about preventing it from falling,” he said.

It is also possible that rates will increase more than the Fed expects, easing the pressure. Ben S. Bernanke, the former Fed chairman, has argued in response to Mr. Summers that rates are being suppressed by a “savings glut” in some countries, notably Germany, that is likely to dissipate as growth improves.

James Hamilton, a professor of economics at the University of California, San Diego, co-wrote a recent paper that reached a similar conclusion.

“Those who see the current situation as a long-term condition for the United States are simply overweighting the most recent data from an economic recovery that is still far from complete,” Mr. Hamilton wrote in a blog post.

Fed officials also see benefits in maintaining the 2 percent target, which was formalized in 2012 but had long been acknowledged informally. People have come to view 2 percent inflation as a reliable constant. When oil prices rose in the middle of the last decade, measures of inflation expectations showed that American consumers remained confident the effects would subside. In recent years, as inflation has consistently fallen short of the Fed’s goals, those same measures show that confidence in an eventual rebound has not wavered.

“I don’t see anything magical about targeting 2 percent inflation,” Mr. Bernanke said at a panel sponsored by the I.M.F. But he added that the costs and disruptions of moving to a higher target could outweigh the benefits.

A higher inflation target also would require political support. Congressional Republicans already are upset that the Fed is trying to raise inflation back toward 2 percent. They would loudly object to any effort to enshrine a higher target.

Some Fed officials also see considerable costs in tolerating more inflation. Stanley Fischer, the Fed’s vice chairman, said at a separate I.M.F. event this month that it was important to keep inflation low enough so that people did not need to pay it any attention. At 2 percent annual inflation, a dollar loses half its value in about 36 years; at 4 percent inflation it takes about 18 years.

“When you start getting up to 4 percent inflation you begin to see signs of indexation coming back and a whole host of the inefficiencies and distortions,” Mr. Fischer said. A 4 percent target, he concluded, would be “a mistake.”

A version of this economic analysis appears in print on April 29, 2015, on page B1 of the New York edition with the headline: Issue for Fed: Is a 2% Inflation Rate High Enough?.

“This recent mortgage newsletter excerpt on appraisers and related regulations is nuts. It’s all form-over-substance. Nothing has really changed re. the methodology of home appraisals, despite the fact that they didn’t detect or prevent the housing bubble/bust. U.S. homes are still being valued using “market comparables,” which tend to confirm the direction of prices rather than challenge or refute them…

…What’s the alternative? Every other form of real estate is appraised based on the present value of net rental cash flows and so should homes. I am so glad to be out of the mortgage biz. You’d have to be crazy to start your career in mortgage lending these days and that includes wanting to become a residential appraiser. That’s why the average age of mortgage professionals is going ever higher. Young people aren’t going to put up with all this bureaucratic regulation. They are smart enough to understand it’s mostly nonsense.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Appraisal Excerpt from April 2015 Mortgage Industry Newsletter (all names were changed):

“I received this note. “Nancy, one of my borrowers had their property appraised the other day. She mentioned that the appraiser looked like he was 85 years old and a hermit, could barely shuffle around the property, and seemed almost inconvenienced to be there. It reminded me that with all the talk about the average age of LOs and Realtors, no one talks about the aging appraiser population. As I understand it, it is almost as if the appraisal business has the odds stacked against it. No one goes through high school or college wanting to be an appraiser. The national group – whether it is NAIFA or the Appraisal Institute – doesn’t seem very strong. Appraisers need 3,500 hours of appraisal time and 200 class hours – what advantage do appraisers have to train someone and pay them? In the past banks had staff appraisers, and training could occur – but that is no longer the case. Is anyone out there making recommendations about how the industry can bring in new blood in a cost-effective, efficient, and prudent manner?

John Doe with John Doe Appraisal Service wrote, “It is accurate that the average age for appraisers is rising. Depending on who’s calculating, it’s estimated to be in the mid to high 50’s (similar Realtors and loan originators). Recently I was in New Orleans at an appraisal symposium put on by the Collateral Group. Some of the industry’s best thought leaders shared their perspectives on what the future holds for appraising and what steps we should take to best serve our constituency; appraisers, lenders, and communities alike.  One of the topics was on the very issue of ‘growing’ new appraisers. Tina, Chief Appraiser for one of the country’s largest banks (and largest mortgage lender), announced an initiative to bring on and train 10 appraisal trainees. Historically, the big banks were instrumental in being a training ground for new appraisers – and I think Tina was attempting to challenge all of us, banks and AMCs alike, to join in a movement to ‘replenish the herd’. It was encouraging.

“Here at John Doe, we’re about to ‘graduate’ our 1st trainee after a 2 year and 2500 hour experience requirement for Certified Appraiser Classification here in California. We currently have 2 others in training and look to increase our efforts. We’ve found that bright kids with technological skills coming out of college and paired with experienced appraisers (almost in the tradition of the old Guild system) make a perfect complement. And we believe that the natural attrition in the appraiser ranks will open up true career opportunities for those with 21st century skills infused with the tribal knowledge of their elders.

As for the barriers to entry for the profession, I personally agree with your reader, they’re inhibiting. We are living with a generation where instant gratification often takes too long. So the new threshold that requires an appraiser as of Jan 1, 2015 to have a BA Degree plus 2500 hours of experience over no less than 24 months and 200 hours of appraisal course education (which can vary a bit by state) is imposing. Given that neither Realtors nor loan officers have to demonstrate anywhere near that level of education or experience, it does seem disproportionate. That said, there is some movement to accelerate the training aspect and perhaps institute a series of testing protocols to shorten the timeline.

“I think most industries go through shifts that challenge their structure and roles. The more data we accumulate, the more imperative it is that we have skilled professionals to dissect and translate that data. Appraisers are only going to be more valuable and in growing demand if we are to meet the challenges in front of us.”

Jane Smith with Jane Smith VMS wrote, “Appraisers are going through an adjustment period after the wave of regulations over the past 8 years and are still trying to find their identity on how to be sustainable long-term within the current regulatory environment. There’s a host of issues on the table like new licensing, customary and reasonable fee’s and licensing regulations on trainees that all need to be addressed, and the current regulatory environment is not suitable for prosperous future for the industry. I think that unless there are changes made you will see the industry continue to struggle.

