August 20, 2017

The Goal Is To Inflate Asset Prices

A weekend topic starting with MarketWatch by Caroline Baum. “It wasn’t long ago that the Federal Reserve resorted to the word ‘conundrum’ to explain the inexplicable. For example, as the Fed raised its benchmark rate from 1% in 2004 to 5.25% in 2006, long-term interest rates barely budged. Former Fed Chairman Alan Greenspan decided it was a conundrum, given that the short-term rate, current and expected, is a key determinant of the long-term rate. Greenspan’s successor, Ben Bernanke, took a stab at the conundrum, blaming a ‘global savings glut’ for the stability of long-term rates during the 2004-2006 tightening cycle.”

“Conundrums are a thing of the past. Nowadays, Fed Chairwoman Janet Yellen has an explanation — an excuse, really — for almost anything, from the atypical behavior of asset prices to inconsistencies in economic relationships. Every month, it’s something else. Maybe the answer lies within. The tendency to dismiss consistently soft inflation readings must be contagious because private-sector economists have taken the bait. In the post mortems on the July consumer price index, released on Friday, one economist attributed the 0.1% increase to ‘volatile’ hotel rates. (Why is the volatility always to the downside?) Another referred to the biggest decline in two decades in lodging away from home (-4.2%) as an ‘anomaly.’ The excuses — and synonyms — are wearing thin.”

“When the Fed expands its balance sheet through asset purchases, it has no control over where that newly created money will go: toward the purchase of goods and services; or into financial assets, such as stocks, junk bonds or housing. Because asset prices aren’t part of official inflation measures, and because identifying an asset bubble is beyond their scope, central bankers eschew using monetary policy to respond to them.”

“Of course, every bubble exhibits unique characteristics and features newfangled instruments (think collateralized debt obligations and CDO-squareds). But they all have a few things in common, as William White, the former head of the BIS’ Monetary and Economic Department says: leverage, speculation and declining credit standards. If the goal of monetary policy, as described by Bernanke, is to inflate asset prices, it might behoove the Fed to explore an antidote for moderating them. Asset bubbles, when they burst, can be destabilizing. Ergo, central bankers should care about asset bubbles and explore ways to lean into them in order to minimize the lasting consequences a crash can impose on the real economy.”

From the Seattle PI in Washington. “In Seattle, the housing market is a topic of conversation that almost can’t be avoided. For several years, real estate prices and rents have been rising fast. Bidding wars and tales of being pushed out as rents soar have become the norm. Issues of equity and access to housing aside, fears have cropped up in some circles that the market — which has been hot across the nation — might be headed for another correction like that of the Great Recession. In other words, some have worried that it’s a bubble.”

“Such rumors are definitely circulating, and becoming easier to believe, especially after looking at median prices that increased 18.6 percent year over year in King County, according to the Northwest Multiple Listing Service’s (NWMLS) latest monthly report. That 18.6 percent represents a jump of more than $100,000 — to a median price of $658,000 — from July 2016 to July 2017.”

“Some level of ‘market correction’ is likely to come, said George Moorhead, one of NWMLS’s directors and a broker at Bentley Properties. He did have some concerns about practices making it easier to buy a home for those with low credit scores or existing debt.”

The Union Tribune in California. “Virtually every Californian can attest to the increased cost of living we have seen in recent years. Since 2000, the median rent in the San Diego region has spiked by 36 percent. However, the median household income for renters has risen just 4 percent. Our lowest-income earners spend nearly 70 percent of their income on housing.”

“The problem on its surface is supply-and-demand economics: We’re simply not building enough housing. What is being built is disproportionately for high-income residents. In fact, we’re meeting 128 percent of the demand for luxury housing but only 18 percent of the demand for middle-income housing and 22 percent for low-income. This is the real problem.”

The American Statesman in Texas. “Austin-area home sales and prices continued on their upward trend in July, with both showing increases over the same month last year, the Austin Board of Realtors said. Within the city of Austin, sales declined 2.5 percent year-over-year, with 832 sales, while the median price rose 7.2 percent, to $369,900. On the supply side, housing inventory levels posted strong gains last month, increasing to 3.2 months of supply, the board said. Despite the increase, the market remains undersupplied, said Brandy Guthrie, the board’s president.”

“Guthrie said strong homebuilding activity, particularly in Williamson and Hays counties, is boosting inventories. ‘In years past, the high demand of the summer selling season has further constrained inventory levels and further pushed up home prices,’ Guthrie said. ‘This year has been different, with steady gains in sales volume as well as listings and inventory throughout the summer. During a month when housing inventory should reach its lowest point of the year, housing inventory across the Central Texas region is at its highest point since fall 2012.’”

The Sun Sentinel in Florida. “Cash deals are by no means dead, but they aren’t dominating the South Florida housing market the way they once did. Sales without mortgages are happening less frequently as investors flee and traditional buyers gain easier access to financing, industry observers say. ‘The market has dramatically shifted,’ said Mike Pappas, president of Keyes Co. in Miami. ‘Cash drove the market in the bottom-feeding and opportunistic times, but today we have a real market with real buyers, and they need mortgages.’”

“In many cases, buyers are wealthy enough that they don’t require mortgages, but they’re choosing to get financing anyway because they can put their money to better use elsewhere, said Stephen B. McWilliam, president of Florida State Realty Group in Fort Lauderdale. ‘You make a lot more when you leverage your money with a mortgage,’ he said.”

From Investment News. “An estimated 7 million to 10 million homes were lost to foreclosure during the housing collapse, and that surge has largely ended. Forclosure filings peaked at 2.87 million in 2010, according to RealtyTrac. They fell to 933,045 in 2016. But the effects of the crisis linger. ‘I do have a couple of clients with little to no equity in their homes, which makes dragging that debt and those payments into retirement a drag on other assets and cash flows,’ said Matt Chancey, an Orlando financial planner.”

“Others say they have clients with real estate investments that still haunt them. Steve Branton, a financial planner with Mosaic Partners in San Franciso, notes that housing prices there have recovered. ‘But I do have clients who bought vacation homes in Nevada which, after the housing collapse, became public or affordable housing. That investment will never recover,’ he said.”

