Does The Fed See Housing As ‘Too Big To Fail?’
Several readers suggested federal funds rate policy as a topic. “Was listening to the radio this amr. I forget if it was Bloomberg or CNBC. The announcer said that several of the big banks predict the Fed is gonna DROP rates this or next neeting. Almost all predict a drop in early to mid ‘07.”
“The responder said: (paraphrase) ‘are you kidding? retail sales are up the last 3 months. Wages have risen, gas prices are down. The consumer seems as strong as ever.’ To me, it now seems obvious that the Fed will risk inflation/hyperinflation to save housing as much as possible. Otherwise they would have raised. Instead, they’re squaking like chickens and then holding the FFR steady.”
“Perhaps the Fed actually does see housing as ‘too big to fail,’ specifically because of Fannie/Freddie, all the MBS out there, and the potential ’systemic risk.’ A little stealth inflation to steal the bailout from us, instead of repeating the obvious S&L bailout?”
A reply, “I wonder if we don’t end up like Japan with a deflation problem after this plays out. Japan tried to inflate its way out of its bubble and had interest rates at basically 0 % but no one would spend. There seems to be a consensus that this can’t happen here, but certainly the Japanese are not any less capable at solving problems than us.”
Another said. “What is a fall in mortgage interest rates suppose to do? 14+ increases from the FED and the 30 year rates have barely budged. (To my great bafflement). The money printers really want to put the brakes on RE and get things back to reality, you need to push to the mid 9’s, like Greenie did in ‘94.”
“The RE mess still boils down to a market run-up fueled by toxic loans. The fool pool has been fished out. People are being educated to the realities of being stuck with a highly illiquid ‘asset.’ Feds can do a Japan drop for all that matters. But the point still remains-average incomes cannot purchase an average house at today’s levels. FED is stuck in the mud.”
And another, “Dropping rates won’t solve the issue. The effective interest rate for purchases is below what they can sustain the dollar on due to funky financing and the total overextension of credit. It’s doomed to implosion, suckering in more buyers only extends the population who will suffer.”
One looked at the markets influence. “The Fed sets very short term interest rates. Longer term rates, like the 10-year (which is what the 30-year mortgage generally follows) are set by the market and its expectations. Obviously, the market expectation is that over the next 10-year period, rates will moderate. That doesn’t rule out a big spike in short term rates at all.”
“Now whether ‘the market’ and its expectations will turn out to be correct over the next 5-10 years, that’s a whole ‘nother story.”
One said, “People aren’t buying based on 30 yr fixed anymore anyway. One of the big causes of a housing meltdown will be when people’s ARMs reset. When they reset, they will of course reset higher. The people are in trouble because they can’t afford the new payment, they can’t afford to sell, so they foreclose.”
“Dropping the FFR will likely drop the ARM rates. Thus, as people get to their resets, their payments don’t jump as much, and thus less of a ’shock.’ This will NOT lead to increases in housing prices again. But it may slow the fall of housing prices.”
“Thus, the fed may be trying to engineer a ’soft landing.’ By allowing as many people as possible to either refinance into ARMs or by keeping their payments down upon the ARM reset. It just buys time. In the end, it’s giving borrowers more rope to hang themselves.”
“But borrowers have proven that they are stupid beyond belief. Many of them will be thankful for the gift from the benevolent fed. In the process, lowering the FFR will of course cause the dollar to start losing value. thus, we Americans will become more ‘competitive.’ Thus, our incomes (in nominal of course) will rise somewhat. Or at least not fall as far as they were falling due to global arbitrage.”
One looked at the consequences of lower rates. “Reducing the fed funds rate prematurely will cause inflation and once the bond markets realize we aren’t headed into a deflationary recession they would demand a lot more than 4.8% yield on 10 yr treasuries.”
“The other problem as you mentioned would be a significant deterioration of the dollar. This will fuel inflation as imported goods are more expensive, and will also create a glut of bonds as foreigners refuse to buy dollar denominated assets. We could see yields go through the roof, which would really put the screws to housing.”
“The only thing that can help housing would be wage inflation, and I think global labor arbitrage through offshoring and massive illegal immigration is going to keep a lid on the price of labor.”
“I don’t expect the FED to cut rates until late 2007 after negative GDP growth is reported and both stocks and housing have lost a lot of steam.”
One comment from Las Vegas. “I can see how lower rates would help homeowners who got sucked into the mania and purchased more house than they could afford, but I’m not sure how much lower rates will help folks who bought two, three, or more homes with the intention of selling quickly at a profit. How long can those ‘investors’ afford to wait before they must sell? I see lots of empty homes here (Vegas).”
One pointed out, “My husband and I are currently renting and have no motivation to purchase a home right now. Why? Housing prices are simply too high relative to incomes. We just don’t want to put ourselves at financial risk by buying a house. If we had to move a few years from now, who could afford to buy that house from us? At the current rate at which wages are (not) increasing, the answer to that question will be: No one.”
The New York Times. “Maybe the sputtering housing market will not be that big of a drag on the economy after all. Falling gas prices are leaving Americans with more money to spend, and inflation has become less of a threat in recent weeks, according to a report released yesterday by the Federal Reserve.”
“The growing trade imbalance with China was a major factor in the ballooning trade deficit. The unadjusted trade deficit for August was $79 billion. The numbers defied expectations. Economists who were surveyed before the numbers came out predicted that the overall deficit would fall in August, but it rose.”
“When the gap hit a record in July, economists said they believed that the numbers were nearing a peak. But as energy prices remained high this summer, the deficit continued to swell. Still, many economists said yesterday that they now believed that the turning point was near.”
“‘This is probably as bad as it gets,’ wrote Paul Ashworth, senior United States economist with the economics research firm Capital Economics.”
This was also posted as a response by a reader:
‘For those of you who believe lowering the FFR is going to quickly reflate the housing bubble I suggest you read Charles Kindleberger’s Manias, Panics, and Crashes. According to a book review written by Hans Melberg:’
‘First, there is some exogenous shock (policy switching, technology, financial innovation). [MBS, Credit Default Swaps, ownership society, new HUD risks models, downpayment assistance programs, taxcuts]‘
‘Second, the boom created by the profit opportunities after the shock is fed by increasing money supply. There is little to be done about this because the money supply is endogenous (new banks enter, personal credit increases, new credit instruments are used). [H and R block et al, Home builder banks, Hedge Fund lenders, Pay Option Arms for the masses]‘
‘Third, the boom leads to speculation that initially has positive feedback; speculators earn money and invest more as well as making more people invest. This leads to what Adam Smith calls “overtrading” which can be caused by pure speculation (buying something with the aim of selling it later at a higher price), overestimation of the true expected return and excessive gearing (low initial cash requirements when buying something). [Most of us remember the homeless guy with 4 or 5 homes, negative equity downpayments, and so on; we’re all too familiar…]‘
‘Fourth, the overtrading spreads from one market to another (psychological links and others). [First they said it was a local phenomenon; now we know it is national]‘
‘Fifth, speculation spreads internationally (again, psychological mechanisms are important, as well as: arbitrage, foreign trade multiplier, and capital flows). [Asian financing, Australia, Ireland, US, UK, …]‘
‘Sixth, at the peak some insiders leave the market, there is “financial distress” and a bankruptcy or the revelation of a swindle leads to the final stage; the rush for liquidity. The panic (or “revulsion”) feeds itself until prices become so low that people are tempted to once again go into less liquid assets, trade is cut off or a lender of last resort convinces the market that there is enough money for all.” [CEOs sell shares and earnings turn down, a trickling of speculator led auctions, conversions reversions, construction project funding withering away, criminal fraudsters, FNM yet to report. Still awaiting credit crunch and FRB and Congressional intervention]‘
‘*Comments within [] are my emphasis. So, my answer is no; reflation will not quickly happen. Did not w/dotComs, Japanese land and stock bubbles, 1929 crash, tulips, south sea, mississippi, beanie babies, …. In other words, after a while the market becomes oversupplied/saturated, investment expectations sour, demand slows, and the fad comes to a crushing end.’
