I am Jewish, and as suggested by my prior post (“Makepeace & Goodwill”, ), I attended a house of worship yesterday.

I prayed for our country, AND I also learned a bit about “promised returns”. I’d like to share with you what I learned, since “promised returns” are all over the news. While I will start with a couple of religious references, I promise that I will quickly return to the topic of mortgage-finance.

Returns were promised in both my temple (by man and God), and in the news (by government). Let’s review each.

At The Temple

The day’s first bible reading described how God tested Abraham by ordering him to sacrifice and burn Isaac, his son. As Abraham approached the sacrificial site, he and his son left the servants who had accompanied him, and Abraham said to his servants:

“ You stay here… The boy [Isaac] and I will go up there: we will worship and we will return to you.”

(Some of you may be more familiar with Bob Dylan’s fragmentary account at the start of “Highway 61 Revisited”, the lyrics of which may be found here.   This is that story.)

The day’s second reading described God’s (as it turns out) false or unfulfilled promise to the Northern and Southern Jewish tribes. God promised to return them to their homeland.

To make a long story short, the man in the first story (Abraham) ends up keeping his promise, and returns to his servants with his unsacrificed son. The much more powerful God, in the second story, does NOT keep his promise.

In The News

As described by Reuters on October 1 (“FDIC wants to raise deposit insurance limit”,

the head of the FDIC thinks it would be a good time to raise the limit on federally insured deposits from its current level of $100,000 to $250,000.

As reported, community bankers and regulators now suggest that a higher federally-insured limit would be just the thing to calm today’s turbulent markets and restore confidence in the banking system.

Well … perhaps. I seem to recall that in the aftermath of the 1980’s S&L debacle, higher insurance limits were cited as one of the chief causes of that crisis.

I have company. Consider the words  of Bert Ely, an accountant and specialist in deposit insurance, who predicted the S&L crisis and bailout of the FSLIC in the 1980’s:

“Federal deposit insurance … was the root cause of the S&L crisis because deposit insurance was actuarially unsound from its inception… Deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for years. … Federal deposit insurance is unsound … because it charges every S&L the same flat-rate premium for every dollar of deposits, thus ignoring the riskiness of individual S&Ls. In effect, the drunk drivers of the S&L world pay no more for their deposit insurance than do their sober siblings.”

—————-

Source: Bert Ely’s “Savings & Loan Crisis”

Making A “Federal Case” of Promised Returns

My concern is NOT that the Federal government might be unable to deliver on the promise to return depositor’s money. I am concerned with HOW they might do that.

I believe that Orson Welles, as Charles Foster Kane, warned that one should never get in an argument with someone who “buys ink by the barrel”. The same thing holds true, of course, for the good folks at the US Treasury who print your money. To misquote Jay Leno, “Take all you want … we’ll make more!”

In this case, the government has embarked on a variety of special programs and efforts by the Treasury & Federal to halt the “crisis”. How much will this cost, and who will pay?

While no one can be sure, one way the government could “cover” the cost would be to let the printing presses roll, creating inflation. This would ensure that they would always have enough to “make good” on any insured depositors’ losses, and also pay for the costs of the other bailout programs.

Finally, to the extent that borrowers have financed their homes with fixed rate loans at relatively low rates before we “gin up” the presses, inflation would also increase real estate values and make it easier for borrowers to pay off their loans with devalued dollars. (If the borrowers used ARMs, this would make it tougher to inflate our way out of the crisis – as interest rates rose, the higher loan payments would “put a squeeze” on borrowers.)

Aside: The other day I was chatting with the head of an investment bank’s fixed income department. I asked why, with all of this concern about affordability, nobody was talking about using ARMs with lower payments to make housing more affordable. The reply was swift – “There is absolutely no interest by any authority in using ARMs to get us out of this.”

Men and God both make promises. Sometimes men keep their promises. Sometimes, as we have seen, even God doesn’t. But when the Government makes a “promise”, we might find that we would have been better off if it HADN’T.

If you’d like to learn more about me, you’ll find it here

Till next time. – Ira Artman