“If I was going to provide a solution it would be to first allow trainees to inspect the properties instead of requiring supervisors to do so at all times in federally related transitions, second it would be to allow working at a review position or staff appraiser position for an AMC or lender to be counted as field experience hours towards obtaining full licenses and finally establish some type of state wide minimum fee for appraisals so that lenders don’t have to compete on appraisal price at all times like they do now. If these 3 changes were made you would start seeing the industry be re-born very quickly. Without them you are dealing with an appraisal industry that is playing not to lose rather than playing to win.”

Lastly, Mike with XYZ Valuation said, “This topic has been a huge source of consternation not only for appraisers but lenders as well. I attend appraiser conferences where the numbers of appraisers are dwindling and there does not appear to be any way for new appraisers to get into the profession.

“Here are the facts: To become a licensed appraiser (and many lenders will only accept certified residential or certified general levels and you MUST hold a certified level licensed to be on the HUD-FHA roster) there is 150 hours of education and 2,000 hours of experience in no fewer than 12 months. So not only does an individual have to take courses, but then work for a minimum of a year BEFORE they can sit for their test to become licensed. For certified residential it is 200 hours of education and 2,500 hours of experience (along with at least an AA degree or 21 semester credits in specific subjects) and for certified general it is 300 hours of education, 3,000 hours of experience and a Bachelor’s degree or higher. Many lenders require, at a minimum, certified residential licensure or FHA Roster status in order to be an approved appraiser. So – this is akin to a company ONLY hiring folks with 10 years of experience or more. Other than a few appraisal companies around the country, I don’t know of any way for a new appraiser to get the required experience and enter the profession – I wish I had a more positive answer. Back when I started in appraising, many banks and savings & loans maintained staff appraiser positions and had trainee positions to bring in new talent – that just doesn’t seem to be the case these days.”

On the subject of appraisals Suzie with Loan ABC writes, “On HUD’s latest conference call it was stated that the primary role of an FHA Roster appraiser is to, ‘Observe, Analyze and Report’ what he/she encounters during their on-site visit to a property. There were a number of specific examples cited in which the HUD staff presenter indicated that the appraiser has effectively completed their assignment when they have documented and reported their concerns to the lender or underwriter. The problem, however, is that no specific guidance was provided to the lenders & underwriters as to how to deal with the problems reported by the appraiser. In fact, the draft 4000.1 Handbook has many examples of this dilemma and needs to be modified before it is implemented.

“One topic discussed was, ‘Appraisers must now make a statement as to whether or not the subject property can be legally rebuilt if destroyed when the property has a legal non-conforming zoning designation.’ However, what about situations in which the property cannot be rebuilt if it is more than 75% destroyed?  Should the underwriter reject the property for mortgage insurance although the borrower’s will be required to have adequate hazard insurance coverage?  No guidance is provided in the Handbook or on the call.

Another topic was, ‘Appraisers will report to the lender if they could not observe the roof surface.’ Should a lender then require a roofing certification, a roofing warranty or would a hold-harmless letter from the borrower be acceptable? No guidance is provided in the Handbook or on the call.

“‘An Appraiser must report whenever he/she cannot gain access to the attic area and state why it is not readily accessible.’ The underwriter will be required to make a decision as to what actions (if any) are deemed necessary to close the loan transaction.  No guidance is provided in the Handbook or on the call. In fact, an underwriter on the conference call stated that she had a recent case in which the appraiser stated that he could not gain access to the attic area but observed no signs of problems with the roof shingles or any evidence of roof leaks on 2nd floor ceilings. This underwriter documented the file accordingly but received an Indemnification Agreement request from HUD subsequent to the loan closing.

“And, ‘Appraisers must perform a highest & best use analysis and let the lender know when it is determined that the subject property has Surplus Land.’ Specific guidelines, however, have not been provided to lenders as to how to deal with a transaction in which the Appraisers determine if there is Surplus Land.

“To access the draft Handbook [meant to consolidate much of HUD’s efforts] go to the website and type in 4000.1 Handbook in the Search Box. NOTE: On April 22, 2015, HUD/FHA Headquarters staff conducted a follow-up industry conference call to discuss the recently published new Section of the draft “Origination Through Post-Closing/Endorsement” Handbook (4000.1) dealing with Appraiser and Property Requirements. This Handbook will ultimately serve as a single reference point for FHA underwriting and appraisal policies & procedures and is targeted to be effective for all transactions in which the FHA case number was assigned on and after June 15, 2015.””

“…the lawsuit (Quicken vs. the DOJ) gives voice to an increasingly popular sentiment among financial institutions: that the government is, for political reasons, extracting hundreds of millions, if not billions, of dollars in settlements for what are at best technically and immaterially incorrect claims.”, Matthew Schwartz, partner, Boies, Schiller, and Flexner, April 2015

Excerpt from April 2015 Mortgage Industry Newsletter:


“Many lenders are watching this battle of industry frustration from the sidelines: Quicken vs. the DOJ, and vice versa. Prior to the government suing Quicken, Matthew Schwartz, a former federal prosecutor who is now a partner at Boies, Schiller & Flexner in New York, wrote, “Quicken Loan’s decision to sue the Government over what it has alleged is arbitrary and capricious conduct related to the investigation of Quicken’s lending practices is unconventional, to say the least. The lawsuit itself is a legal long shot. The government generally has immunity and great discretion where it doesn’t, over how it conducts its investigations or settles enforcement actions. But the lawsuit gives voice to an increasingly popular sentiment among financial institutions: that the government is, for political reasons, extracting hundreds of millions, if not billions, of dollars in settlements for what are at best technically and immaterially incorrect claims. While the government will probably win this lawsuit, if Quicken’s allegations are correct, it may be forced to explain its conduct in a way that will undermine the law enforcement effect of this and other recent enforcement actions.””

“Instead of letting political ideology or climate “religion” guide government policy, we should focus on good science. The facts alone should determine what climate policy options the U.S. considers. That is what the scientific method calls for: inquiry based on measurable evidence. Unfortunately this administration’s climate plans ignore good science and seek only to advance a political agenda.”, Lamar Smith, chairman of the House Committee on Science, Space and Technology, April 24, 2014

The Climate-Change Religion

Earth Day provided a fresh opening for Obama to raise alarms about global warming based on beliefs, not science.