“now we know it is national”
Now we know it is international, and possibly intergalactic…
This reader response is an excellent tailoring of Kindleberger’s scheme to the situation at hand. The only question IMO is whether the Fed will succumb to the temptation to respike the liquidity punch bowl in order to keep the party going at the cost of a still bigger crash down the road.
NO. This was the “bigger crash down the road” after the Scam Market bubble burst. One runs out of spiking the punch bowl after the liqour has run out.
Jas Jain
That’s an interesting thought, Jas. I am more of the opinion that stock/scam market punch bowl was replaced by the housing punch bowl. And, fed, may still have some liquor left to spike this punch bowl.
What “the Fed has left” is a cow’s pee. And I am not so sure if that is a holy cow’s.
Yes, the Fed can make the economic punch taste “interesting.”
Jas Jain
The Fed has a proclivity to bend to the masses. They may very well cut rates without effect. What they do after the correction begins is truly inconsequential unless they grow a pair like Volcker.
Paul Volcker was a great Chairman because he didn’t cater to the interests of Bankrupters and Fraudsters of New York City (BFNYC). Greenspan and Bernanke have acted like they are sworn agents of BFNYC.
The US economy was put on the path to Greater Depression day that Volcker was replaced with “our guy” Greenspan by political hacks like James Baker, III. Then, in 1992 election year “our guy” Greenspan bit Baker like an ungrateful dog.
Jas Jain
Jas posts “The US economy was put on the path to Greater Depression day that Volcker was replaced with “our guy” Greenspan by political hacks like James Baker, III. Then, in 1992 election year “our guy” Greenspan bit Baker like an ungrateful dog.”
More like he bit prez Bush I …. But still you are somewhat shrill…. Wall Street had a 5 year lovefest with him. Greenspan was no dummy he did what hw had to do after 911.
Say what you may…. the choices were slim and none and slim just left town! I do beleive it was the choices of the lesser evil’s.
We did not visit this evil upon our Country, nor or Countrymen that died. This was not our course, it was our reaction. We had to save the day and the rest be dammed.
Volcker fought his war. AG fought his…. both played the hands rhey were delt……… not the one’s they wanted.
Wow. George Washington, John Paul Jones, Robert E. Lee, George Patton… and Alan Greenspan.
“More like he bit prez Bush I…”
Baker was his campaign manager ans he got the bite first.
We can believe what we want and there is justification for all actions of the leaders. Mr. “Irrational Exuberance” gave rise to the biggest Scam Market bubble in history and then topped it off with the biggest Housing Bubble in history. So, go ahead and justify what Greenie did. History will not be kind to the Maestro.
Jas Jain
Jas,
Does History equal Truth?
Usually, but not always. Depends on who’s writing the history. It’s certainly usually more true than “current events” reporting in the media.
- “‘Sixth, at the peak some insiders leave the market, there is “financial distress” and a bankruptcy or the revelation of a swindle leads to the final stage; ”
Most CEO’s of the Home Builders cashed large amonts of shares at the peak in 2005.
yo - you forgot community bankin law
ownership society is a mop up operation
Probably. Othewise, why would BB and others be talking up the slowing housing market, when their business is to keep inflation in check. Where was the talk when the bubble was inflating?
If you recall the Fed minutes from December 1999, the Fed guys chuckled at the idea that people would lose money in the stock market. IMO, they don’t care about saving homeowners, but rather their hold on power. As long as they can make any bust look like someone elses fault (via guidance, etc.) I doubt they care who gets hurt. Remember, the Fed acknowledged they helped drive oil prices down and kept them there in the 1980’s.
I agree. They are there to protect “the institutions” the banks. When push comes to shove the little guy gets what he always gets……
…..Cue Auger-in”
posted ” When push comes to shove the little guy gets what he always gets……”
Isn’t that what government does best? Be thankfull it’s only money! How would you like to be drafted to fight Bush’s War…. a free trip to Iraq maybe you could find the WMD that would be a hoot!
I guess I would rather have a bag’em-and-tag’em mortgage, if that was the choice…
“Perhaps the Fed actually does see housing as ‘too big to fail,’ specifically because of Fannie/Freddie, all the MBS out there, and the potential ’systemic risk.’ A little stealth inflation to steal the bailout from us, instead of repeating the obvious S&L bailout?”
That sounds to me like Plan A. But I am guessing that Plan B will need to be invoked instead (Plan B = post-bubble-collapse mop-up operation).
The trouble with Plan A is that it has been used too often and too many Joe Soccermom types are habituated to it. This is why we have a topsy-turvy selection into the housing demand pool, where unqualified, uneducated, underincomed folks are stepping up to buy homes priced at 12X their annual incomes, while those who know better are watching and waiting. If you rig the game so often that the market breaks, then the fooling games no longer work.
GS:
This may be true, but I am continually dumbfounded as to the frightful events that are unfolding around me.
I feel like I’m one of the few who hasn’t eaten a big piece of crazy pie.
For so long I have felt that Fed’s #1 job was to protect the dollar hegemony. i’m starting to question this.
Their policies CLEARLY are not in line with their actions.
Either they are idiots (even I won’t go that far) or they’re saying one thing and doing another for an express reason.
To me it seems that the most likely reason is a little more stealth inflation. It’s “worked” the last 7 decades, why not try it again.
OF course we all see the folly in this…
That said, the ‘conundrum’ may work in their favor this time.
The FFR will likely affect the ARMs more than the Fixed rates. I truly see them trying to drop the ARM rate down, allowing the FB’s whose loans are resetting to refinance, hence resetting the ticking time bomb.
I THINK they’re looking at it this way:
Option 1:
keep raising FFR to keep within their inflation targets per their mandate. In this case, many FBs will foreclose. It will expose all the toxic crap in all the MBS out there, which are likely in various banks, hedge funds, pension funds, foreign lands, etc. If allowed to happen, this could pose “systemic risk”, since nobody even knows where this stuff is, much less the various hedging strategies and derivatives used to “manage” the risk.
Option 2)
Hold rates a few more times. Watch housing start to implode> This will inevitably cause a recession, or AT LEAST should slow growth. Use the slowing growth numbers to justify dropping the FFR again. This will allow the FBs to refinance. It will only DELAY the pain of course, but perhaps we’ll have figured something out by then, or perhaps our economy will be doing well by then, or SOMETHING. It’s just buying time.
At the same time as dropping FFR, keep guidance a bit stricter. The level of speculation in housing will likely not be as severe because people now realize that housing can fall in value. So a repeat of 2002-2005 is highly unlikely.
In doing so: magic. You buy some time. At the same time you avoid some of the “froth” from coming back to the market. You avoid housing collapse. You avoid depression (for now).
Of course there will be unintended consequences.
-There may be another gold/PM rally. We’ll need to coordinate this with various central banks to dump their holdings keeping the gold price down, masking what’s really going on. (oh, wait, already going on now).