“And others are simply disappointed with the returns from their homes, which is often the largest chunk of Americans’ savings. ‘Most people today don’t understand why their house is worth only slightly more than it was 12 years ago,’ said Ray Ferrara, CEO of ProVise Management Group. ‘The good news is that prices have mostly recovered, but there has really been little appreciation from where prices were at the peak.’”

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Comment by Ben Jones
2017-08-20 09:50:54

‘Wells Fargo: Here’s the impact of HARP extension, GSEs’ new high-LTV refi program’

‘After several delays, the government’s crisis-era Home Affordable Refinance Program was finally set to expire next month, until the Federal Housing Finance Agency announced Thursday that it’s extending the HARP deadline until the end of 2018.’

‘According to the FHFA, the 15-month expansion is necessary to due to Fannie Mae and Freddie Mac implementing a new streamlined refinance program, which is designed for certain borrowers with high loan-to-value ratios.’

‘So what’s the impact of all of these changes? Not much, unless there’s another housing crisis, Wells Fargo said in a new report.’

‘As Wells Fargo notes, the LTV threshold for the new refi program is 95% for single- unit primary residences for both Fannie and Freddie. And considering the new program is only for loans that were originated after Oct. 1, 2017, the criteria for the program limits its impact, outside of one specific circumstance, Wells Fargo’s analysts write.’

“The program is only offered to loans originated on or after Oct. 1, 2017, and the eligibility criteria considerably limit the population that can take advantage of the program,” Wells Fargo analysts Vipul Jain, Anish Lohokare, and Randy Ahlgren write. “From our perspective, the program appears to be geared toward having an efficient refinancing construct in place, should there be another housing downturn.”

Comment by Ben Jones
2017-08-20 09:54:43

So be sure to wait until after October 1st to apply for that loan.

Comment by Professor Bear
2017-08-20 17:56:13

“…the eligibility criteria considerably limit the population that can take advantage of the program…”

What kind of discriminatory qualification criteria are being used to limit the eligible population to people that policymakers have decided to reward?

Comment by SFMF
2017-08-20 10:11:47

And in 2018 it will be extended another 18 months. Once a welfare program is instituted, it never goes away. See Obamacare as Exhibit A.

Comment by Mafia Blocks
2017-08-20 10:15:38

And in 2018 demand will collapse even deeper. With housing demand at 20 year lows no less.

Comment by GuillotineRenovator
2017-08-20 14:18:26

Every one of these programs is designed to do one thing: Keep the rigged system from collapsing in order to protect the wealthy from any financial losses.

Comment by Professor Bear
2017-08-20 17:54:10

“The program is only offered to loans originated on or after Oct. 1, 2017, and the eligibility criteria considerably limit the population that can take advantage of the program,”

So is the plan to once again set up low-income people of color as the bagholders in the next housing price collapse?

Comment by oxide
2017-08-21 09:51:58

+1. I caught that too, bear. Add this is in with the new 1% down mortgages and those non-relatvie income approvals, and what do you get… it looks like they are planning to “help” minorities by putting up a safety net first, and then throwing them off the roof of the building just to prove how wonderful their net is.

Disgusting. IMO that alone is enough to throw out Mel Watt for cause. Why can’t these idiots in government just create some actual JOBS (even if it’s just digging holes), instead of moving money around like this?

Comment by Ben Jones
2017-08-20 10:05:50

Chairman Ben S. Bernanke
Op-ed column for The Washington Post
November 5, 2010

Aiding the Economy: What the Fed Did and Why

Two years have passed since the worst financial crisis since the 1930s dealt a body blow to the world economy. Working with policymakers at home and abroad, the Federal Reserve responded with strong and creative measures to help stabilize the financial system and the economy. Among the Fed’s responses was a dramatic easing of monetary policy–reducing short-term interest rates nearly to zero. The Fed also purchased more than a trillion dollars’ worth of Treasury securities and U.S.-backed mortgage-related securities, which helped reduce longer-term interest rates, such as those for mortgages and corporate bonds. These steps helped end the economic free fall and set the stage for a resumption of economic growth in mid-2009.

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Comment by Ben Jones
2017-08-20 10:13:23

‘lower mortgage rates will make housing more affordable’

He should consider stand up.

‘Why the Wealth Effect Doesn’t Work’

03/11/2014 Christopher P. Casey

“Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending.” — Ben Bernanke, 2010.

‘Regardless as to whether or not increased wealth will actually spur increased consumer spending, the most important component of the wealth effect is the assumption that increased consumer spending stimulates economic growth.5 It is this Keynesian concept which is critical to the wealth effect’s validity. If increased consumer spending fails to stimulate the economy, the theory of the wealth effect fails. Wealth effect turns into wealth defect.’

‘The paradox of thrift can essentially be described as such: decreased consumer spending lowers aggregate demand which reduces employment levels which negatively affects consumption which in turn lowers aggregate demand. The paradox predicts an economic death spiral from diminished demand. And mainstream economists believe we were (and potentially are) mired in such a spiral. As noted econo-sadist Paul Krugman noted in 2009: “we won’t always face the paradox of thrift. But right now it’s very, very real.”6′

‘The inverse of this “reality” predicts flourishing economic prosperity when a society increases its consumer spending. But history suggests the opposite: it is higher savings rates which lead to economic prosperity. Examine any economic success story such as modern China, nineteenth century America, or post-World War II Japan and South Korea: did their economic rise derive from unbridled consumption, or strict frugality? The answer is self-evident: it is the savings from the curtailment of consumption, combined with minimal government involvement in economic affairs, which generates economic growth.’

‘So why do so many “preeminent” economists falsely believe in the paradox of thrift, and thus the wealth effect? It is because of their mistaken understanding of the nature of savings.’

‘Does this economic maxim hold even when the economy is in a recession?8 Even more so. As all Austrian economists know, business cycles derive from government manipulation of the money supply which artificially lowers and distorts the structure of interest rates.9 To minimize the length and severity of a recession, economic actors should save more which will reduce the gap between artificial and natural rates of interest.’