President Obama at Everglades National Park in Florida for Earth Day, April 22. Photo: joe skipper/European Pressphoto Agency

By Lamar Smith

‘Today, our planet faces new challenges, but none pose a greater threat to future generations than climate change,” President Obama wrote in his proclamation for Earth Day on Wednesday. “As a Nation, we must act before it is too late.”

Secretary of State John Kerry, in an Earth Day op-ed for USA Today, declared that climate change has put America “on a dangerous path—along with the rest of the world.”

Both the president and Mr. Kerry cited rapidly warming global temperatures and ever-more-severe storms caused by climate change as reasons for urgent action.

Given that for the past decade and a half global-temperature increases have been negligible, and that the worsening-storms scenario has been widely debunked, the pronouncements from the Obama administration sound more like scare tactics than fact-based declarations.

At least the United Nations’ then-top climate scientist, Rajendra Pachauri, acknowledged—however inadvertently—the faith-based nature of climate-change rhetoric when he resigned amid scandal in February. In a farewell letter, he said that “the protection of Planet Earth, the survival of all species and sustainability of our ecosystems is more than a mission. It is my religion and my dharma.”

Instead of letting political ideology or climate “religion” guide government policy, we should focus on good science. The facts alone should determine what climate policy options the U.S. considers. That is what the scientific method calls for: inquiry based on measurable evidence. Unfortunately this administration’s climate plans ignore good science and seek only to advance a political agenda.

Climate reports from the U.N.—which the Obama administration consistently embraces—are designed to provide scientific cover for a preordained policy. This is not good science. Christiana Figueres, the official leading the U.N.’s effort to forge a new international climate treaty later this year in Paris, told reporters in February that the real goal is “to change the economic development model that has been reigning for at least 150 years.” In other words, a central objective of these negotiations is the redistribution of wealth among nations. It is apparent that President Obama shares this vision.

The Obama administration recently submitted its pledge to the United Nations Framework Convention on Climate Change. The commitment would lock the U.S. into reducing greenhouse-gas emissions more than 25% by 2025 and “economy-wide emission reductions of 80% or more by 2050.” The president’s pledge lacks details about how to achieve such goals without burdening the economy, and it doesn’t quantify the specific climate benefits tied to his pledge.

America will never meet the president’s arbitrary targets without the country being subjected to costly regulations, energy rationing and reduced economic growth. These policies won’t make America stronger. And these measures will have no significant impact on global temperatures. In a hearing last week before the House Science, Space and Technology Committee, of which I am chairman, climate scientist Judith Curry testified that the president’s U.N pledge is estimated to prevent only a 0.03 Celsius temperature rise. That is three-hundredths of one degree.

In June 2014 testimony before my committee, former Assistant Secretary for Energy Charles McConnell noted that the president’s Clean Power Plan—requiring every state to meet federal carbon-emission-reduction targets—would reduce a sea-level increase by less than half the thickness of a dime. Policies like these will only make the government bigger and Americans poorer, with no environmental benefit.

The White House’s Climate Assessment implies that extreme weather is getting worse due to human-caused climate change. The president regularly makes this unsubstantiated claim—most recently in his Earth Day proclamation, citing “more severe weather disasters.”

Even the U.N. doesn’t agree with him on that one: In its 2012 Special Report on Extreme Events, the U.N.’s Intergovernmental Panel on Climate Change says there is “high agreement” among leading experts that long-term trends in weather disasters are not attributable to human-caused climate change. Why do the president and others in his administration keep repeating this untrue claim?

Climate alarmists have failed to explain the lack of global warming over the past 15 years. They simply keep adjusting their malfunctioning climate models to push the supposedly looming disaster further into the future. Following the U.N.’s 2008 report, its claims about the melting of Himalayan glaciers, the decline of crop yields and the effects of sea-level rise were found to be invalid. The InterAcademy Council, a multinational scientific organization, reviewed the report in 2010 and identified “significant shortcomings in each major step of [the U.N.] assessment process.”

The U.N. process is designed to generate alarmist results. Many people don’t realize that the most-publicized documents of the U.N. reports are not written by scientists. In fact, the scientists who work on the underlying science are forced to step aside to allow partisan political representatives to develop the “Summary for Policy Makers.” It is scrubbed to minimize any suggestion of scientific uncertainty and is publicized before the actual science is released. The Summary for Policy Makers is designed to give newspapers and headline writers around the world only one side of the debate.

Yet those who raise valid questions about the very real uncertainties surrounding the understanding of climate change have their motives attacked, reputations savaged and livelihoods threatened. This happens even though challenging prevailing beliefs through open debate and critical thinking is fundamental to the scientific process.

The intellectual dishonesty of senior administration officials who are unwilling to admit when they are wrong is astounding. When assessing climate change, we should focus on good science, not politically correct science.

Mr. Smith, a Republican from Texas, is chairman of the House Committee on Science, Space and Technology.

“As I understand it, some mainstream economists and others think former congressman, presidential candidate, and libertarian icon Ron Paul is “a bit of a nut.” These “experts” point to the current strong dollar and low inflation and interest rates as evidence against Mr. Paul’s anti-Fed and fiat currency (paper money backed only by a government promise) and pro-sound money (backed by gold and/or other commodities) views…

