If you were in the market for a new credit card or needed a loan to buy a car, would you think to go to some federal agency to get one?
Not right now, maybe, but we seem to be headed in that direction—and very quickly, too.
And the idea isn’t all that far-fetched when you come to think of it. The federal government is already heavily involved in consumer lending, either directly or indirectly. It’s the biggest player by far in the two biggest consumer loan businesses. Getting into new areas like credit cards and auto loans isn’t a terribly big leap.
It’s fairly safe to say that the residential mortgage market would barely exist were it not for the government-sponsored enterprises like Fannie Mae and Freddie Mac, plus other government agencies like the FHA, VA, and USDA. While these agencies don’t make loans themselves, they buy them from private lenders, stamping a federal guarantee on them in the process. Before the global financial crisis, there was a thriving market for private mortgages through a private secondary market, but since then that market has largely ceased to exist, except for a smattering of securities backed by jumbo loans, those too large for the federal agencies to buy. That leaves the government with about a 90% or more market share. Prior to the financial crisis, the government still commanded a market share of about 50%.
The market for student loans, now at $1.2 trillion and climbing rapidly, is now the virtual monopoly of the U.S. Department of Education, especially at the undergraduate level. And it deals with borrowers directly. If you want a loan to get yourself or your child through college, you apply directly to the federal government. There is no bank or private lender in the middle.
A handful of banks, notably Discover, Wells Fargo and Bank of America, make student loans, too, but their business is usually limited to graduate students and undergrads who have borrowed as much as they can from Uncle Sam. Indeed, many of these banks advise prospective borrowers to first exhaust all their federal loan options before calling.
So, getting a credit card or a car loan from the federal government doesn’t seem so crazy now, does it?
What has me concerned about all this is the over-reaching that central banks in Europe, the U.K., and Japan have been engaged in recently and that this contagion will spread to our Federal Reserve, which may succumb to the economic version of peer pressure.
Ever since the depths of the financial crisis, now eight long years ago, the European Central Bank, the Bank of England and the Bank of Japan have been buying up all manner of bonds – both government and private alike – to try to stimulate their respective economies, mostly to no avail. To its credit, our Fed has largely stopped buying U.S. Treasury and federally-guaranteed mortgage-backed securities, although it still holds about $4.2 trillion worth, including about $2.4 trillion of the former and another $1.8 trillion of the latter.
But in recent months central banks outside the U.S. have taken bond buying to new heights – or new lows, depending on your perspective.
In the U.K., the Bank of England will start buying this month as much as £10 billion ($13.33 billion) of British corporate debt, on top of £60 billion of additional government-bond purchases, all in response to expected complications and economic turmoil as the country tries to extricate itself from the European Union.
Two months earlier, the ECB also started buying bonds of non-bank corporations. For the past few years, the ECB restricted its debt-buying to bonds issued by banks before opening the doors to other types of corporations.
The BOE quickly ran out of inventory to buy on the secondary market that prices on U.K. government debt soared, and yields plunged. The ECB has run into the same problem, but it has seen fit to circumvent that by buying debt directly from corporations. Although the ECB doesn’t actively solicit such deals, according to news reports, it is happy to provide on its website the specifications of what it will buy.
And of course, the Bank of Japan has bought so much debt, government and corporate, that it’s now had to move into the equity markets, where it’s one of the largest owners of Japanese stocks.
Now it appears the Fed wants in on the fun.
At the Fed’s annual late-summer get-together in Jackson Hole, Wyoming, last month, Fed Chair Janet Yellen said that in the next financial crisis, the U.S. central banks “could resume asset purchases,” which many interpreted to mean non-government, i.e., corporate, debt.
"Central banking is in a brave new world," Atlanta Fed President Dennis Lockhart told Reuters.
Indeed, as their recent actions show, central banks don’t seem to have any qualms about how far they are willing to inject themselves into what was previously private business. And clearly, governments aren’t doing a whole lot to stop them.
So, if a central bank is willing to lend directly to a private corporation, why wouldn’t it be willing to do the same for a private citizen? Other than the size of the transaction, what really is the difference? Which begs the question: Are we OK with this?
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George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