‘Regrettably, this is not merely an academic discussion. Due to their mistaken economic beliefs, the Federal Reserve has quadrupled the money supply while bringing interest rates to historic lows.10 The results will inevitably arise: significant price inflation, volatile financial markets, and severe economic downturns.’

Comment by GuillotineRenovator
2017-08-20 14:21:15

I think that behind closed doors these people know good and well that the wealth effect doesn’t work, but their policies are working exactly as designed - they are protecting the profits and net worths of the moneyed special interests.

Comment by Professor 🐻
2017-08-21 02:26:32

“…it is higher savings rates which lead to economic prosperity.”

Why would anyone in their right mind save money, given the dismally low interest rates the central bankers have financially engineered and perpetuated indefinitely?

People have stopped saving for a rainy day and that’s just when an economic crisis strikes
- U.S. household savings are at their lowest since the Great Recession, with UK savings also falling.
- “This was last seen in 2007, just before the bursting debt bubble blew the global economy and financial system to smithereens,” says Albert Edwards of Societe Generale .
- The potential economic calamity could be even worse in the UK, according to the strategist.
Fred Imbert | @foimbert
Published 1:15 PM ET Thu, 3 Aug 2017
| Updated 2:32 PM ET Thu, 3 Aug 2017

Comment by Professor Bear
2017-08-20 18:03:23

RE: What the Fed did

June 4, 2013 @ 02:13 PM
Great Reflation Produces Mirage Of Recovery In Housing
Great Speculations
Buys, holds, and hopes
Opinions expressed by Forbes Contributors are their own.
Peter Schiff , Contributor

Investors and politicians are being treated to some of the “best” home price data since the frothy days of 2006 when home loans were given out like cotton candy and condo flipping was a national pastime. The Case-Shiller 20 City Composite Home price index was up a startling 10.9% for the 12-month period ending in March. Prices in all 20 cities were up, with some (Las Vegas, Phoenix, and San Francisco) notching gains of more than 20%. Meanwhile the National Association of Realtors announced that April pending home sales volume reached the highest level in nearly three years.

After five years of dismal real estate performance and a lackluster economy, it’s hard to fault people for believing that rising home prices are a good barometer of economic health. There can be little doubt that rising home prices feel good. Even single digit appreciation can make modest home buyers feel like mini-moguls.

The effect is magnified in a falling interest rate environment where any appreciation can be instantly turned into an opportunity for cash out refinancing. The “wealth effect” created by such activities then translates into consumer spending and other seemingly positive economic developments. But some things can taste great but be very harmful (cinnamon buns come to mind). It felt good when real estate prices were rising during the pre-financial crisis bubble, but that rise only exacerbated the problems when the bubble burst. The questions we should now be asking ourselves is why are prices rising, are those higher prices sustainable, and what are the costs to the broader economy?

The truth is that most buyers cannot afford today’s prices without the combination of government guarantees and artificially low mortgage rates. The Federal Reserve has been conducting an unprecedented experiment in economic manipulation. By holding interest rates near zero and by actively buying more than $40 billion monthly of mortgage-backed securities and $45 billion of Treasury bonds, the Fed has engineered the lowest mortgage rates in generations.

At the same time, federal control of the mortgage industry has become nearly complete, with government agencies Fannie Mae, Freddie Mac, and the FHA buying or guaranteeing virtually all new mortgages. In addition, a variety of Federal programs, such as the Home Affordable Modification Program (HAMP) are in place to help keep underwater homeowners in homes that they could not otherwise afford. Taken together, these programs create far more favorable terms for home buyers than those that existed before the crash.

Comment by Professor Bear
2017-08-21 00:57:39

FT Series
Financial crisis anniversary
The US government is still propping up its mortgage market
Reform of housing finance is largest piece of unfinished business from the crisis
August 17, 2017
by: Alistair Gray

The US mortgage market was the epicentre of the earthquake that shook the financial world a decade ago, and remains the largest area of unfinished business from the crisis.

The US government’s response to the meltdown amounted to a takeover of the market.

Fannie Mae and Freddie Mac, government-sponsored enterprises which had historically guaranteed about half of all new mortgages, were brought under a tightly-controlled federal “conservatorship” and propped up with $188bn of taxpayer funds. That allowed them to continue supporting the market when private investors — who had been voraciously buying securities linked to subprime mortgages before the crisis — disappeared and banks pulled back from lending.

The government has also extended programmes backing mortgages for low-income families and military veterans, and these together still outweigh the renewed private sector lending.

Comment by Professor Bear
2017-08-21 01:04:18

How can all this taper talk possibly translate into action for the Fed to even tiptoe away from its bloated balance sheet if the likely outcome would be crashes in the stock and housing markets?

Fed Taper Brings Risk to Mortgage Bonds Unseen in Treasuries
By Wes Goodman
and Liz McCormick
August 10, 2017, 5:21 PM PDT
August 11, 2017, 7:28 AM PDT
Central bank may purge mortgages, keep some sovereign bonds
U.S. 30-year fixed home-loan rate has risen from record low
Fed’s Taper Plan & Mortgage Debt

For all the talk that Janet Yellen’s plan to shrink the Federal Reserve’s balance sheet will hurt Treasuries, U.S. mortgage bonds face a bigger test.

The securities are already lagging behind Treasuries for the first time since 2011. Investors are demanding 29 basis points of extra yield to buy the bonds instead of Treasuries, with the spread almost tripling from 2016’s low, Bloomberg data show. Firms including Allianz Investment Management and Federated Investors say the spread widening probably isn’t over.

“The market will be able to digest it, but you’ll need a higher yield to make buyers buy it,” said Marc Fovinci, head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which handles $4.8 billion. “The pace Yellen is talking about, it won’t be like flipping the light switch off. It’ll be like turning the dimmer switch down” on investor demand. The spread will probably double in a year, Fovinci said.