…Yet most of these folks have never read the facts and arguments in Mr. Paul’s 2009 book, “End the Fed,” let alone any of the publications and/or economic theories of the Austrian-school economists (Nobel Laureate Hayek, Mises, etc.), from whom nearly all of Mr. Paul’s economic and monetary policy views derive. (By the way, former Federal Reserve Chairman Alan Greenspan expressed Mr. Paul’s exact monetary views in a 1966 paper and confirmed them again to Congressman Paul in the mid-2000’s! Don’t believe it? See blog posting statement # 705.) Right now, Mr. Paul’s long-time predictions of a collapsing dollar and inflation don’t seem right, but his predictions for more Fed-caused asset bubbles/busts do. As we all know post-crisis, in the short-run markets can be distorted or just plain wrong (and in a big way) for years. So let’s look at the longer term and keep it simple. On August 15, 1971, President Nixon took the United States fully off the gold standard.  (As I understand it, as a result of the 1944 Bretton Woods Monetary Accord, implemented in the 1950’s, the United States promised to convert foreign governments’ U.S. dollars into gold at the fixed price of $35 an ounce, and kept that promise until August 15, 1971.)  So, on August 14, 1971 the U.S. dollar price for gold was $35 an ounce. Today, April 22, 2015, gold trades at about $1,187 an ounce. That’s a compounded annual return for gold of over 8.3%, during that roughly 44-year period of time. Meaning that since we went to fiat (paper) money in 1971, the United States dollar has depreciated annually by the same percent, relative to gold. (Throughout history gold has been considered the world’s primary currency and is still held in massive quantities by many central banks and treasuries, including the United States.) Another (mathematically identical) way of saying this is as follows: “A 1971 U.S. dollar is worth about 3 cents today, when compared to gold!” The Fed and many “experts” will point to low government-reported inflation over the years, but Mr. Paul would respond that the market price of gold shows the truth and is a more comprehensive measure of inflation. As shown above, gold has risen, on average, at more than 8% a year for the past 44 years. Don’t think that really matters? Mr. Paul would then point out the fact that Fed Chairman Greenspan testified to Congress in the mid-2000’s that he believed it important that prudent and successful central bankers “replicate the performance of gold” and that the Fed, under his watch, had “generally done so.” Clearly, the math I show here, proves beyond any doubt that Chairman Greenspan’s Congressional testimony, on this issue, was materially wrong. The Fed’s U.S. dollar became nearly worthless (3 cents!) compared to gold since 1971 and much of that dollar decline (relative to gold) occurred during Chairman Greenspan’s tenure. So, is Mr. Paul right or are the “experts” and others who think Mr. Paul is “a bit of a nut” right? I don’t agree with everything Mr. Paul says, but I do think he is right when he says: “Fiat currency and the Fed’s highly distortive monetary policies have severely damaged our economy (causing almost constant bubbles and busts and malinvestment) and free market capitalism.” And like Mr. Paul, I believe these monetary issues were a major cause of our 2008 financial crisis and The Great Recession.” Mike Perry, former Chairman and CEO, IndyMac Bank “P.S. If you don’t agree, where do Mr. Paul and I have this wrong? (I also read that in the 34 years before Nixon closed the gold window in 1971, the money supply grew two-fold and in the 34 years after, the money supply grew 13-fold. I don’t know if this is accurate, but I repeat it here because it jives with the rapid increase in the price of gold since 1971. If it’s not accurate, please tell me and I will take it down. Finally, someone may appropriately argue that the $35-an-ounce, 1971 government price is inappropriate to use, because it was “price-fixed” by the U.S.; that’s why it had to be abandoned as unsustainable. As best I can tell, the average market price for gold in 1971 was $40.62 an ounce. If you use that figure instead, that results in an annual rate of about 8% vs. 8.3%. Not materially different.)”

“The problem is that, in the early stages, government economic planning and affirmative action lending look appealing. More homes are built and more people purchase homes that they otherwise would not have qualified for. Home prices soar and borrowing against the inflated prices is something the government and regulations encourage…

…The homeowners live beyond their means on borrowed money. None of this would have occurred in a free market with sound money.”, Ron Paul, “End the Fed”, 2009

“Many, including Greenspan, now argue that the major flaw in the system was the lack of adequate legislation to control “unbridled capitalism.” If only we could have monitored the “derivatives” market, the bust could have been prevented, they argue. Not so! Bureaucratic regulations cannot compensate for government programs and a Federal Reserve policy of inflationism that guarantees gross imbalances in the economy and provides a permanent safety net so that major losses are not felt by the perpetrators.”, Ron Paul, “End the Fed”, 2009

Part 2: Other Key Excerpts from Chapter 9: The Current Mess:

“The Congress, the bureaucrats, and the courts took an unsound monetary system destined to wreak havoc on our economy and made it much worse. Various programs, many started in the 1930s, encouraged and sometimes forced lenders to make subprime loans.”

“The market, though not perfect, minimizes unsound lending practices. Both borrowers and lenders are much more cautious when the risk is borne by the two parties involved rather than protected by the proverbial safety net.”

“In a structured social welfare…interventionist state, no one becomes solely responsible for his or her own actions….If individuals aren’t responsible for their actions as the bubble forms, the responsibility falls on others and to a future generation. Taxpayers, eventually, must foot the bill.”

“All bailouts are dependent on the Fed to create new credit out of nothing, the very policy that caused the mess in the first place.”

“The Community Reinvestment Act of 1977, as well as the Equal Credit Opportunity Act of 1974, contributed in large measure to the excess in the subprime market by forcing lending agencies to specifically make loans they otherwise would have avoided.”

“The flawed concept of economic equality through force, a socialist notion, prompted legislation like the Community Reinvestment Act, which was really a way of institutionalizing affirmative action in the financial sector, since the borrowers who temporarily benefited (or were exploited) were disproportionately minorities. The very most one might concede is that affirmative action in making loans is based on the good intentions of many who support the programs. But as with all government programs, unintended consequences and new problems result.”

“The problem is that, in the early stages, government economic planning and affirmative action lending look appealing. More homes are built and more people purchase homes that they otherwise would not have qualified for. Home prices soar and borrowing against the inflated prices is something the government and regulations encourage.”

“The homeowners live beyond their means on borrowed money. None of this would have occurred in a free market with sound money. But the climactic end to this illusion of wealth and home ownership for everyone is logically predicted. The poor are being foreclosed upon. Many will be out on the street. More inflation and government handouts won’t solve the problem.”

“The poor were deceived into believing government force could get them a home even if they hadn’t saved a penny, and it didn’t work. But many thrived as the housing bubble developed. Fannie Mae and Freddie Mac executives did well and “escaped” with millions.”

“Builders made huge profits constructing houses and stashing away profits, enjoying the steady increase in prices. Sales prices frequently exceeded the anticipated price when construction started. Mortgage brokers, banks, insurance companies, “flippers,” landowners, and developers all enjoyed the ride, and many were able to protect themselves. The poor were not so lucky.”