-there may be another stock rally. but stocks are “good.” especially in our ownership society. especially since the big banks and financial sector and business will love this. they’ll make out like a bandit
-there may be a flight away from US Treasuries. This could be a problem. Unless we get the BOE and BOJ and Eurozone to go along with this, and drop their rates as well. (doesn’t sound too hard)
-the dollar may fall precipitously. That only makes our exports more attractive, and imports less so. This will help with the trade imbalance. It will also help with repaying our deficit, especially if we cook the inflation numbers (also already done). Oh, we’d have to get rid of M3 too. (oh yeah, done). But again, I’m sure we could coordinate this with our friends in other high places, to keep the dollar from dropping TOO far.
Big tinfoil hat conspiracy, I know.
And yes, with Option 2 we will still have a housing collapse. But it may be turned into a very slow very gradual agonizing 10 year collapse, instead of a blowout.
I doubt slow dragged out housing collapse would be any better than a quick one. But hope springs eternal on Wall St and at the Capitol that “we’ll figure something out by then”
Just like the trillions of unfunded liabilities we keep piling on
I, for one, don’t think that your arguments require a tinfoil for acceptance.
I don’t think the Fed is stupid, or planning a conspiracy. I think they have simply lost control. The economic forces are too great, and we are in uncharted territory.
I am hoping you are correct, because in this case the invisible hand will take care of things that government engineering tends to make worse.
Right, I’d rather eat a hefty 10 lb plate of Sh#t once. Than a marble sized turd every day for a year. Let’s get it over with. We’ve all got some living to do.
Clouseau, I believe you nailed it. Option 2 makes a scary world of sense.
lalaland posts “Clouseau, I believe you nailed it. Option 2 makes a scary world of sense.”
ME TOO! The current leadership never has a plan #2 for anything. Look at all of the major events in the last 6 years. They struggle mightly for a rotten plan #1.
The call it Mission acomplished!
Ditto. Scary… but most likely.
Prepare for import inflation. But with rent likely to decline… the “core inflation” is making more and more sense to me. My it justifies a lot!
Neil
Once the bubble pops that’s it.
No lowering of the interest rates
will save the FB’s.
IMHO
posted “Once the bubble pops that’s it.”
Yep! just like a fart in the bathtub.
“I feel like I’m one of the few who hasn’t eaten a big piece of crazy pie.”
Maybe it is time for us skeptics to just get ourselves a bucket of money and box of stupid so we can go out and eat some crazy pie of our own before the price turns out to have reached a permanently high plateau while waiting for wages to catch up. I think this is the govt’s ideal plan — otherwise why would all the “experts” keep talking about it like it is some kind of done deal?
“I truly see them trying to drop the ARM rate down, allowing the FB’s whose loans are resetting to refinance, hence resetting the ticking time bomb.”
They may have this plan in mind, but I keep reading hints from the mortgage industry insiders who post here that nobody who bought the I/O Option ARM financing package when rates were low can make it into a fixed rate mortgage, or anything else.
“-there may be a flight away from US Treasuries. This could be a problem. Unless we get the BOE and BOJ and Eurozone to go along with this, and drop their rates as well. (doesn’t sound too hard)”
This has been discussed for thirty years now (check out The Great Depression of 1990 by Ravi Batra for an early example). Something tells me the bond market has some sort of teflon coating to prevent this scenario, but I am not sure how it works…
I truly see them trying to drop the ARM rate down, allowing the FB’s whose loans are resetting to refinance, hence resetting the ticking time bomb.
FB’ers can’t refinance. Their houses are worth less than they paid for them, and FNM won’t buy mortgages from declining value neighborhoods.
It will take crooked appraiser’s to fudge the numbers and check the neighborhood stable value box on the appraisal form.
This is why none of the nimwits on AppraisersForum want to acknowledge a bubble.
They have to rationalize the circumstance in order to sleep at night after compromising themselves by lying about the market conditions and rubber stamping the valuation numbers.
Not bad, HIC. Still, no magic with option 2:
-TPTB have barely been containing PMs as it is.
-The dollar’s dropped by nearly half since 2001 yet our current account deficit and trade deficit have increased, not decreased. Too many items not found or made in America anymore.
IMHO, they’ve lost control and are pretty much paralyzed. The roads in front (rate increase) and behind (rate decrease) are washed out, and any move is a bad move. So, they continue to flap their jaws to try and influence the economy, all the while hoping that no one really figures out the truth. Again, though, Wall Street doesn’t want to know the truth, as it would spoil the party.
‘The New York Times. “Maybe the sputtering housing market will not be that big of a drag on the economy after all. Falling gas prices are leaving Americans with more money to spend, and inflation has become less of a threat in recent weeks, according to a report released yesterday by the Federal Reserve.”’
Gee, Mabel, gas prices just dropped $0.30/gallon. I guess we can afford that $900K Toll Brothers McMansion after all…
The fact that they trotted this out makes one wonder what they are up to. Joe public is pretty gullible and the press will echo what the NYT prints.
Here are a couple more comments that were farther down in the thread:
‘This is a battle with deflation so the Fed will seek to avoid an American ‘lost decade’ (or two) with all its might. The problem is that the US has lost much of its productive capacity i.e. there isn’t much left to inflate. Ask the Japanese what it feels like competing against $1 an hour labour.’
‘The outcome’s the same, you’re just altering the speed at which we get there. Figure it this way… the knife’s deep in housing’s gut — do you gut’em (20%) or simply withdraw it slowly (1%)? It’s not treatment at all, just different levels of pain & suffering.’
A reply:
‘which is an interesting point in and of itself: why bother having a FOMC? Why not just set a fixed (regulated) rate of interest at, i dunno, 10%? if the economy sours, change laws, lower taxes, increase spending; if inflation surges, do the opposite… I know I’ve answered my own question, the FOMC provides a cover for incompetent legislators (elected by uninformed voters) But it wasn’t always thus, no?’
Interest rates should be set by the free market, which is why Austrian theory is so compelling. The level of savings determines rates, as there is a surplus of savings rates fall, a shortage of savings and rates rise. This is why central banking is so perverse. Here in the US, the Fed lowers rates at a time when savings are at an all time low, the exact opposite of what would happen in a free market. So now we have this ridiculous amount of mal-investment which needs to be worked off. The adjustment is coming, the only question is in what form it takes. Bottom line is a lower standard of living here in the States.
Savings don’t matter when the ‘money’ loaned is not savings. ‘Money’ borrowed does not exist until it is borrowed:
“You ask if you can borrow 10 dollars and I say sure…then get you to sign a contract which states I will lend you $10 for 1 year at 10% so after a year you will owe me $11 in gold or silver…Then I pull out a napkin and write $10 on it and hand it to you…
You say this is a napkin it’s not money…Then I say you are in luck because I’m a banker and all the banks accept my napkins because I accept theirs…
Now get to work because you owe me $11…in gold and silver the Judges and police accept my napkins too and will enforce the contract you signed…
That is how banking has basicly worked for 300 to 400+ years…
Now we have a debt backed by debt system so forget the gold…
Elimination of the Gold standard allows banks to create almost unlimited amounts of debt out of thin air because money has been eliminated…But consumers have a finite ability to borrow it…once the borrowing slows or stops when the maximum potential is reached…the bubble will pop…
Bankers are just accountants with two sets of books and the power to create debt out of thin air…and call it money…
It is just a monumental ponzi scheme…everyone is paying interest on something that does not exist except in their imaginations…100’s of millions of people totally duped bouncing around in a debt inflationary bubble that is going to pop violently…Without the foggest clue as to why…”
Hypertiger
Lower rates in the short term might offer a last chance for owners to refinance out of an ARM. It should help.