The Fed owns more than a quarter of the $6.86 trillion in agency mortgage-backed securities, and its holdings are likely to dwindle to almost nothing at some point because it only bought the securities as an emergency measure to prop up U.S. housing in the last recession. The Fed holds 18 percent of the publicly traded Treasuries market, and it’s likely to ultimately keep more of those holdings as part of its monetary policy arsenal.

Comment by Taxpayers
2017-08-20 10:09:52

Por que es?
Zillow has neighborhood link w 2% predicted increase while home values prediction is flat.
Kinds confusing n embarrassing has no money down!

Comment by aqius
2017-08-20 10:11:17

wait until after October 1st AND under no circumstances do business with Wells Fargo!

that’s hard for me to type as a native Californian. you want to see your state do well but after all the repeated deliberate fraud it’s obvious Wells needs to be put down.

the fact it’s still around is just confirmation of deep-seated corruption.

embarrassing & disgusting

Comment by Mafia Blocks
2017-08-20 10:36:41

The WF saga is dwarfed by Californias nosebleed levels of poverty, housing fraud and every other crime imaginable.

Comment by Mr. Banker
2017-08-20 11:00:13

“The WF saga is dwarfed by Californias nosebleed levels of poverty, housing fraud and every other crime imaginable.”

A thing of beauty. All indicators suggest that WF should not continue to exist, but nevertheless there it stands, flourishing.

Bahahahahahahaha, Californians: Dumb ‘em down, and profit.

Comment by Mafia Blocks
2017-08-20 10:12:13

Kahuli, Hawaii Housing Prices CRATER 14% YOY

Comment by Ben Jones
2017-08-20 10:17:00

‘Fed Policy Has Benefited a Small Handful … But Not the Economy As a Whole’

‘We’ve repeatedly noted that the Fed’s main strategy has been to artificially blow bubbles in asset prices. And we’ve repeatedly pointed out that one of the Fed’s main goals is to boost the stock market, yet the great majority of Americans – the bottom 90% – own less than 20% of all stocks and mutual funds. So the Fed’s effort overwhelmingly benefits the wealthiest Americans, and doesn’t help the general economy.’

“When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation?” -Dave Rosenberg, chief economist and strategist at Gluskin, Sheff.’

Comment by Ben Jones
2017-08-20 10:20:57

‘Banker showdown: Bernanke tells off India’s Rajan’
10 April 2014

‘In a surprising faceoff Thursday between two of the world’s most prominent central bankers, former Federal Reserve Chairman Ben Bernanke shot back at one of his most prominent critics in monetary policy circles: India’s central bank chief, Raghuram Rajan.’

‘Speaking at a Brookings Institution panel discussion in Washington, D.C., Rajan repeated his position that the world’s most powerful central banks should pay more attention to how their policies affect other countries, calling for “better coordination.”

‘He rhetorically asked, “If the policy hurts the rest of the world more than it helps the United States, should this policy be pursued?”

‘Adding fuel to the fire, he suggested the Fed has kept interest rates low for too long through its “quantitative easing” asset purchases. Referring to QE, Rajan said unconventional policies “have a role,” but “the benefits are much less clear once they are prolonged.”

‘Bernanke, formerly the head of the Fed, but the architect of the policies Rajan spent 20 minutes criticizing, was in the audience. He is now a distinguished fellow in residence at Brookings. Bernanke was called on to ask the first question after Rajan’s remarks, but delivered more of a criticism than a question.’

“The speech just reflects the fact that you are very skeptical of unconventional monetary policies. You say that the rules of the game should prevent policies with ‘large adverse spillovers and questionable domestic benefits.’ If you have a different empirical assessment than I do, that in fact, emerging markets would be better off if they hadn’t been used, then you would have a different view.”

‘Bernanke also said he wanted to take Rajan “to task” for “ignoring money.”

Comment by Ben Jones
2017-08-20 10:29:40

‘Raghuram Rajan, governor of the Reserve Bank of India, has been leery of the unconventional monetary policy tools used by central banks since the financial crisis. At some point, he said, pushing interest rates low seems to have the perverse effect of making people save rather than spend.’

‘Perhaps the most cogent critic of Fed quantitative easing policy, Rajan says the asset-price boost that comes with it may disappear if these assets can’t grow into their valuation. That risks still haunts the U.S. economy, he said.’

“A bridge that relies on wealth effects, you better hope that you got enough growth to justify the asset price increase which created the wealth effect in the first place.” - Raghuram Rajan’

Comment by Ben Jones
2017-08-20 10:53:57

‘Why does California have nation’s highest poverty level?’

‘By Dan Walters August 17, 2017′

‘With all the recent hoopla about California’s record-low unemployment rate and the heady prospect of its becoming No. 5 in global economic rankings, it is easy to lose sight of another salient fact: It is the nation’s most poverty-stricken state.’

‘So says the U.S. Census Bureau in its “supplemental measure” of poverty, which is more accurate than the traditional measure because it takes into account not only income, but living costs.’

‘By that measure, just over 20 percent of Californians are living in poverty. The Public Policy Institute of California has devised its own measure, similar to the Census Bureau’s, that not only validates the 20 percent figure, but tells us that another 20 percent of Californians are in “near-poverty” – which means they struggle to pay for food, shelter and other necessities of life.’

‘Another indicator of California’s impoverishment is that more than a third of its 39 million residents are enrolled in Medi-Cal, the state-federal program of medical care for the poor. And that doesn’t count a few million more who cannot legally obtain Medi-Cal coverage because they are undocumented immigrants.’

‘Our soaring housing costs are one factor. It’s not unusual for a low-income family to pay two thirds of its income for housing. California has very high automotive fuel prices and utility rates, which weigh heavily on the state’s poor, particularly the so-called “working poor” who don’t qualify for many public benefits.’

‘Direct efforts to relieve poverty via raising minimum wages, providing an earned income tax credit and expanding other public benefits certainly have marginal effects. But the latest reports indicate that in the long run, holding down costs for housing and other living expenses, making education more available and effective, and encouraging private investment in more and better jobs are vital if California is to escape the ignominy of having the nation’s highest level of poverty.’

