More Harm Than Good
Readers suggested a topic on the latest central bank move. “Suppose you were one of those hapless retirees who used to count on interest earnings on your CDs for income. Recent declines in interest rates severely crimped your returns. Now Operation Twist promises to crimp them still further. Where should a retiree depending on interest income turn for income to pay living expenses under Operation Twist?”
A reply, “There is hardly anything available for a decent return. CDs are gone for a long time. BB put them to rest. Stock market is a casino now. Gold/metals are in a high bubble. BRICs are falling in their stocks. Where should a person put money? I know one place: The savings bank accounts in India or Brazil. The interest rates are 11% with zero risk.”
Then this, “Zero risk?”
One had this, “It is obvious that we have passed from an era where every ‘investment’ seemed to give a pretty decent return to one in which simply preserving capital is challenging. It is the end of the biggest credit expansion in history. Interest rates are low simply because we are in deflation. If you want to borrow money though, interest rates don’t matter because you can’t get a loan. If you want a loan that by itself makes you a bad risk.”
“What will we do? We will consider the money that we do have very valuable. We will spend it as though it is irreplaceable. We’ll do with less. Life will still be good, unless you’re in debt. Welcome to the world of our grandparents and great grandparents.”
Another said, “This isn’t about saving a hapless retiree or anyone else! This is about where the Government is going to grab another dollar to keep the game going until things turn around. Those in power don’t have a picture of what’s happening. They just want to see a turn in the economy and will deal with the aftermath later. So, come on down retirees and put your money into the stock market so your Uncle Sam can have quick permanent and easy access to your money.”
And finally, “Operation twist….keep housing prices up by giving everyone 4%, no 3%, no 2%, no wait lets do it right 0% interest for 30 years….. that’ll work…”
From Reuters. “The Federal Reserve surprised investors on Wednesday when it said it would help keep mortgage interest rates low by reinvesting proceeds from past purchases of housing debt into government-backed mortgage securities. The program is part of the Fed’s latest easing initiative, which investors dubbed ‘Operation Twist,’ after a similar program in the 1960s.”
“Frustrations are growing in Washington that efforts to revive housing have failed in the face of high unemployment and rampant foreclosures that have ravaged home prices. ‘They are trying to do anything they can to pump up the housing market,’ said Bert Ely, a banking consultant and chief executive officer of the firm Ely & Co. ‘This may have some slight positive impact at the margin, but it’s not salvation.’”
“After more than three years of trying to remedy one of the root causes of the U.S. recession and the slow economic recovery, the administration has largely exhausted efforts involving tax credits, mortgage modification programs, government-backed loans and other tools intended to keep home values up and help delinquent borrowers avoid foreclosure. The prevailing view of the White House economic team has been that any aggressive remedies would cause at least as many problems as they solved.”
“Mortgage rates are at record lows, yet many U.S. homeowners have been unable to refinance because they owe more than their homes are worth or have less-than-perfect credit. The housing sector faces a small hurdle at the end of September when the size of the loans that Fannie and Freddie, as well as the Federal Housing Administration, can purchase are set to fall back to pre-financial crisis levels.”
“Karen Petrou, managing partner of Federal Financial Analytics Inc., in Washington, said the administration’s best hope to support housing would be to ramp up the refinancing initiative. ‘If there was an easy way out of this, then a solution would be done,’ Petrou said. ‘The refinance proposal is the remaining cannon in the arsenal.’”
The Desert Sun. “A fundamental teaching in medical ethics is that sometimes a patient’s situation is either so precarious or so puzzling that hasty intervention by a doctor could cause more harm than good. Hence the dictum: first do no harm. We wish that the Federal Reserve would have the same consideration for our ailing economy.”
“There are many reasons to question the wisdom of this particular intervention. With unprecedented cash reserves on corporate balance sheets, liquidity really doesn’t seem to be the macro issue facing this economy. Long-term interest rates were already near historic lows. Did those rates really require this kind of intervention just so that they could float a few notches lower?”
“And although a major part of the policy seems to be directed to increasing demand for home mortgages, a low-yield on 10-year Treasurys is not automatically linked to cheaper 30-year mortgages. Bernanke and friends seem to have forgotten that there are two sides to the mortgage — borrowers and creditors. The lower yields go, the less likely investors are to finance mortgage-backed securities.”
“Indeed, the lower yields go, the less likely people will want to save. And by intentionally reducing the cost of long-term debt, the Fed has just undermined the profitability of banks — the very institutions that are now under increasing scrutiny from credit agencies.”