Long term we have problems. Our industrial economy runs on cheap oil and we’re about at the the peak global capacity to pump oil.
http://jameshowardkunstler.typepad.com/clusterfuck_nation/2006/10/swan_dive.html
As the price of oil goes back up, the financial markets will get a new signal that running industrial societies has just gotten more expensive again. That will dampen hopes and expectations for increased wealth from these societies. Meanwhile, the air will be coming out of millions of mortgages, and the loss of value will spread among playas holding these bundles of mortgage debt (i.e. promises that money spent on houses is being paid back, which it won’t be). At the same time the houses themselves will lose value as the pool of potential buyers shrinks to nothing. That is, the inflated value (high price) of these assets will deflate.
As this occurs, there will be far fewer wage-earners putting up additional houses, fewer furniture sales, fewer trips by delivery truck drivers and fewer tile-jobs in the McBathrooms.
This is why I view the fall melt-up of the stock markets as a swan dive. We’re at the apogee now, just as the world is at the apogee of its oil production. I confess, I thought the reality of our economic predicament would be recognized by the playas and their markets sooner than it has. It turns out the the chief luxury of the final cheap oil blowout has been the artificial support of unrealistic hopes and expectations.
That seems an oversimplification. Among the restrictions that have been in place since the Great Depression are rules dictating fractional reserves for most banking. It is only recently that a series of modifications to this rules have first allowed bankers to do without as much reserve, then through competition forced banks to operate with as little reserve as possible.
The references to gold backed currencies seem to all have blinders on to the reasons these currencies failed and were abandonded. Linking growth to mining rather than innovation results in fairly consistent bouts of deflation that cause problems for everyone.
Fiat currencies involve risk and tend to eventually fail at which point some other currency is adopted. Metals backed currencies squeeze everyone, especially to most innovative. Ever since the early days of moving from agrarian economies to industrialization productivity has increased fast enough that linking value to a mined asset would be quite damaging.
Mole Man,
I’m confused by some of your points. In my view, they misunderstand the nature of money.
Why were the reasons that gold backed currency’s “failed”, in your view? “Failed for whom?” seems to be a critical question.
Re-read Smith, Wealth of Nations, Chapter IV, “on the origin and use of money.” Or myriad other similar accounts, if you don’t happen to like Smith.
Also you imply that gold-backed currencies “link growth to mining”? How so? So why don’t we instead each build ourselves a machine to just print ourselves money? Won’t all be rich then? The answer to that question should cause you to re-think your understanding of money.
Also, please explain why a gold-backed currency “links value to a mined asset”? Especially in relation to the origin of money.
And I’m no gold bug, I just really want to understand what you’re talking about.
I am kind of surprised about how people evidently view energy prices. Energy is down for a few months–does this mean that gas guzzlers are home free and that consumers have more or less permanent relief from high energy? If we have a recession, that will, of course, keep energy costs down for a while. However, assuming that I will keep a vehicle for a couple of years, I would not want to bet on low energy for the next few years. If I were buying a house at the limit of my credit, it seems risky to assume low energy and a strong economy for the next several years.
this is a election scheme… any slight disruptions will drive it higher again. anyone who thinks they should go out and buy a surburban because it will be cheaper to fill up should beware. the market is unstable imho and could go up or down by 50% swings.
I agree that the decline in energy prices are just temporary. Given the unrest in the world they could swing wildly upward for no other reason than perceived scarcity and speculation on any news. It’s crazy how fast gas prices have fallen in the past few weeks, but realistically I’m not even saving enough on my morning commute to even buy a cup of coffee for the drive. I’m skeptical about the drop in gas being an election ploy. The system is too big for that to be successful.
My thoughts exactly. “Now that we’re saving a hundred bucks a month on fuel, we can handle that ARM reset, no problem!” Have any of these brilliant minds at NYT been to a grocery store lately? Amazing!
Gas prices may be down for a while, but I am certain the extra hundred will be eaten up twice over the next year in medical insurance costs alone.
People will have a few more bucks to go piss away @ sbux, BFD.Ain’t going to help joe blow make the 3k mortgage payment.
Don’t forget heating costs for the winter.
If they are anything like the summer bills while running the a/c, may as well go ahead and bend over; no KY, no foreplay!
FWIW 2006-07 is supposed to be an unusually warm winter pretty much everywhere in the US. Also natural gas supplies are no compromised as they were post-Katrina last year. Heating costs should be much less of a strain on the household budget this year.
Your point really cracks me up about being to a grocery store. This is especially funny here in New York City where I believe the New York Times is probably located. Most of us living here in Manhattan don’t have cars anyway. Lower gas prices help me about as much as growing a third nut. I usually don’t even know what the price of gas is.
You should see our grocery prices here. They are outrageous. Try ordering from FreshDirect or going to Whole Foods for all of your grocery needs. It’s expensive. We do shop mostly at specialty stores, mainly because we don’t have a car. Anything you buy you have to hoof back to the tiny apartment that you live in. I see prices constantly going up at the grocery store.
But it’s great that NYT reports low gas prices will help me out. We do just fine, don’t get me wrong. We rent. There is no way I would buy here. We save money. We don’t try to keep up with the Joneses. We are a minority in this City called “the responsible few”. But to see that gas prices are a boon for us shows that the NYT does not know New York. I think it’s being written in China.
NYCBoy,
I’m with you, I’m astounded at the rise in food prices. Already high prices keep jumping..even at Fairway. The NYTimes covers New York as if we are all suburbanites living in Westchester. Like you, I rent, I work, I save. Since I think we are heading into a serious recession, have been cutting even more out of my budget to pile up reserves. Am I alone in this??–among friends and acquaintances, yes. Mentioned to a co-worker that I was cutting back as I expect recession–she looked at me as if I had two heads. No matter–I can only look after myself.
Yet there’s sky-high utilities, sales and income taxes, etc. in NYC, not the best place to try and save..
(and yeah, I moved out, when I found I could get the same wage in a city with much lower taxes (zero sales, low property, national median income), rents, utilities, etc. And frankly, I don’t miss the eau d’ subway one tiny bit!)
Given that a very large amount of MBS/Fannie/Freddie debt is held by foreigners, it seems to me that letting them hang out to dry would be a great way for the US to reduce its foreign debt load. Put away the violins - those guys know full well it’s junk and they should face the consequences.
And really, do you think US taxpayers are going to stand for their taxes going to bail out the Chinese?
RE debt is sliced and diced too finely for a selective bailout of US debtholders IMHO. Best they can hope for is the standard writeoffs for any bad investment.
Although a large amount of the Fannie/Freddie/MBS debt is held by foreigners, an AWFUL lot of it is held here too.
Think CALPERS, and other pension funds.
Amaranth cost lots of pension funds dearly, such as San Diego’s. And they only lost $6 Billion. What is Fannie’s market cap??? And what about the “value” of all that they’ve sold of late? Trillions?
How much money are American pension funds into Fannie or the MBS market?
Nobody is being allowed to know what’s going on at Fannie. NO financials, and yet they’re not delisted.
This is the biggest crock of all time. And it means that people in VERY HIGH places are VERY scared. Otherwise they would allow the delisting.
It has the smell of LTCM to me.
A few years ago I tried investing in junk bonds and got burned. It is the responsibility of those in charge of pension funds to hire competent management. If I put my money into a mutual fund managed by a bunch of clowns and it loses money, nobody is going to come to my rescue.
People know full well which fixed income investments are guaranteed and which ones aren’t.