Comment by Professor Bear
2017-08-20 18:12:51

‘It is the nation’s most poverty-stricken state.’

Given that we are also one of the states most richly endowed in human and natural resources, this can only possibly be due to epidemically poor governance.

Comment by aqius
2017-08-20 12:06:09

rajan & bernanke: 2 policy wonks debating the titanic’s dinner menu

Comment by Professor 🐻
2017-08-20 23:08:35

“A bridge that relies on wealth effects, you better hope that you got enough growth to justify the asset price increase which created the wealth effect in the first place.”

Wouldn’t a few years of abnormally high consumer price inflation coupled with flat or negative asset price changes suffice?

Comment by Karen
2017-08-21 11:53:49

Uh, you might be forgetting about wages.

Comment by Ben Jones
2017-08-20 10:46:03

‘Update on U.S. property prices in the Fed’s brave new world’

April 5, 2016 by Alex J. Pollock

‘We can see how dangerous a game the Federal Reserve and other major central banks have played by promoting asset price inflation through their monetary manipulations of the last several years. Unavoidably, among the asset prices affected are those of residential and commercial real estate.’

‘The Fed has tried asset price inflation before. In the wake of the collapse of the tech stock bubble in 2000, under then-Chairman Alan Greenspan, the Fed set out to promote a housing boom in order to create a “wealth effect” that would offset the recessionary effects of the previous bubble’s excesses. I call this the Greenspan Gamble. As we know, the boom got away into a new and far more damaging bubble. It was in fact a simultaneous double bubble in housing and in commercial properties. This is made apparent in Graph 1, showing the decade from 2000-2010. These events stripped Greenspan of his former masterful aura and of his former media title, “The Maestro.”

‘The economically sluggish aftermath of the twin bubbles brought us, under Greenspan’s successor, Ben Bernanke, the Bernanke Gamble. The Fed once again set about promoting asset price inflation and “wealth effects” to offset the financial and economic drag of the previous excesses. The brave new world of the Bernanke Gamble includes exceptionally low interest rates, years of negative real short-term interest rates, and the effective expropriation of savers, while making the Fed into the biggest investor in mortgage assets in the world. Of course this has inflated real estate prices.’

‘Graph 2 shows U.S national average house prices from 1987 to 2015 and their trend line. The bubble’s extreme departure from the trend is obvious…This rate of increase is unsustainable. On top of that, the U.S. government is once again, as it did the last time around, pushing mortgage loans with small down payments and greater credit risk. Some politicians have apparently learned nothing and forgotten everything.’

‘The price behavior of commercial real estate has been even more extreme. As shown in Graph 3, while commercial real estate prices peaked in 2008 at a level similar to that of housing in 2006, their fall was much steeper, dropping 40 percent, or about half again as much as house prices. The difference presumably reflects the large government efforts to prop up the prices of houses.’

‘From the 2010 bottom in commercial real estate prices, they have now almost doubled, and the current index is 17 percent above the prices at the peak of the bubble. Cranes are busy, and this so far makes the Fed happy, since it means strong construction spending. But what comes next?’

‘Rapid increases in house and commercial real estate prices is what in the past has induced extrapolations of further price increases, looser credit standards, increasing leverage, and overconfidence among lenders and borrowers. We can only hope that this time they remember that it is the price, not the property, which is being leveraged.’

‘Will the Bernanke Gamble end in similar fashion to the Greenspan Gamble? Will the historical average of a financial crisis about every 10 years continue? We will find out.’

Comment by Ben Jones
2017-08-20 11:02:57

‘Former Federal Reserve chairman Ben Bernanke’s recent memoir (The Courage to Act: A Memoir of a Crisis and its Aftermath) offers a stunning admission. He confesses that the Federal Reserve and the Treasury Department were powerless to prevent the Lehman Brothers financial services firm from failing.’

“We had no way to save the firm,” he writes. “It was a terrible, almost surreal moment… We were staring into the abyss.” Timothy Geithner, who was to become Treasury Secretary, opined “All we can do is put foam on the runway.”

I’ll repeat: they never mention moral hazard anymore.

Here’s one thing they could have done: round up and start prosecuting all the crooks as fast as possible. Oh no, they handed them as much money as they could take.

Comment by Mr. Banker
2017-08-20 11:07:16

Here’s one thing they could have done: round up and start prosecuting all the crooks as fast as possible. Oh no, they handed them as much money as they could take.”

Bahahahahahahahahaha … this song’s for you …

Comment by Mr. Banker
Comment by Ben Jones
2017-08-20 12:11:57

‘It was a terrible, almost surreal moment… We were staring into the abyss.’

What a drama queen. Here’s a thought: all these investment banks could go poof and almost no one would notice. Except for fewer headlines about financial crimes, etc. You guys aren’t the center of the universe. What makes the economy go? People getting up and going to work. Not overpaid, paper-shuffling, super egos in DC or New York.

Comment by GreenEggsAndSpam
2017-08-20 16:17:08

Maybe Yellen and the other fed heads should be replaced by Al Gore and a cadre of his top globull warmists phds. I mean, if they can claim that their predicted build up of carbon *might* have gotten consumed/trapped by the ocean with straight faces, they can surely contrive some HI-larious explanations of the vaunted government statistics that get sprinkled on us on a regular basis like so much fertilizer. Maybe the fed heads can move over to the newly vacated climate research centers and apply their rigorous logic to explain why the oceans are about to engulf all the coastal cities *very* soon, along with disasters, fires, floods, oh my!

I’d go long popcorn companies.

Comment by steadykat
2017-08-20 15:14:21

Ben Bernanke was wrong:

Bailing out your Wall Street masters after you help to crash the system doesn’t involve “courage”.

Comment by Professor Bear
2017-08-20 18:14:47

“We had no way to save the firm,”

It almost sounds as though Lehman Brothers was Too Big to Fail.

