How Capitalism Went On A Brief Sabbatical Which Became A Permanent Vacation: Rosenberg Explains “The Artificial Recovery”

Tuesday, June 28, 2011
By Paul Martin

by Tyler Durden

There is little if anything that can be added to the latest commentary from the original skeptic.

Indeed, this 2009-2011 recovery and cyclical bull market has been as artificial as the 2003-07 expansion. That last one was fuelled by financial engineering in the financial sector. This one is being underpinned by unprecedented government intrusion in the credit markets. As of this quarter, your government has replaced the private sector as the largest source of outstanding mortgage market and consumer-related credit (see front page of the Investor’s Business Daily). So not only is the U.S.A. turning Japanese in many respects, it is also now resembling China where the government also redirects the flow of private sector credit.

When we said capitalism went on a sabbatical three years ago, we didn’t expect this to be a permanent vacation. In the past five years, private sector loans have deflated by $1.9 trillion, while public sector assisted credit has surged a similar amount. Roughly nine in 10 dollars of mortgage flow is being dominated by the Federal government — Fannie Mae, Ginnie Mae, Freddie Mac, and the FHA. That is amazing, and these entities have actually been tightening their scorecards to avoid political taxpayer backlash.

Be that as it may, in this new era of socialized credit, the private sector now accounts for 42% of outstanding residential mortgages, down from nearly 60% at the bubble peak in 2006. The only reason why consumer credit has not shown a complete implosion is because in the past three years, federally- assisted student loans have soared by $250 billion.

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