Unless it is being managed by outright lunatics, no pension fund is going to have more than a few of % of its assets in housing debt. Take your lumps boys, just like you did in dot-com. The “R” word is going to have to return to the American vocabulary.
http://dallasfed.org/eyi/usecon/archived/0609update.html
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I See “See Housing As Too Big To” BAIL!!!!!!!!!!!!
Economic Central Planning, American Style, would prove to be worse than the Soviet Style. Yeah, yeah, our system is better. It WAS, but it ain’t and it wouldn’t be. Our system WILL collapse just like the Soviet. Within two decades.
Jas Jain
More…
And we will take lot more with us than did the Russkies. Remember: We Are #1!
I find a lot of what you say to be insightful, but I don’t believe for a second the U.S. is going to collapse Soviet Union style. We may have a Depression, (more likely a deflationary recession) but we’ll survive it.
Towards the end, with the exception of their nuclear arsenal USSR was one big Potemkin Village, economically, socially, even militarily. The US is the real deal. Just MHO. Even if it fell back into it true sphere of influence, I don’t believe there would be a collapse. Retrenchment? Maybe.
And if we “defaulted on debit” who gonna come and execute the foreclosure on the U.S.? I wouldn’t wanna be on duty in that Sheriffs Department.
Fiat currency is based on Power Politics. Other than the US owing a lot of debit, how has the balance of power changed that would cause collapse? Just my 2 cents
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Well, I realize that it is very hard for people to believe that the American econo-political system could collapse. Why don’t you make a list of all the great nations whose system has collapsed during the past 200 years or so? Then look at the odds of a system surviving long.
American system is as corrupt as the Soviet system was before the collapse. It is corrupt in a different way. Most people get fooled by the changes of forms. Forms change, but the essence of human institutions remains the same. Also, the average life of past democracies isn’t that long. The end of a democracy is bondage! And in America we already are in a Debt Slavery, a common form of bondage thru ages.
To quote Martin Armstrong, “Undermine the middle-class and the conditions would be ripe for an American Hitler.” Farfetched? What sort of demagogue would succeed during the Greater Depression?
Jas Jain
Jas posts “American system is as corrupt as the Soviet system was before the collapse.”
I did not want to re-post your whole post, but it was worthy.
I really have come to think we, the USA are not a “Country” but just a place to make money. With a tiered cast system.
I forgot to add:
How many Russians thought that the Soviet system would collapse in 1980s? How many Germans, in 1900, thought that the German system, at the top, would collapse so soon? How many outsiders saw these coming?
BFNYC have crossed the line in terms of over-reach and abuse. Things can’t be undone. There are going to be dire consequences of the abuses by BFNYC, which would only be broadly understood and come fully into light during the Greater Depression, something baked in the economic cake. Such is the system that we have developed.
Jas Jain
Jas,
I thought I read you downsized to a smaller place in Tehachapi (maybe wrong location). If you really believe that a collapse is inevitable within 20 yrs wouldn’t you be wise to sell now? Or did I remember wrong….
An old coworker of mine told me once that it only takes the dissatisfaction index to become unbearable for the working class and Hitler or worse is not only possible, but historically likely. Without protectionist policies firmly in place, we face a situation of run away price inflation and stagnant wages. This is where we are today. The only reason we are not yet feeling the pain, is because of the massive credit build-up of the past 7 years. Now that the bills are due and the housing market is no longer a source of “income” to millions, it will quickly get ugly.
I guess I was specifically responding to your assertion that “Our system WILL collapse just like the Soviet. Within two decades”
Within two decades is pretty immediate in my mind. The situation and players must be in place. So I was asking you; What’s the mechanism, and who the players are to bring this collapse within 20 years about, since it’s quite a bold prediction.
As to what you’ve just written:
“Why don’t you make a list of all the great nations whose system has collapsed during the past 200 years or so? ”
This isn’t really an argument for the US to collapse in the next 20 years, is it. Many democracies through out the world are flourishing. Who knows how long they’ll last, but for the vast majority I think it’s safe to say at least 20 yrs. Especially the U.S.
“American system is as corrupt as the Soviet system was before the collapse.”
Mmmm, I think to just about anybody this statement would be considered, at best, silly.
USSR since Breznev (sp?) was basically run like a Mafia gang. Essentials were withheld, and extortion was the norm. The people were ill feed, housed and standard of living for most was poor. There is corruption in the US but to say it is anywhere near that kind of degree is poppycock. The corruption in the US comes from everyone having , “to much”, not “not enough to go around”.
“Most people get fooled by the changes of forms. Forms change, but the essence of human institutions remains the same.”
Vague quasi Metaphysics. I can’t decipher this.
“Also, the average life of past democracies isn’t that long.”
Respectfully submit, again, this is not an argument as to why US will suffer a USSR type collapse within 20 years… or 100 years.
“The end of a democracy is bondage!”
So we will all be bonded slaves within 20 years. I’m asking, who will be our Masters?
“And in America we already are in a Debt Slavery, a common form of bondage thru ages.”
we are in a form of Debt slavery. We are slaves to our desires for more junk. Any one that is a debt slave in the US has generally placed the yoke upon themselves. Their lives are hardly the typical “slaves life” the image of “bondage thru out the ages” brings forth.
“What sort of demagogue would succeed during the Greater Depression?”
I know which one succeeded during the last Depression……
ROOSEVELT… Is he a demagogue “Democratic” enough for you?
“To quote Martin Armstrong, “Undermine the middle-class and the conditions would be ripe for an American Hitler.”
And what was that other guys name………. Huey Long? What ever happen to him?
I guess I was specifically responding to your assertion that “Our system WILL collapse just like the Soviet. Within two decades”
Within two decades is pretty immediate in my mind. The situation and players must be in place. So I was asking you; What’s the mechanism, and who the players are to bring this collapse within 20 years about, since it’s quite a bold prediction.
As to what you’ve just written:
“Why don’t you make a list of all the great nations whose system has collapsed during the past 200 years or so? ”
This isn’t really an argument for the US to collapse in the next 20 years, is it. Many democracies through out the world are flourishing. Who knows how long they’ll last, but for the vast majority I think it’s safe to say at least 20 yrs. Especially the U.S.
“American system is as corrupt as the Soviet system was before the collapse.”
Mmmm, I think to just about anybody this statement would be considered, at best, silly.
USSR since Breznev (sp?) was basically run like a Mafia gang. Essentials were withheld, and extortion was the norm. The people were ill fed, housed and standard of living for most was poor. There is corruption in the US but to say it is anywhere near that kind of degree is poppycock. The corruption in the US comes from everyone having , “to much”, not “not enough” to go around.
“Most people get fooled by the changes of forms. Forms change, but the essence of human institutions remains the same.”
Vague quasi Metaphysics. I can’t decipher this.
“Also, the average life of past democracies isn’t that long.”
Respectfully submit, again this is not an argument as to why US will suffer a USSR type collapse within 20 years… or 100 years.
“The end of a democracy is bondage!”
So we will all be bonded slaves within 20 years. I’m asking, who will be our Masters?
“And in America we already are in a Debt Slavery, a common form of bondage thru ages.”
we are in a form of Debt slavery. We are slaves to our desires for more junk. Anyone that is a debt slave in the US has generally placed the yoke on themselves. Their lives are hardly the typical “slaves life” the image of, “bondage thru ages” brings forth.
“What sort of demagogue would succeed during the Greater Depression?”
I know which one succeeded during the last Depression……
ROOSEVELT Is he a “demagogue” “Democratic” enough for you?
“To quote Martin Armstrong, “Undermine the middle-class and the conditions would be ripe for an American Hitler.”
and what was that one guys name………. Huey Long? What ever happen to him?