Comment by palmetto
2017-08-20 11:19:48

So, aqius, I took the liberty of calling on that home owned by offerpad. First of all, it was a local #. The person I spoke with said it wasn’t formally listed yet, but they’re working on their website. I said it had a sign in front of it with this #, and was told they were “pre-putting” the sign up. My hand to God, the word was “pre-putting”. What does that even mean?

They were nice enough and told me the range of pricing they were planning to list it for. I looked it up in the property records and if they’re lucky, they’ll make about 20,000 on the deal, and that’s gross, not net. I guess they’ll make it up in volume.

They’re trying to do business somewhere between flipping and retail, apparently. Structure an offer closer to what a seller might accept in order not to have to pay commissions and deal with the uncertainty of financing for potential buyers, inspections, time on market, etc. Call it a “pain elimination” discount. I could see where that might be attractive to someone who wants to get out from under.

I don’t get that they’re a scam, just sort of don’t have everything in place just yet.

Comment by aqius
2017-08-20 12:25:40

Palmy you would make a good investigative reporter.

sounds like attempts to establish a “Real Estate HMO-style cartel” where opportunists insert themselves in the middle of necessary transactions to skim profit.

more red tape and hoops to jump through if this model flourishes.

just my opinion. but I really think you should freelance for 60 Minutes. I KNOW you’d enjoy watching the pee-the-pants reaction ambushing an office w/full camera crew! ha

Comment by palmetto
2017-08-20 13:40:12

Thanks, aqius, I know you meant it as a compliment, but investigative reporters are few and far between, if they even exist anymore. The only one I follow is George Webb and his buddy Jason Goodman, who cracked the Awan Brothers case and forced the justice department to at least charge them with something.

Not much in the way of pee the pants reactions to be had anymore, people are defiantly criminal now, or too drugged to care. Clinton, Wasserman-Schultz, the Awans, the Podestas, etc. are part of a massive global criminal cartel that includes the banks and the deep state and the “defense” department. And their boosters in the painstream media.

60 minutes is an interesting relic from the past. Probably most of it was BS anyway. At this point that’s how I think of anything that was “reported” by the media since I wuz a pup. Little, if any of it, real or true.

Comment by Carl Morris
2017-08-21 10:44:41

Not much in the way of pee the pants reactions to be had anymore, people are defiantly criminal now

I think that this is what was so damaging about the Clinton-Lewinsky scandal with the finger wag and the refusal to resign. Until that time everyone I knew assumed that situation would result in a resignation. When it instead resulted in defiance all the rules changed. And it lead directly (IMO) to Gore and Hillary not winning their elections, changing history. And here we are.

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Comment by oxide
2017-08-21 10:02:28

One house in my neighborhood had had a for sale sign in the yard, but the placard which said “COMING SOON,” so that’s probably what they mean by pre-putting. The sellers are probably repairing and cleaning up the house to show.

Comment by trader jack
2017-08-20 12:19:29

How anyone could believe that because your house value went up thousands of dollars, that you would spend more money because your house is worth more money.
Somehow a high priced house puts spendable money in your pocket?

Comment by Mr. Banker
2017-08-20 12:25:15

“How anyone could believe that because your house value went up thousands of dollars, that you would spend more money because your house is worth more money.”

“How could anyone believe …”

Bahahahahahahaha … it’s easy to believe this if you are totally dumbed-down ignorant pukes, which is what these believers are.

Comment by aqius
2017-08-20 12:30:35

Mr. Banker: don’t forget your Sunday tee time at the club today. oh by the way, my hottie cousin in that drink cart might “accidentally” run over your cleats . . . with you in them

Comment by Ben Jones
2017-08-20 12:34:50

‘because your house value went up thousands of dollars, that you would spend more money’

It could probably be proven to some degree. But take the Californian example I posted: if really high house prices actually helped, why is it so poor? Every time it’s written about, the conclusion is housing prices are the source of the problem. I don’t know how you can get a more clear example of the wealth effect theory’s failures than that.

Let’s not forget this is all related to the modern globalist structure: the US is the worlds economic engine. We’ll borrow and spend, continuously. The developing countries will grow with the factories we exported, shazaam! Except, we’re kinda broke and getting broker. The Chinese can’t breath and are moving mountains to get out. Yet we keep operating under this consumption model that just isn’t working.

Comment by palmetto
2017-08-20 12:44:34

Ha! Death by ChyNAH!

Comment by scdave
2017-08-20 14:06:50

if really high house prices actually helped, why is it so poor ??

Much of the state has very inexpensive housing. So I think housing prices have very little to do with the poverty level. I think a lot of poor people come here both legally and illegally because they can get free services and support. If that was not the case why wouldn’t they go to some place like Texas ?? I mean, if you are poor with little to lose don’t you go to the place that gives you the most for free ??

Comment by Mafia Blocks
2017-08-20 15:23:14

False. CA has no “inexpensive” housing. Also CA leads the nation in mortgage fraud per the latest data.

Is Californias mortgage fraud problem a result of poor people?

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Comment by SFMF
2017-08-20 15:47:56

You think there aren’t poor people and illegals in Texas? Think again.

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Comment by GreenEggsAndSpam
2017-08-20 16:09:58

For once I agree with you - lots of the “poors” in Cali are there for the benefits and probably in the underground economy. Lots of cheap(er) housing away from silicon valley, beach, etc. I suspect the pols play this up as well to keep the feds doling out money to take care of their dregs - most of which no doubt gets skimmed by the clowns in charge.

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Comment by scdave
2017-08-20 17:41:08

Lots of cheap(er) housing away from silicon valley, beach ??

Try convincing our in house moron HA…

Comment by Mafia Blocks
2017-08-20 18:42:55

Dave my good friend….

CA leads the nation in mortgage fraud per the latest data.
Is Californias mortgage fraud problem a result of poor people?

Comment by Mugsy
2017-08-20 13:08:08

It’s my first time back in San Diego (92129) in many years but I’m happy to see that everyone is so rich. I mean they have to be to afford the home prices here. Never mind what it costs to eat out. And $3.29 for gas? Rich, rich, rich! That’s the only explanation I have.

