September 22, 2013

The Price Of Profligacy

Readers suggested a topic on central bank policy. “Has the Fed just signaled that tapering is off the table? Prediction: Given the Fed’s concern about supporting stock prices, there will be no Octaper. Everybody knows that October is the riskiest month for stock prices, and the Fed will not want history to blame it for an October crash due to a taper re-commitment shock.”

One said, “When all else fails, we’ll have to get money to that darn undeserving deadbeat, Joe6pack. Keynes, rising in the mist. It’s his way or the eventual death of capitalism, which will always choke itself out, if left to its own devices.”

A reply, “Garbage. The economy does not rely on cheap interest. Only the gamblers do. The economy relies on the real wealth creators making a profit.”

One asks, “Could the U.S. handle a 5, 6, or 7 percent yield on the 10 year treasury?”

The New Zealand Herald. “Has US Federal Reserve Governor Ben Bernanke made the right call? Let’s hope so. His message was clear - markets have gotten ahead of themselves in predicting a return to normal policy settings and he wants to see things really humming before he starts pulling back - or tapering, to use the current buzz word. That is a big call for all of us. The US dollar immediately fell. The New Zealand rose and will now likely stay higher for longer.”

“It might be a long bow given the many complex factors at play - not least the Auckland housing bubble - but lower inflation and a higher kiwi may weigh on our own Reserve Bank and shift the time frame for raising rates - which was signalled in the last monetary policy statement.”

“Stepping back though, there is room for some nagging concern about whether Bernanke has made the right call for the world. Hindsight tells us that Bernanke’s predecessor Alan Greenspan left US rates too low for too long in the early 2000s after the dot-com crash. That easy credit environment played a big role in causing the US housing bubble that sparked the Global Financial Crisis in the first place.”

“Bernanke will be highly aware of that of course. He’s done the math and decided that the US economy is not yet well. One would hope he hasn’t been swayed by internal political pressures.”

The Herald Sun in Australia. “Put on your dancing shoes and let’s boogie! That’s the message Dr Ben Bernanke sent to world markets with his shock decision to delay his very own ‘taper’ timetable. Like any party that has gone on for a long time, though, there are bound to be headaches and our own Reserve Bank Governor Glenn Stevens will be one of the first to break out the aspirin. If Stevens cuts interest rates further to help stimulate the economy and put a brake on the rising Aussie dollar, then the chances of asset bubbles moving from a concern to a reality become that much greater.”

From CNBC. “Federal Reserve Chairman Ben Bernanke and U.K. Finance Minister George Osborne are creating the conditions for the next global credit bubble, according to Societe Generale veteran strategist Albert Edwards. Edwards, who is known for his extremely bearish views, said that Osborne’s schemes to support the U.K. housing market, and Bernanke’s continuance of monetary stimulus, were pushing the world towards another boom-and-bust situation.”

“‘In the same way that we spent the years 2001-2007 heaping derision on Alan Greenspan as being the chief architect of the global credit bubble and subsequent bust, we must now do the same for Fed Chair Ben Bernanke and U.K. Finance Minister George Osborne,’ Edwards wrote in a research note on Thursday.”

“‘I can believe the arch-dove Bernanke might have wanted to keep blowing his bubbles, but I am amazed that he got the rest of the Fed, or at least the majority, on his side,’ he wrote, arguing that the central bank had spent weeks preparing markets for a tapering off of stimulus.”

From Forbes. “The Federal Reserve did something completely unpredicted on Wednesday; nothing. So called ‘tapering’ of QE (quantitative Easing) was indefinitely placed in deep freeze………until such time as the U.S. economy is more robust. This artificial demand for mortgages and U.S. Treasuries by all means is the lynchpin to keeping rates low. What is the price of this profligacy?”

“Mr. B’s low rate policies punish the virtuous, the millions of responsible savers who did not take out flim-flam mortgages with little chance of repayment. They can no longer count on decent risk free returns for retirements. Debtors across the spectrum reap benefit. The biggest beneficiary is the U.S. Government. Imagine if we took the training wheels off the bike and had a more normal yield curve where short term rates were 3 percent and longer dated treasuries were 5 or even 6 percent.”

“The low mortgage rates have indeed spurred the housing market. But that too is to some extent artificial. There are still various mortgage programs, like FHA, (Federal Housing Administration) where only a 3 percent down payment is required. Fannie Mae has a three percent down offering as well. FHA standards have been so lax and defaults so high that the agency is now basically bankrupt. They have had to raise insurance premiums to borrowers so high that the products they offer now are often more expensive than many of the conventional Fannie Mae and Freddie Mac mortgages.”

“Where would the housing market be without mortgages of lax underwriting standards? Where would housing be without government subsidy welfare HAMP and HARP which offer lower rates and principal reductions to defaulted borrowers? How many millions of the home purchases over the last four years have been by investment group’s bottom fishing rather than real underlying demand by owner occupied dwellers?”

“Has anyone considered that if there are real buyers out there, with a real cash to make meaningful down payments then a hundred basis point (one percent) increase in rates shouldn’t matter very much? Maybe the price of some houses would come down to compensate for the higher rates. There are so many asterisks next to the housing recovery I wonder where the truth really lies.”

Bits Bucket for September 22, 2013

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