I apologize for double post
“To quote Martin Armstrong, “Undermine the middle-class and the conditions would be ripe for an American Hitler.” Farfetched? What sort of demagogue would succeed during the Greater Depression”
I don’t think it’s farfetched. During the last four decades, the American public school system has declined significantly in educating children about the events leading up to the American revolution. More importantly the philosophers have destroyed the ideal of reason as the key to knowledge. If we were to have a revolution today, the Declaration of Independence would be torn to shreds and any copies of it would be outlawed. Our Constitution would, of course, be replaced. Most Americans do not understand what America is about. It’s too late. Blood in the streets of every American city will result in a Hitler. But don’t think it will be a racist Fascist regime. It will be either a Nationalist Socialist or a Communist regime. A socialist regime, nonetheless.
Ask any American on the street and they would say such an idea is ridiculous. But most Americans do not know the importance of philosophy to culture, even though they have a small idea that modern culture is shaping American minds.
For me, I will merely consider myself a citizen of the world. I think it’s too late to change America. I hope to have the resources to escape the possible gulag that could be in store here, when the opportunity to escape comes. Americans don’t want to bring back the Enlightenment.
Name one empire that has continually prospered at their highest level. There isn’t one. Egypt, Rome, Greece, Soviet Union, Great Britain, France, etc. All were great powers at one point in history and all have fallen from their pedistal. The U.S. will be no different. I don’t think it will happen in my lifetime, but the cracks are starting to show. At some point the U.S. will be a “former world power” in the history books. Future generations will read about us as we do of the Roman empire. Read Collapse” by Jared Diamond. It’s a book about the rise of falls of empires both great and small.
And don’t forget Spain, which was the last superpower to live on debt before the US. Look what happened to them.
Egypt BTW was never an empire, they were not interested in ruling foreign lands.
Also highly recommend “The Rise and Fall of the Great Powers” by Paul Kennedy.
Of course this is eventually true. The only thing that stays the same is change.
But the US collapsing like the USSR within 20 years? Well, I’m not betting on it.
I agree that they want to let people refinance because, otherwise, people feel trapped— one bad thing is not being able to sell your house, another is not being to make your situation better by refinancing or anything else… so, this, IMO, might be a psychological move to make people think they’re in control….
personally, the wages don’t seem to support much of an increase but then, the 400 richest people on forbes list were billionaires…
Two problems. One, lower rates will only help people that can refinance. Two, the billionaires seem to be the only ones experience wage increases.
A reply, “I wonder if we don’t end up like Japan with a deflation problem after this plays out. Japan tried to inflate its way out of its bubble and had interest rates at basically 0 % but no one would spend.”
I don’t think we’ll ever have a problem with getting Americans to spend.
“I don’t think we’ll ever have a problem with getting Americans to spend.”
You are dead wrong on that. Americans WILL run out of money to spend and caution will set in those who behaved responsibly.
Most Americans haven’t seen a depression and that is why they are behaving in a manner to invite one.
Jas Jain
I can see the “Indian” upbringing peeking through, Jas. I echo the sentiments since I had the same upbringing. And, yes, I do not like when my father tells me to save. But he does make sense and so I do save
Guess my son will learn someday as well.
Well, I come from a family of businessmen for centuries and most of my relatives are in “finance.” One thing I do understand better than most and that is Debt business. We have a big mess at our hands.
Jas Jain
posted “We have a big mess at our hands.”
Soon to be in our trousers.
As Cheech and Chong once said:
“No, Sheeeet, Man!
I don’t see how the FED, which exists at the pleasure of elected officials, who exist at the pleasure of the electorate (which is in debt up to their ears) ever gets away with enforcing a policy that would be viewed as worsening the common folk’s financial situation (regardless of how sound that policy may be from an economic standpoint). So, the question isn’t whether folks will keep spending, clearly when credit drys up spending will also.
The question is what will our elected officials do as well as the FED, and to what effect, once the general public stops spending?
Unless the election process is stopped (that would be a whole other issue) there is no way that sound economic policies can be implemented. (IMO) As an observation, it doesn’t even seem like they are the least bit interested in sound economic policies.
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“I don’t see how the FED, which exists at the pleasure of elected officials, who exist at the pleasure of the electorate (which is in debt up to their ears) ever gets away with enforcing a policy that would be viewed as worsening the common folk’s financial situation (regardless of how sound that policy may be from an economic standpoint).”
You got most of this backwards and some sideways.
The lected officlas don’t “exist at the pleasure of the electorate,” but at the pleasure of the Money Bags, headed by Bankrupters and Fraudsters of New York City (BFNYC). The Fed is selected based on the pleasure of BFNYC.
It is the system of the Crooks, for the Crooks, and by the Crooks. Got it?
Democracy = Domination of Money — Oslwald Spengler.
Jas Jain
Most Americans haven’t seen a depression and that is why they are behaving in a manner to invite one.
I was raised by grandparents who did know the depression. It scared them so bad they lived the remainder of their lives frugally-even after selling their ranch for millions in the 80’s.
When people get scared enough they will quit spending.
Yes, major depressions happen once in a lifetime for a good reason.
The time couldn’t be riper?!
Jas Jain
Major depressions are usually caused by irresponsible spending and regulation by governments, not individual excesses, which generally lead to no more than a slowdown/recession.
Oh? Well, then I guess that’s why most people never suffer when a depression hits - they haven’t spent to excess and have no debt, only savings. When they’re thrown out of work, they live off their savings - tanning in the sun, frolicking on the beach - until the next upswing.
I’m not discounting the real possibility of a Depression. If this credit bubble fully implodes, not only will freshly squeezed lenders be hesitant to lend, there won’t be anybody credit worth to lend to. At least not enough to continue expansion. So you end up with contraction and absence of liquidity.
If it happens in the US, the rest of the world will suffer just as badly. I’d still rather be in the U.S. under those conditions. Crazy and as dangerous as it seems, I’ll “take my chances” the U.S. will still be here in 20 years.
“Major depressions are usually caused by irresponsible spending and regulation by governments, not individual excesses, which generally lead to no more than a slowdown/recession.”
Yes, it is the actions of the leaders that cause depressions. I am with Schumpeter in that Boom-Bust cycle is due to Bankers’ Mischief. The coming depression, the biggest of them all, will be due to the abuses of BFNYC and the Fed today is a servant of the BFNYC.
Jas Jain
crissrose: I think you are confusing cause and effect.
Jas posts ““I don’t think we’ll ever have a problem with getting Americans to spend.”
Just like the drunk a cop asked” do you have a drinking problem?”
He answered “No!” I have a stopping problem!
Don’t worry. Our president has a plan, see, and it involves houses…
W: “…Houses will begat jobs, jobs will begat houses.”
Houses will be lost, which will begat job losses, and job losses will begat more houses.
“…here will be a momentum, momentum will be gathered.”
It is fun to have a dupus an the President. I don’t doubt that he believes his own BS.
Jas Jain
Barbara begat an imbecile.
G.W begat “money heaven”
Instead of the old question what came first the chicken or the egg, we can now ask, what comes first, the house or the job?
posted “Houses will begat jobs, jobs will begat houses.” —Bush
Too bad Bush got begot.
Does anyone know a good fund that invests in Euros?
MERKX
Why not just have a euros bank account with Everbank?
begbx; tends to trade like euro.