“With the collapse of the imbalances created by the dream of easy wealth, the poor, deceived into believing politicians could deliver the moon, are now unemployed and without a home.”

“The last thing that is likely to save them is a public works program. If the government was completely wrong in allocating massively excessive capital into housing, precipitating the greatest financial bubble in human history, it is hardly capable of making the correct decision as to where capital should be directed in the next decade.”

“There are many programs similar to the CRA that add fuel to the fire of waste, fraud, debt, and malinvestment. Significantly contributing to the moral hazard, that is the bad judgment, have been the FDIC, SEC, Fannie Mae and Freddie Mac, HUD, rules and regulations, court orders, the IRS, and a credit card mentality of no limits.”

“GSEs (government sponsored enterprises) such as Fannie Mae and Freddie Mac sent a message to investors and lenders that the Treasury and the Fed would always be there if any problems arose.”

“Foreign investors were definitely more inclined to invest in securitized mortgages knowing that Fannie Mae and Freddie Mac had an open line of credit to the U.S. Treasury. Interest rates were already below market due to the Fed policy, but the line of credit lowered rates even more, encouraging more risk taking. (Government) Subsidized mortgage insurance produced great incentive for making subprime loans that would have otherwise been rejected. And if there was no Fed, the risk takers would have thought much more about the consequences of their actions.”

“Sarbanes-Oxley, a regulatory consequence of the Enron and Long-Term Capital Management failures that imposed massive new costs on American business, did nothing to prevent today’s crisis. Our problem today was not caused by lack of business and banking regulation.”

“Many, including Greenspan, now argue that the major flaw in the system was the lack of adequate legislation to control “unbridled capitalism.” If only we could have monitored the “derivatives” market, the bust could have been prevented, they argue. Not so! Bureaucratic regulations cannot compensate for government programs and a Federal Reserve policy of inflationism that guarantees gross imbalances in the economy and provides a permanent safety net so that major losses are not felt by the perpetrators.”

“The Fed, short of being abolished, should have been prohibited from creating money and credit out of thin air and exerting monopoly control of the system with authority to set interest rates. These powers, unregulated, have nothing to do with freedom and sound economic policy. The Treasury should be regulated much more carefully.”

“As part of the ignored President’s Working Group on Financial Markets (Plunge Protection Team), the Treasury, along with the Fed, SEC, and CFTC, will continue to rescue the market in any way possible. Unfortunately, it’s more likely that its powers will be used to bail out friends at the expense of the rest of us. Wall Street won’t object. It wants protections from downturns and cares little about truly free markets.”

“The post-meltdown bailout economy has been one of the most frightening sights I’ve seen in all my years in Washington.”

“The Fed has committed trillions of dollars……The (government) debt buildup crowds out private-sector lending. It perpetuates bad views concerning home ownership. It subsidizes the past while ignoring the future.”

“The U.S. debt obligations are unfathomable, approaching $12 trillion. You might say the entire federal government is one giant toxic asset at the moment. It certainly has no business telling the private sector how to run its affairs.”

“And yet someone is getting money. Mostly it is powerful players in the market, institutions regarded as essential to national well-being, such as Goldman Sachs and AIG insurance.”

“Manipulating the money supply and interest rates rejects all the principles of the free market, and so it cannot be said that too free a market caused this mess (the 2008 financial crisis). The market was not free at all. It was manipulated and distorted…x`

…The market rate of interest provides crucial information for the smooth operation of the economy. A central bank setting interest rates is price-fixing and is a form of central economic planning. Price-fixing is a tool of socialism and destroys production. Central bankers, politicians, and bureaucrats can’t know what the proper rate should be. They lack the knowledge and are deceived by their own aggrandizement.”, Ron Paul, “End the Fed: Chapter 9, The Current Mess”, 2009

Part 1: Other Key Excerpts from Chapter 9: The Current Mess:

“Artificially low interest rates are achieved by inflating the money supply, and they penalize the thrifty and cheat those who save. They promote consumption and borrowing over savings and investing.”

“In 2008…the American people woke up to the reality that they have been living in a bubble economy that was now completely popping.”

“Many accusations were made about who was responsible for the downturn. It was argued, and still is, that it’s a reflection of the shortcomings of free-market capitalism.”

“Then-Secretary of the Treasury Henry Paulson simplified it by saying that the downturn in the housing market has caused all the trouble.”

“But…and this is crucial….focusing on the housing market alone was just the last of a parade of claims about the root problem. There were other sectors that have suffered, in finance, car manufacturing, services, retail, and stocks. These are all merely symptoms of a deeper problem: The Fed and its role in sustaining and unsustainable paper money system.”

“As current Treasury secretary Timothy Geithne said to PBS’s Charlie Rose: “But I would say there were three types of broad errors of policy, and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.” Mr. Rose asked specifically: “It was too easy?” Mr. Geithner went on: “It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time.””

“Just as Henry Hazlitt and the other Austrian economists knew, in 1944, when the Bretton Woods system was established, that it would not last, many others knew from the beginning that the current system started on April 15, 1971, would also fail.”

“The current crisis, started in 2007, with the break in the housing mortgage market, is now in full swing and signifies the end of the fiat dollar reserve currency system. It is impossible to understand the current crisis without understanding the international monetary system, which has been dominated by our Federal Reserve.”

“The core of the contemporary problem dates from 2001 when the Fed attempted to forestall recession through low interest rates. Actual interest rates fell well below historical averages and any monetary rule that the Fed claimed to be following. Greenspan slashed the federal funds target from 6.5 percent in January 2001, down to 1 percent by June 2003. He held the rate at this level for a full year before ratcheting them up again to 5.25 percent in June of 2006, a move that popped the bubble he had earlier created.”

“The lower interest rates are creating no new capital; they are merely distorting the signals borrowers use to assess risk.”

“We should consider the political context of the time. The terrorist attacks on American soil had taken place, and the entire country was moving toward war frenzy. The idea then was we would not let terrorists beat us economically or politically…fine impulses but also conditions that led to stupid short-term decision making. Part of the drive of the Fed to inflate in the year following the attacks was to create an appearance that we as a nation had not been harmed in any way….that our economy was stronger than ever.”