Comment by aqius
2017-08-20 15:06:10

Mugsy shhhhh don’t let that secret get out about us richies in CA!
and please: save me a place in line at Del Taco Tues/Thur.

Comment by Professor Bear
2017-08-20 18:16:54
Comment by Mugsy
2017-08-20 19:32:33

Escondido? No way. That’s almost Orange County.

Comment by Professor 🐻
2017-08-20 23:20:06

We live inside the San Diego city limits (Rancho Bernardo). I can get to that station in 10 minutes. However, Costco, 5 minutes to our south, has comparably cheap gasoline.

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Comment by Mafia Blocks
2017-08-20 13:31:28

Boulder, CO Housing Prices CRATER 6% YOY

Comment by palmetto
2017-08-20 16:19:35

Russia? Russia, anybody? Russia, Putin, any takers? Things are soooo quiet on the Russia front. Wha’ hoppen?

Lol, that one guy resigned abruptly from the Mule Team and went back to the FBI from whence he came. And then it got REALLY quiet.

Webb says that the Russia investigation has been quietly shut down by the Democrats. And Mueller is sitting there pulling his pud, hoping no more is said about his role as a uranium courier for Hillary Clinton.

Hence, McAuliffe had to stage that little contretemps in Charlottesville, with both sides being fake fronts to pull in the roobs.

Comment by palmetto
2017-08-20 17:10:01

And remember those immortal words attributed to Jay Gould:

“I can hire one half of the working class to kill the other half.”

Sometimes that’s what it takes to wipe out stuff like “muh Russia”

Comment by jeff
2017-08-20 17:28:10

“with both sides being fake fronts to pull in the roobs.”

That one was pretty easy to see.

Comment by palmetto
2017-08-20 18:33:56

Easy to see for anyone who has half a brain. I wasn’t even aware of it until I read the story about the PR firm that hires crowds. Dang, they pay over $20 bux an hour! And then there was that Kessler guy who organized the Unite the Right and just happened to be an Obama supporter, lol.

Comment by Ben Jones
2017-08-20 18:47:46

Charlottesville False Flag Theory- Something Strange is going on. [Graphic Content]

A comment:

‘Airbag not deployed !….definitely the smoking gun!’

That is strange. Why wouldn’t the air bag have gone off?

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Comment by tj
2017-08-20 19:41:43

complimentary video from the truth kitty

Comment by jeff
2017-08-20 20:37:25

How did he paint racing stripes on the car between driving down and backing out of the street?

“but I don’t think he had a paint job between this picture and this one”

“either he’s Batman or this was taken in two takes” (shoes)

“He also looks like he drove like a professional stunt driver or has done this before, the way he drove backwards that fast I don’t know if I could make an exit like that, I mean probably if you worked for the CIA and you were going to participate in a False Flag event you would practice your driving skills.”

Comment by palmetto
2017-08-21 05:16:58

Strange dayz indeed.

Today an eclipse, where many just might lose their sight wearing those glasses lovingly brought to you by Jeff Bezos.

And now this:

Signs and wonders.

Comment by Professor Bear
2017-08-20 17:53:01

“When the Fed expands its balance sheet through asset purchases, it has no control over where that newly created money will go: toward the purchase of goods and services; or into financial assets, such as stocks, junk bonds or housing.”

That’s puzzling, because I was under the impression that the reason they expanded their purchases of MBS was to explicitly inflate housing prices.

“Because asset prices aren’t part of official inflation measures, and because identifying an asset bubble is beyond their scope, central bankers eschew using monetary policy to respond to them.”

They seem fine with using monetary policy to artificially inflate asset prices, but at a loss when it comes to the point where the asset price inflation gets wildly out of control.

Comment by Professor Bear
2017-08-21 01:14:14

Fed Owns How Much Agency MBS?
Jul 31 2017, 8:31AM
Rob Chrisman

What does the Fed reducing its balance sheet mean for LOs and their borrowers? The NY Fed released a new two-week FedTrade schedule covering the July 28 to August 10 period, and it showed about $1.2 billion a day of Agency MBS purchases. If lenders originate $1.6 trillion total of residential mortgages in 2017, that is $6.4 billion a day - including jumbo, non-QM, and bond programs - non-agency stuff.

I bring this up because at some point it will end - and the Fed has done a fine job telling us that. Michael Ehrlich with ThomsonReuters kindly crunched a few numbers for me to determine that there is $5.5 trillion of Ginnie, Fannie, and Freddie (Agency MBS) out there. Of that, the Fed owns about 1/3 - $1.75 trillion - or more than a year’s production of all types of residential mortgages. Not only that, but remember that the Fed was a big buyer when 30-year rates were .75% lower than where they are now, so those bonds are underwater by several points.

The Fed doesn’t want to spook the markets, drive long-term rates higher, sell in a poor market, or negatively impact the U.S. housing market. But the industry is worried about the pace of the Fed selling over a year’s worth of underwater agency mortgage-backed securities. Who out there in the U.S. or world wants to own billions of dollars of fixed-rate 30-year 3.5% mortgages?

Comment by Rental Watch
2017-08-21 08:54:27

My understanding is that the Fed has had principal payments (and complete repayments) of these loans that has required them to continue to buy.

(Again, my understanding) When they “burn off” their balance sheet, they will not be selling the loans onto the open market, but simply not replace the principal that is repaid with more purchases.

Comment by palmetto
2017-08-20 18:10:44

And what, you may ask, do the Awan Brother have to do with housing?

Well, that’s a fascinating thing. I’ll let George Webb tell about it, although if you haven’t been following him, much of this isn’t going to make sense.


Seven 400K Mortgages on Hawkshead, Awan Spy Clubhouse

DC Walk Imran’s Homes and Bizes

Awan’s Laundering Home Loans Through KC Banks For EZ CaR Buying?

Comment by Young Deezy
2017-08-21 07:48:27

The Awan Bros. story is really something. It’s absolutely galling how much they appear to have gotten away with and how much info they had access to.

Palmy, thanks for publishing the links here for other people who aren’t familiar with the story.