About refi abilities of homeowners, from marketwatch’s Hank Greenberg:
“Mortgage melee from Annaly (nly), citing information from UBS: “Market participants are beginning to ask: ‘How far do mortgage rates have to fall to generate a significant refi wave?’ The academic answer is based on the likelihood of a borrower with a specific mortgage rate to refinance at a given interest rate… [I]f the mortgage market rates decline approximately 40 bps to 5.93% (roughly corresponding to a 4.13% 10-year Treasury yield), then 34% of the mortgage market would be marginally refinanceable. If mortgage rates fell to a 5.69% (or about a 3.89% 10-year Treasury), then 58% of the mortgage market would be marginally refinanceable. For the mortgage market to get to the levels of 2003 when virtually 100% of the market was fully refinanceable, mortgage rates would have to rally to 4.73%, (or about a 2.93% 10-year).” Not holding my breath…yet. Onward…”
It is my view that Lereah is terrified if the fed cannot lower rates due to inflation NOW. If the fed lowers rates while we still have inflation the dollar will tank and foreign nations may start unloading our bonds. The fed does not want that. On the other hand, if housing tanks there is an outside chance that it won’t take the economy with it, totally, because of strong emerging middle classes in foreign countries. Maybe Bernanke is a riverboat gambler, or at least he needs to be. I would not want his job right now.
I often read comments that the Fed blew up the housing bubble in response to the collapsing NASDAQ bubble, but I don’t think that was the case. NASDAQ had already tanked. The stock markets have crashed before, without the Fed responding so dramatically, with basically “free” money.
I really believe that the Fed’s was responding to 9-11, period.
They got the call to “do their duty” to insure and protect the dollar and the economy, so they did what they did.
They did what they’re chartered to do; Protect the “institutions of capital” during what seem like at the time a possible Armageddon scenario. Looking back now, as with most things in the past, people forget how scary and unsure those times were…. And that sense of instability went on for a long time….. And the Fed kept the money “free” for a long time. I really think that the housing bubble was just an unforeseen and unfortunate result of their actions.
Now…. Do they know it’s there? Do they know it’s gonna pop and cause a lot of individual borrowers to lose their shirts? Come on, they’re not dumb. Of course.
Are they gonna drop rates back down to “free” so people can scramble to try and possibly NOT lose their shirts? Sorry, that’s NOT what they are there for.
The fact that all the “little people” got a crack at borrowing what basically amounted to free money was really just incidental to what they were trying to do.
Did they succeed in defending the US economy during what seemed like possible “End Times”? Well, we are all still here economically speaking, so I guess you’d have to say yes. When people say Greenspan is dumb, etc. I really just think they’re misinterpreting what he was doing. Greenspan is not dumb. Neither is Ben Bernake. They will do what they need to do, per their objectives, and I don’t think “saving the little guy is on the agenda. If it happens coincidentally, great.
I think Ben (Jones) sums it up well in a post above:
“If you recall the Fed minutes from December 1999, the Fed guys chuckled at the idea that people would lose money in the stock market. IMO, they don’t care about saving homeowners, but rather their hold on power.”
Fed funds rate where it is now is still historically ridiculously low. They need to save all their bullets for “WHAT EVER IS OUT THERE . All the fools, flippers and fly-by-nights that overindulged at the party. Get what they always get….
“Cue Auger-in”….. “and ACTION!”
“Are they gonna drop rates back down to “free” so people can scramble to try and possibly NOT lose their shirts? Sorry, that’s NOT what they are there for.”
Of course not. But then why aren’t they raising the FFR? Inflation targets are well above what they are “comfortable” with.
I will concede that the economy seemed to have been slowing at the last FOMC meeting, and the Fed has a tricky job, since most of their data looks in the “rear view” mirror. so perhaps they were prudent to hold the FFR at the last meeting.
We’ll see come Oct 25. If the Fed holds again, in the face of all this latest of data (almost all of which shows blistering economy, inflation, and even wage inflation) then you have your answer.
Given what they are “supposed” to do, a rate hike is imminent. If they’re trying to save housing, a rate pause is imminent.
BTW: I’m not saying they’re trying to save the LITTLE guy! hahahahhhahahahahahah, whew that’s a funny one. It’s not “helping” the little guy to let him/her refinance again for a house they can’t afford!!!! No, they’re trying to save the BANKS who lent foolishly to the little guy.
My self, I have no doubt they’ll hold till after the first of the year, but that isn’t gonna save housing. Its gonna continue to throttle housing with both hands.
And your right, they are attempting to engineer a soft landing, for the BANKS. They are trying to “walk the tightrope,” but in the end if the past is any indication, they will defend the dollar to maintain favored currency status. Look what Volcker did to maintain such. He was literally crushing the little guy…. To bad, Had to be done.
posted by Imploder “My self, I have no doubt they’ll hold till after the first of the year, but that isn’t gonna save housing. Its gonna continue to throttle housing with both hands”
Very true! With the full blessing of the GOP. Who are praying to Pat Robertson…. because he talks to God, that no more ill will falls thier way before the mid- term elections.
BTY prez GW Bush said if the GOP losses the House and or Senate he dose not have a back up plan…. perfect! Another “Mission acomplished!”
‘Of course not. But then why aren’t they raising the FFR? Inflation targets are well above what they are “comfortable” with.’
Considering what a big deal BB made about the virtues of inflation targeting back during his academic days, such discussions seem conspicuously absent during the first year of his tenure as Fed chairman.
I don’t see how the fed can lower rates when the DOW is reaching new highs.
Imploder
Good post. I agree that the Fed cut rates mainly in response to 9/11 and the housing bubble was a somewhat unintended consequence. In hindsight they should have started tightening earlier but again, as you say, those were uncertain times though a lot of folk have short memories and seem to have forgotten the extent of that uncertainy.
Nah, sorry but I got to disagree with you guys. The fact that the Fed lowered in response to 9/11 is understandable. But keeping them down for as long as they did is not. And as far as unintended consequences goes, why the complete lack of regulation of loan standards during the past 5 years. If “Stated Income” required 20% down and “Interest Only” was eliminated, the bubble would not have gone as far as it did.
I was just trying to point out that they didn’t “create” the housing bubble for the purpose of pumping up the economy.
Now once the bubble GOT GOING and everybody was making money hand over fist (the banks, investment firms, MBS, hedge funds) All of the players applied their “considerable influence and access” to subvert any regulation, legislation, etc., and keep the party going for as long as possible. Really just, business as usual in the ole USA. With the advent of the MBS it seemed fail safe from the point of individual players because “they” weren’t holding the bag. Perfect recipe for a sh#t storm. Billions of dollars to be made and no skin in the game.
Devo posts “Good post. I agree that the Fed cut rates mainly in response to 9/11 and the housing bubble was a somewhat unintended consequence. In hindsight they should have started tightening earlier but again, as you say, those were uncertain times though a lot of folk have short memories and seem to have forgotten the extent of that uncertainy. ”
Well said Devo! These are the facts.
Well as far as I am concerned, the fed did not respond just to 9/11. And the fed allowed all this easy lending. They could have slowed down the arms. They chose not to because of banker GREED.
Fed funds rate where it is now is still historically ridiculously low. They need to save all their bullets for “WHAT EVER IS OUT THERE . All the fools, flippers and fly-by-nights that overindulged at the party. Get what they always get….
“Cue Auger-in”….. “and ACTION!”
So well said !!!!
call moodys
most of these cities are already off 10%
WTF ?
http://biz.yahoo.com/weekend/weakhome_2.html#table
Earlier this week we learned about an auction for 45 prime properties in the Naples FL area in about two week. Moodys is predicting a 14% decline and bottom for Naples in early 2007. I think that there is a good chance of a 20% decline in the next few weeks. Naples is usually placed as the most over priced market in the country. Hard to imagine that a 14% decline would be the bottom.