“Sadly, Greenspan chose the wrong means to convey this message.”

“Everyone in those days was consumed by the drive to not let the terrorists win. Well, the Fed assisted in undermining the foundation of the structure of the American economy and, in the long run, did more damage to American prosperity than the attacks of 9/11.”

“I want to be clear here. The Fed’s policy was dreadfully malformed.”

“We’ve been through nearly a hundred years of this same repeating pattern…The problem isn’t with the choices made by central bankers. The problem is that they possess the power to make any choice at all. There is the additional problem that markets are forever having to guess what the Fed is going to do, which creates as historian Robert Higgs call “regime uncertainty.””

“Market forces are always working to correct mistakes made by individuals or government.”

“The post-Bretton Woods system has been challenged numerous times over the past thirty years, but the authorities have been able to reprime the monetary pump, distract the masses, and keep it from deflating and correcting the errors inherent in central bank economic planning.”

“Instability was already apparent in 1987, with a sharp stock market correction called a crash. The Fed reinflated and restored confidence in a broken system. No final payment was extracted for the inflation that has gone on since 1971.”

“The savings and loan crisis of the 1980s was another effort of the marketplace to rectify the mistakes inherent in the system. Debt, to some degree, was liquidated, but as there were no significant changes in policy the country and the Federal Reserve went back to their old ways, with even more inflation than before.”

“Japan’s market has never adequately recovered from its 1990s slump because it prevented liquidation of bad debt held by the banks. Throughout the 1990s in the United States, the market was arguing for liquidation of debt and elimination of gross malinvestment. But our recessions, the Asian crisis, as well as the Russian crisis were papered over with more inflation. Even the failure of Long-Term Capital Management in 1999 was barely a blip on the economic radar screen.”

“The collapse of the stock market bubble in 2000, especially the bursting of the NASDAQ bubble, was the beginning of the current crisis, although many want to date the onset in 2007 when the mortgage crisis became obvious…..The massive inflation that was directed into housing was designed to make people feel better, and consumers once again were enticed to continue their spending spree by borrowing again their home equities, driven up at least nominally by inflationary expectations.”

“But prosperity can never be achieved by cheap credit. If that were so, no one would have to work for a living. Inflated prices only deceive on into believing that real wealth has been created. But easy come, easy go. It is fun when the bubbles are forming and many can live beyond their means; it’s a different story when they’re forced to live beneath their means in order to pay for their extravagance. Like an individual, a whole nation must accept a decrease in the standard of living if the debt-inflationary system finances an illusion of wealth.”

“Although the Fed was primarily responsible for the financial bubbles, the malinvestment, and the excessive debt, other policies significantly contributed to the distortions that had to be corrected. Artificially low rates of interest orchestrated by the Fed induced investors, savers, borrowers, and consumers to misjudge what was going on. Multiple mistakes were made.”

“The apparent prosperity based on the illusion of such wealth and savings led to misdirected and excessive use of capital. The false information generated by the Federal Reserve policy led to a false confidence that all would be well. This illusion is referred to as moral hazard.”

“They (“progressives” who are aligned with libertarians on many issues like restraining the Fed, but make an exception for personal economic decisions) recognize the right to decide for ourselves what our social and religious values are to be, though they do not understand that it is the same right as the right to decide how to spend our money, enter into any voluntary economic contract, and reject any economic association we please.”

“It is bewildering to see some people strongly and correctly want to keep the government out of all social, religious, and intellectual decisions, yet also assuming for some reason that the average citizen cannot exist without central economic planning regulating our every move. It’s this inconsistency that allows institutions like the Federal Reserve to gain power over money and credit and, unfortunately, over the entire economy.”

“Once it’s assumed, as has been the case for decades, that government must protect all citizens against their own actions and compensate them for any harm done, the floodgates of preemptive regulations and uncontrolled prior restraint are opened.”

“Much has been said about the subprime loans encouraged by government regulations made over the decades before the housing bubble burst, but one could argue that all loans that come from credit created out of thin air have an element of being subprime, making them a less than wise use of capital. This is why the euphoria during the boom is excessive, but only on the bust side is it found to be excessive and devastating. The risky loans were pervasive while the financial structure was being built without a foundation.

“Those who did not see it coming, and still don’t understand why it has occurred, are unaware of how the market works. They are in denial of the shortcomings of the Fed’s monetary policy. The world economy cannot be rescued by the same people, or their philosophy, which brought the havoc upon us.”

“Inflation is the most vicious and regressive of all forms of taxation. It is the absolute enemy of the workingman. It transfers wealth from the middle class to the privileged rich. It is responsible for recessions and depressions. It’s deceptive, addictive, and causes delusions of grandeur with regards to wealth and knowledge.”

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holdings illegal, as was done in the case of gold…

…If everyone decided, for example, to convert all his bank deposits as silver or copper or any other good and declined to accept checks as payments for goods, bank deposits would lose their purchasing power and government-credited bank credit would be worthless as claims on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty understanding the statists’ antagonism toward the gold standard.” Alan Greenspan, “Gold and Economic Freedom”, Ayn Rand’s Objectivist Newsletter, 1966

“According to his own logic, Greenspan (as Fed Chairman) had simply become a statist.”, Ron Paul, “End the Fed”, 2009

“Prior to one of our biannual meetings with (Fed Chairman) Greenspan, we were given a photo opportunity. Since it was a scheduled event I brought with me my copy of the original faded green objectivist newspaper of 1966. During the short visit and picture taking, I showed him a copy of the letter and asked if he recalled  the newsletter, which he quickly acknowledged. Upon opening the small booklet to his “Gold and Economic Freedom” article, I asked if he would autograph the article for me, which he promptly did. As he was signing the article, I asked if he would like to put a disclaimer on it. Astoundingly, he answered that he had just recently reread it and wouldn’t change a word of it.”, former Congressman Ron Paul, “End the Fed”, 2009 