Comment by palmetto
2017-08-21 08:35:54

Webb has been on this for almost a year now, first on his own, more recently with Jason Goodman, who really pulled it all together with Crowdsource the Truth. Not to mention bailing George out of jail.

It’s been a tremendous amount of work and along the way, decent citizen journalists have contributed hours and hours, running down leads and documents and such, doing the jobs that the painstream media won’t do.

The Awan Brothers are just the tip of the tip of the tip of the iceberg. The whole thing keeps unraveling and morphing into a global horror show fueled and supported by congress and deep state. So massive, so many players, both individual and corporate, it’s hard to know where things begin and end. It’s really worse than anyone can imagine and sometimes I come away from the reading and viewing with nausea. No wonder so much screaming about “muh RUSSIA” and racism and whatever else they can throw into the pot. Clinton, Weiner, Abedin, Schiff and Wasserman-Schitz, a firing squad would be too merciful for them. And others as well.

Comment by oxide
2017-08-21 10:16:57

I’ve always wondered how these bigwigs have the TIME for all this crap. Golfing, multiple vacation homes… and then all these deep state meetings on top of it? All while being a high-profile public servant like Congresscritter or Secretary of State with all the public appearances? I can barely keep up with my lawn and my laundry and my car insurance.

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Comment by Tarara Boomdea
2017-08-21 12:04:51

Ran across this yesterday:
Your Child’s Tuition Is Paid While You’re in Tahiti

Stuart Ross, a former insurance executive, sold his Puerto Rico-based company 12 years ago and has since enjoyed a globe-trotting lifestyle, with homes in multiple locations and grand travel aspirations.

But while he and his wife, Val, are away on extended holidays, the bills and other burdens of daily life continue to pile up. He turned to his wealth adviser for help managing these tasks and was connected to Total Personal Services, a Garden City, N.Y., company that does things like sorting and scanning his personal mail, paying bills, arranging international money transfers, and routine household services.

Mr. Ross, who calls a ranch in Glenwood Springs, Colo., his home base, said the arrangement helped ease the stress of travel, because he knows that “someone is watching the farm.”

Taking vacations is not in my “stress” category. These people are retired, but I’m sure the bigwigs use similar services. How much work the powers that be actually do is debatable. I hear congresscritters spend most of their time fund raising.

In my “yout”, I worked for a very wealthy couple living on Sutton Place in NYC. My job was to keep track of their bills and who paid what and make sure their share was equal. I think they paid me more than doing that (they could have easily done it themselves but they didn’t know how) than what the over/under turned out to be every month. Weird.

Comment by Professor Bear
2017-08-20 18:11:30

Dumb questions of the day:

1. Does a financial crisis situation make it legal for the Fed to do whatever it chooses to remedy the crisis?

2. If yes, why wouldn’t the Fed do its best to create ripe conditions to increase the chances of future crises, in order to ensure that it will have full license to do whatever it chooses, unfettered by a rule of law?

Comment by palmetto
2017-08-20 18:26:18

There’s a rule of law?

Comment by Professor 🐻
2017-08-21 00:22:17

“… unfettered by a rule of law” is roughly equivalent to “no rule of law”…

Comment by Ben Jones
2017-08-20 21:27:06

The Blues Brothers - Ray Charles Shake Your Tail Feather

James Brown, Can you see the light, Blues Brothers

I have seen the light!

Comment by palmetto
2017-08-21 06:12:11

“I have seen the light!”

As long as you don’t see the light through a pair of Bezos’ special glasses.

Comment by Professor Bear
2017-08-21 00:53:52

I have what I believe is a better question than Mr. Authers’: Why would the Fed ever reduce its balance sheet if a stock market crash was the likely outcome?

FT Series Financial crisis anniversary
John Authers: US stock valuations have been inflated by the Fed
Financial Times columnists pick their charts of the credit crisis on the decade anniversary
August 18, 2017
by: John Authers
US share prices inflated by the Fed

If you want to understand the bizarre decade that markets have experienced since the financial crisis, you cannot do better than to look at the S&P 500 — the main index for US stocks — compared to the expansion in the Fed’s balance sheet.

The central bank has bought bonds to try to push down their yields and so push up the valuations that people will put on stocks — and they have been phenomenally successful.

Since hitting rock bottom in March 2009, the S&P 500 has more than trebled and the rally over that period has been remarkably in tune with the Fed’s bond-buying
. There was a hiatus during 2011 when the Fed was not buying, and stocks hit a plateau again once the buying programme was finally over in 2015.

Which leads to the big question for the future. Stocks look very expensive by any measure other than when you compare them to bonds, in which case they look cheap. What will happen to the US stock market when the Fed — as it must — starts to reduce its balance sheet?

Comment by Mr. Banker
2017-08-21 06:29:00

“What will happen to the US stock market when the Fed — as it must — starts to reduce its balance sheet?”

“… as it must …”

And it must … because?

Why must it?

Comment by Professor 🐻
Comment by Ben Jones
2017-08-21 06:18:36

Dealing with the effects of one bubble creating more
Financial Times-9 hours ago
Several housing markets have rallied despite lacklustre economic growth. In particular, London, a classic haven for foreign owners, and Vancouver, a favourite …

Comment by Professor 🐻
2017-08-21 08:32:17

Ron Paul: Stocks may get chopped in half within a year, but it won’t be Trump’s fault
By Shawn Langlois
Published: Aug 21, 2017 10:17 a.m. ET
Critical information for the U.S. trading day

Comment by palmetto
2017-08-21 08:55:42

Sure, if the “sock market” even exists within a year.

We’re almost at the end, I think. The final act, who knows what it will look like. Krakato

Comment by palmetto
2017-08-21 09:05:10

Eh, let me try again. I mistakenly hit the send button.

Just wondering what the big bang will be that rings the curtain down. Krakatoa east of Boise? Fault line in Cali? EMP? Who knows. But the planet is overdue for a big-time flushin’.

Comment by palmetto
2017-08-21 09:00:50

Wow. Google just banned this guy, apparently for telling the truth through statistics. Interesting read.

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