December 9, 2012

An Exit From Record Monetary Stimulus

Readers suggested a topic on what creates bubbles. “The government should not be in the business of buying or guaranteeing private debt. Yes/No? I’ve concluded this system is absolutely ripe for abuse, as we’ve seen in the education and housing bubbles. When government starts buying or insuring debt in a sector, purportedly to drive down costs, the price of the goods in that sector skyrocket, primarily benefiting connected insiders. Typically bond market participants. Those who wind up paying more are those who take on debt to pay for the increasingly expensive goods.”

A reply, “I agree. For a bank to get it’s charter it should be forced to allocate it’s loans sector by sector, and by location without regard to race. Same for insurance companies.”

From Reuters. “Frustrated Federal Reserve policymakers on Monday sought an explanation from mortgage lenders as to why the benefits of lower interest rates were not filtering to home buyers as quickly as in the past even as investors benefited. This clog in the passage between the primary and secondary markets undermines an important reason for the Fed’s monetary stimulus: kick-starting a housing sector that was at the heart of the 2007-2009 financial crisis and that has only just begun to show some life.”

“Industry experts raised some common reasons that could be driving the spread higher, including the inability of lenders to meet robust demand for loans. One prominent analyst said a reason for the increase was likely capacity constraints as mortgage bankers can’t add resources fast enough to process requests for loans with rates at such low levels.”

“Another expert said lenders are unwilling to extend loans to lower-quality borrowers because they could become delinquent, leaving lenders on the hook if they are forced to buy back the loan. Still, this put-back risk was relatively small given the high quality of loans made since the crisis, the analyst said.”

“Not everyone saw a problem. One investor argued there was nothing unusual in the wider primary-secondary spread and it was a foreseeable consequence of the Fed’s aggressive policies. Journalists were restricted from identifying speakers.”

“‘There is clearly something that is manifesting as a form of constraint’ in mortgage lending, Jeremy Stein, a Fed governor, said at a Boston conference. Stein highlighted odd differences in the availability of credit, depending on the type of loan, where lenders seem to treat mortgages more conservatively than they do auto loans made to the same household.”

“‘Whether it’s a regulatory or a put-back risk,’ he said, ‘there’s clearly just quantitatively not the volume happening.’”

From Bloomberg. “A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month-old blueprint for an exit from record monetary stimulus. Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit — increasing the risk that a jump in interest rates would crush the economic recovery.”

“Krishna Memani, director of fixed income at OppenheimerFunds Inc., said a too-rapid sale of assets risks disrupting the $5.2 trillion market for agency mortgage debt. ‘They have to find ways of unwinding the balance sheet without dumping all of it in the marketplace,’ said Memani, who oversees a bond portfolio of about $70 billion, including about $6 billion of mortgage-backed securities.”

“Asset purchases have made it harder to change the federal funds rate when the time comes to raise borrowing costs. In the five years before the crisis, excess bank reserves averaged $1.7 billion, so the Fed could alter interest rates by buying or selling comparatively small amounts of short-term debt in open-market operations. Those reserves are now more than 800 times larger at $1.4 trillion.”

“The Fed’s other tool is to extinguish reserves by selling bonds back to dealers. Even a fully-explained plan could push up home borrowing costs as traders account for hundreds of billions of dollars of new supply flowing back into the market. ‘We are deep into experimentation at this point,’ said. ‘It’s understandable that people are worried.’”

The Aucklander. “The two faces of the North Island property market are reflected in new figures out today that show Auckland prices still largely surging while other cities and the provinces are struggling to reach the boom levels of five years ago. The median sale price of a home in central Auckland is now $690,000 - slightly up on the previous quarter and 12.5 per cent on the 2007 boom. Pockets of the city, including Grey Lynn, Pt Chevalier and Sandringham, are now up 23-30 per cent on the 2007 peak, according to the Herald Property Report published today.”

“‘Provincial New Zealand must be scratching its head at the endless headlines of soaring prices,’ says report writer Bruce Morris.”

“Economist Rodney Dickens said the Auckland spurt was a ‘reasonably decent cyclical upturn,’ but the stimulus of the low mortgage rates could be wearing off. He expected a slowing of increases over the next year, probably led by suburbs that had moved the most lately, and then a levelling-off as higher interest rates kicked in.”

“The news is even less cherry for owners of holiday homes and coastal properties. Douglas Wealleans of First National Mangonui estimated prices were back at 2002-2004 levels and it might be another four or five years before they began to move. ‘I would like to be more positive, but I’m afraid parts of the Far North are disaster areas at the moment.’”

From Ottawa South. “We are a nation in debt. In mid-October, the average debt-to-income ratio of Canadian households hit an all-time high of 163 per cent. That means for every dollar we earn in a year, we owe an average of $1.63. As a result of this news, finance ministers across the country went all nanny-state on us: ‘What’s wrong with you people? Get your fiscal houses in order.’”

“Indeed, every few weeks or so, federal Finance Minister Jim Flaherty finds it prudent to stand behind a podium to at some posh event and collectively slap the wrists of Canadians for being so careless with their funds. But he’s hardly leading by example. Despite inheriting a massive surplus from his Liberal predecessors, Flaherty’s government racked up the biggest deficit in Canadian history in a move to - guess what? Boost consumer spending in the wake of the recession. In other words, governments tell us to spend one week and then reprimand us for doing so the next, all the while committing the sin of overspending themselves.”

“Of course, governments like to couch their overspending in terms like ‘investing for the future.’ The problem is the future never comes, so they just leave mammoth debt balances for the next generation without any accountability whatsoever. As a result for governments and the citizens they govern money has taken on a rather mythical quality.”

“We live in a time where the value of money has become meaningless for most people. Never mind the fact that half of Canadians would likely find themselves in a food bank line should they miss a single paycheque. Just as there’s always another squeeze of toothpaste in the bottom of the tube, it seems there’s always more money available in the credit line or what I like to call, the pot of gold at the end of the rainbow.”

Bits Bucket for December 9, 2012

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