“We had views about inflation in the 1960s, and in fact, the desirability of a little inflation, which we no longer hold anymore, at least the vast majority no longer hold as being desirable…..So all I can say is that the long tentacles, you might say, of the Austrian school have reached far into the future from when most of them practiced and have had a profound and, in my judgment, probably irreversible effect on how most mainstream economists think in this country.”, Federal Reserve Chairman Alan Greenspan Responding to Congressman Ron Paul, June 25, 2000

“Greenspan’s claim, in answer to one of my questions, was that central bankers essentially had become smart enough to achieve all the benefits of the gold standard without its limitations. Of course, it’s the limitations that are so valuable, and the reason the gold standard is so important to a free society.”, Ron Paul, “End the Fed”, 2009

“Once you decide that a commodity standard such as the gold standard is, for whatever reasons, not acceptable in a society and you go to a fiat currency, then the question automatically, unless you have government endeavoring to determine the supply of the currency, it is very difficult to create what effectively the gold standard did. I think you will find, as I have indicated to you before, that most effective central banks in this fiat money period tend to be successful largely because we tend to replicate that which would probably have occurred under a commodity standard in general. I have stated in the past that I have always thought fiat currencies by their nature are inflationary…..And what I have begun to realize is that, because we tend to replicate a good deal of what a commodity standard would do, we are not getting the long-term inflationary consequences of fiat money. I will tell you, I am surprised by that fact. But it is, as best I can judge, a fact.”, Federal Reserve Chairman Alan Greenspan Responding to Congressman Ron Paul, July 21, 2004

“Congressman, as I have said to you before, the problem you are alluding to is the conversion of a commodity standard to fiat money. We have statutorily gone to a fiat money standard, and as a consequence of that it is inevitable that the authority, which is the producer of the money supply, will have inordinate power. And the power that we have is all granted by you. We don’t have any capability whatsoever to do anything without the agreement or even acquiescence of the Congress of the United States.”, Federal Reserve Chairman Alan Greenspan Responding to Congressman Ron Paul, February 11, 2004

“Well, as you say central banks own gold….or monetary authorities own gold. The United States is a large gold holder. And you have to ask yourself: Why do we hold gold? And the answer is essentially, implicitly, the one that you have raised….namely that, over the generations, when fiat monies arose and indeed, created the type of problems….which I think you correctly identify…of the 1970s, although the implication that it was some scheme or conspiracy gives it a much more conscious focus than actually, as I recall, it was occurring. It was more inadvertence that created the basic problem. But as I’ve testified here before to a similar question, central bankers began to realize in the late 1970s how deleterious a factor the inflation was. And, indeed, since the late 70s central bankers have generally behaved as though we were on the gold standard. And, indeed, the extent of liquidity contraction that has occurred as a consequence of the various different efforts on the part of the monetary authorities is a clear indication that we recognize that excess of credit of liquidity creates inflation which, in turn, undermines economic growth. Would there be any advantage, at this particular stage, in going back to the gold standard? And the answer is: I don’t think so, because we’re acting as though we were there. Would it have been a question at least open in 1971, as you put it? And the answer is yes. Remember, the gold price was $800 an ounce. We were dealing with extraordinary imbalances, interest rates were up sharply, the system looked to be highly unstable and we needed to do something, and we did something. Paul Volcker, as you may recall, in 1979 came into office and put a very severe clamp on the expansion of credit. And that led to a long sequence of events here, which we are benefiting from up to this date. So I think central banking, I believe, has learned the dangers of fiat money and I think as a consequence of that we’ve behaved as though there are, indeed, real reserves underneath this system.”, Federal Reserve Chairman Alan Greenspan Responding to Congressman Ron Paul, July 20, 2005

“So, it looks like it will take high consumer price and producer price inflation for Greenspan ever to give token reconsideration of gold….As for his claim that central bankers were behaving as if on the gold standard, the record of the 1990s indicates otherwise, and result is the catastrophe that began in 2008. The message Greenspan was delivering in 1966 was quite different from his message and policy as Federal Reserve Board Chairman.”, Ron Paul, “End the Fed”, 2009

“In a way, it’s pretty astounding. After inflating the currency endlessly for every correction and every political crisis during his tenure, he claimed that he recognized the danger of how excessive credit of liquidity creates inflation. Now in the middle of possibly the greatest correction of credit creation of all history, Greenspan remains in denial as to his most significant contribution to the crisis. I would say that he never came close to achieving what he claimed….that he could get paper to substitute for gold when managed by wise central bankers. History will prove that goal unachievable, and any sophistication in managing fiat currency may well delay corrections, but in doing so only allows a greater financial bubble to form. That’s what today’s crisis is all about.”, Ron Paul, “End the Fed”, 2009

 “Most of Greenspan’s (Congressional) testimony (on October 24, 2008) was designed to attempt to protect his reputation and to explain away his shortcomings as Federal Reserve Board chairman. His testimony was pathetic. He made the point about the computer programs that they were using to anticipate these problems were not well designed. The only reason there was an expansion of debt is there was excessive demand for our debt; it was not a consequence of Federal Reserve Board policy. And to climax his arguments, he said he did make a mistake, that indeed we did not have enough regulations on the market. In other words, create the conditions for malinvestment and compensate for them by having more government regulations.”, Ron Paul, “End the Fed”, 2009

“History will show that Greenspan, during his years as Fed chairman (1987-2006), planted all the seeds of the financial calamity that erupted in 2007 and 2008.”, Ron Paul, “End the Fed”, 2009

“For the same reason a disease cannot be cured by more of the germ that caused it, the inflation and debt accumulation of the Obama years will not inflate our way out of it. The depression will likely last and last. If the depression lasts a decade or more, its length cannot be blamed solely on Greenspan. That blame will be placed on the current Federal Reserve Board, Congress, the President, the Treasury, but above all on Keynesian economic policy, the same philosophy that gave us the Great Depression of the 1930s.”, Ron Paul, “End the Fed”, 2009

 “The economic downturn is the necessary correction of the artificial boom produced by the central bank’s easy credit and artificially low interest rates. The duration itself is a consequence of the interference with the liquidation of debt and malinvestment and adjustment in prices of labor, goods, and services. It’s too much to ask politicians or bureaucrats not to centrally plan the economy, especially when the market is struggling to rectify the mistakes that come as a consequence of the Federal Reserve Board policy.”, Ron Paul, “End the Fed”, 2009

“So how is Navy Federal pulling in hordes of young first-timers? By offering loans that address their needs — zero-down payments, no private mortgage insurance premiums, plus the standard low-down payment menus of the Federal Housing Administration (3.5% minimum) and the Department of Veterans Affairs (zero minimum) loans.”, Kenneth R. Harney, The Los Angeles Times

Many credit unions offer tempting mortgage deals

LM Otero / Associated Press

By Kenneth R. Harney Reporting from washington

Want to buy your first home with little or nothing down and maybe get a refund on part of your realty agent’s commission?

Here’s one way: Consider joining a credit union that is aggressively expanding its mortgage business. Credit unions have been increasing their presence in housing — more than quadrupling their share of total mortgage market volume in the last nine years, according to the National Assn. of Federal Credit Unions — by offering deals you simply can’t find at most banks.

Case in point: The country’s largest credit union, Navy Federal, closed more than $1 billion in home purchase loans during the month of March alone.

But what’s really extraordinary is that 59% of the loans went to first-time buyers, and two-thirds of those first-timers were from a demographic slice that has been missing in action for years — borrowers ages 18 to 34. The historical norm for first-time buyer participation in home purchasing is around 40% but currently is just 28% to 29%, according to the National Assn. of Realtors.

So how is Navy Federal pulling in hordes of young first-timers? By offering loans that address their needs — zero-down payments, no private mortgage insurance premiums, plus the standard low-down payment menus of the Federal Housing Administration (3.5% minimum) and the Department of Veterans Affairs (zero minimum) loans.

Navy Federal also is tapping into a massive membership base of 5 million members worldwide and adding young new members quickly: It’s open to all branches of the armed services, active and retired, civilian employees, contractors and a wide range of relatives. Even “cohabiting partners” are eligible for membership.

Navy Federal’s first-time buyer focus is hardly unique. Other credit unions are running programs with tempting terms.

North Carolina’s State Employees’ Credit Union offers qualified members up to 100% financing on mortgages as large as $400,000 with no private mortgage insurance premium payments. The interest rate as of mid-April: 4.25% on a 30-year term that has a rate adjustment after five years. For buyers who need help on closing costs, the program can lend them an additional $2,000, pushing the loan-to-value ratio beyond 100%.

NASA Federal Credit Union, which is open not only to NASA-related employees but to members of 900 “partner” companies and associations, offers zero-down mortgages up to $650,000 with no private mortgage insurance plus a $1,000 “lender credit” toward closing costs if the home purchase doesn’t go to settlement by the contract date.

Still other credit unions help new home buyers with their expenses by refunding portions of real estate agents’ commissions. The Boeing Employees’ Credit Union, which is open to all residents and workers in the state of Washington — not just Boeing employees — gives purchasers the option of receiving a 20% cash refund of their real estate agent’s commission plus a $250 credit toward mortgage closing costs.

But here’s a key question: Are credit unions that offer come-ons like these increasing their risk of defaults and losses? Counterintuitive though it might seem, credit union home-purchase programs generally have minuscule delinquency and default rates.

Katie Miller, vice president for mortgages at Navy Federal, told me its serious delinquency rate as of March on its entire portfolio was 0.57%. Stacie Walker, senior vice president for loan origination at North Carolina’s State Employees’ Credit Union, said that its portfolio of zero-down payment, first-time buyer loans “actually performs better” than the entire mortgage portfolio, though she did not have specific figures on hand.

“We know our members,” Miller said, adding that Navy Federal has been following “ability to repay” underwriting guidelines for years, well in advance of congressional mandates for all lenders to do so after the mortgage crisis of the last decade.

Credit unions’ rapid growth — they now have about 100 million members — hasn’t gone unnoticed by banks and mortgage companies who compete against them. Robert Davis, executive vice president for mortgage markets at the American Bankers Assn., says large credit unions get an unfair break — they essentially function like banks, but they have lower costs because as not-for-profit, member-owned institutions, they are exempt from federal taxation.

But let’s be frank: If you’re a first-time buyer, tax policy issues probably don’t concern you. You just want the lowest-cost option for a mortgage. Not all credit unions offer attractive loan deals, but many do. To check out credit union membership possibilities in your area, go to

“The decision is a reminder of how little has changed in mortgage finance and at Fannie and Freddie despite their central role in the financial meltdown. The housing lobby—the Realtors and home builders and “affordable” housing advocates—want the government to continue to favor housing over other parts of the economy. Taxpayers bear the risk.”, The Wall Street Journal Editorial Board, April 20, 2015

Review & Outlook

Mel Watt’s Taxpayer Guarantee

The housing regulator keeps Fannie Mae large and in charge.

One lesson of the financial mania and panic of the 2000s is that bad policy choices often don’t scream out at the time they’re made. Instead they build over time, often as a series of small blunders that eventually compound into a larger disaster.

Which is all the more reason to regret Mel Watt’s Friday decision not to raise the fees that Fannie Mae  and Freddie Mac charge to guarantee home loans. Mr. Watt, who regulates the government-run mortgage giants, decided instead to maintain the status quo for the most part while mildly reducing the fees for loans to the riskiest borrowers.

Mel Watt

Mel Watt Photo: Associated Press/Jacquelyn Martin

The move is being spun as a compromise between Republicans, who wanted higher fees, and affordable housing advocates who wanted bigger fee reductions. But while most borrowers won’t notice the difference, Mr. Watt’s decision will at the margin put taxpayers on the hook for riskier home mortgages.

Upon taking the job in early 2014, Mr. Watt cancelled a fee increase planned by his predecessor, Edward DeMarco. Congress had instructed the housing regulator to increase guarantee fees to reduce taxpayer risk and to revive the private mortgage guarantee market. Mr. Watt is ignoring those Congressional wishes in a way that will keep Fannie and Freddie as the dominant forces in the secondary mortgage market due to the pricing advantages that come with their government role.

The decision is a reminder of how little has changed in mortgage finance and at Fannie and Freddie despite their central role in the financial meltdown. The housing lobby—the Realtors and home builders and “affordable” housing advocates—want the government to continue to favor housing over other parts of the economy. Taxpayers bear the risk.