Like they did during the S&L 80’s, the US govt including the fed and congress will do everything in their power including buying lender stocks/bonds, watering down accounting rules (FNM already), and lowering the FFR to keep the money/credit supply humming and lenders solvent. Mr. and Mrs. SoccerMom are going to get soaked, FBs twice over.
After the bubble bursts (AB), the big challenge for the US govt and lenders will be maintaining liquidity b/c of the symbiotic relationship between house prices and lender asset portfolio valuation (loans). When house prices are increasing a lender can easily foreclose, liquidate, and adjust his asset portfolio accordingly. However, if house prices are declining, a big chunk of the lender’s asset portfolio goes down with it. Consequently, liquidity dries up and lenders if they have the cash are hard pressed to lend.
Add to that the other side of the coin. With so many broke people, there won’t be enough qualified people to loan to.
That’s why I think were heading for a deflationary recession.
I believe the beauty of this country and semi-capitalism is the ability of the various institutions that fund it to adjust quickly. No way will it take 12 years, Japan as an example, for the market to adjust. The fall will be swift, and housing will become affordable again within the next 2 years. Is this a great country or what?
PG posts ” I believe the beauty of this country and semi-capitalism is the ability of the various institutions that fund it to adjust quickly. No way will it take 12 years, Japan as an example, for the market to adjust.
I do think this is one of the USA’s saving graces…. we can move quick when stuck with a dog…. even as I write this I cannot explaine my comments when I think of GW…. but in my gut I know it is so. I can not defend this statement except to say it is true and I do like dogs.
When lending institutions begin offering extraordinary above market interest rate returns, beware of liquidity issues. It usually means they are cash short and are trying to rebalance their asset portfolio.
Lowering the rates again would be a dangerous move. First, because it would do nothing to save the housing bubble, since the driving bubble psychology has already turned. Secondly, it would increase inflation, discourage savings, and continue to encourage debt, just fueling the problem. Third, while it had no effect on housing, it would now be impossible to raise the rate back again because of the now overwhelming unpopularity among the indebted and subsequent whining in the press; thus inflation would continue unabated. Finally, an arrow in the quiver of offsetting any other potential upcoming catastrophic effect is squandered, as they can’t then tactically lower rates while the rates are already in the cellar.
ronin posts ” First, because it would do nothing to save the housing bubble”
Let alone all of the contract law. These dummies signed on the dotted line. There is nothing to think about……. just read em’ and weep!
I was thinking about economic imbalances in round figures a bit earlier. Suppose after the bubble dust settles, or while it is still settling, it comes to light that the USA has, say, 5 million housing units in excess of needs. Now I know many homes out in the coastal bubble zones (like around where I live) were recently valued (appraised???) in the multiple $100Ks or even $1m+, but to be conservative, let’s estimate the average value of these “extra” (unneeded) homes is $100K a piece.
Then (drumrolls, please!!!) I believe we are talking about over $500,000,000,000 (yes, $500 billion) in malinvestment thanks to the bubble. Anyone at the Fed who prefers to respike the housing market punch bowl ought to pause and reflect for a moment about what will ultimately become of this huge malinvestment in our housing capital stock, which will enjoy a much higher rate of depreciation than traditional owner-occupied (i.e., needed) housing. This will become increasingly apparent as it gradually sinks in to the masses who recently tried to become latter-day Donald Trumps that it can get pretty expensive to maintain more than one house, especially when some of the homes in your “investment portfolio” are perennially empty because there simply are not enough US households around who can afford the rent on so many investor-owned McMansions-turned-tenement houses.
The amount of mortgage debt outstanding has roughly doubled these last five years. If you assume that a majority of the increase is due either to malinvestment in unnecessary new development or unwarranted inflation of existing property, the true number is somewhere between 4 and 5 trillion (with a “t”) dollars… most of which can (and will) evaporate.
btw: ARM rates are determined by LIBOR (London Interbank Offered rate) not necessarily by BB.
Even if fed interest rates decreases, it may not stimulate NEW mortgage demand. Re-mortaging will be difficult if market is perceived on the way down.
The housing market has already enticed the majority of buyers to buy earlier that what they naturally would (or should) have. The market is exhausted.
Looks like Housing is going to move to a consumable product. ie/ depreaciates but still has some residual value.
Warnings Against the Bankers
Americans are ignorant of all the warnings that their greatest leaders have issued, over some 200+ years, against the evil nature on bankers that must be fully kept in check.
I don’t have time to research and post all such quotes, but TR was very worried about “our usurer mastered future.”
“While campaigning [in 1932], FDR’s frequent targets were the bankers, financiers, and speculators who were much in news that year…” He also talked about the Moneychangers.
Today’s BFNYC make all the past bankers and financiers look like choirboys. These people are the true evildoers in the world today.
Only a total dupe fails to understand the evil inherent in PUSHING DEBT. Yes, there are proper and beneficial uses of credit, but we have strayed so far from it that it is not funny. Actually, it is sad. Very sad.
The Federal Reserve System was created by the bankers of NYC or the benefit of the bankers.
Those who are ignorant of history…
Jas Jain
The founding fathers knew this when they put together the constitution. Unfortunately, TPTB conveniently ignored the constitution when they created the Fed.
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The start of it all began when the US shifted from a manufacturing economy to a service economy. By leaving the creation of consumer goods to other countries, it left us in the position of becoming a debtor nation since most of the services we now “produce” are only used locally and have no international market. The common wisdom of the least few decades is that the American citizen has their retirement wealth tied up in their homes. If there were a way to steal that wealth, then the middle class for all intents and purposes could be eliminated, and all that wealth could revert to the bankers and corporations. Hence the creation of HELOCS, and low rate refi’s. Give them the money and they will spend it foolishly. Which they did. The result of all this will be a standard of living similar to serfdom..debt that can never be repaid, wages at a subsistence level that can barely buy food and medical care, and no hope for upward mobility. Meet the new boss, same as the old boss. We just got fooled again.
Apparently not everybody. Vis a vis many reading this blog. Since most here sold and saved, and there will be no middle class, will we become the new “Lower Upper Class”? (Oh, ya… wait till I tell my mom her boy is almost Royality…)
Imploder posts “wait till I tell my mom her boy is almost Royality…)
You must be English! I was raised by the same type. Old bean simply having WASP dna makes the rest of this lot mearly common.
Sorry to those offened…. well not really it is just that God loves us, we know it, we feel it from the inside out!
Oh it is tea time …. must run old boys!
“The responder said: (paraphrase) ‘are you kidding? retail sales are up the last 3 months. Wages have risen, gas prices are down. The consumer seems as strong as ever.’ To me, it now seems obvious that the Fed will risk inflation/hyperinflation to save housing as much as possible. Otherwise they would have raised. Instead, they’re squaking like chickens and then holding the FFR steady.”
I can’t tell you how much this hurts me. I have followed all the rules and saved and invested conservatively and wisely. The house I purchased in Sunnyvale, California has been paid off (in 15 years), and a second property was purchased (for retirement, not investment) for cash.
With interest rates dropping, income from our savings is shrinking. Why? So people can continue to flip houses?
The government is screwing me. I thought I was an ideal citizen, and I’m being screwed.
You know what bothers me more? When I do retire, I wonder if they’ll hold back Social Security and Medicare benifits because my investment income would be too high. I wonder if I would end up being better of if I work as little as possible, spend money I don’t have and just wait for the government to throw printed money at me.
And what else sucks is that there are so few careful hard-working savers in this country that nobody will give a damn about me.
It’s long been obvious that the NY Times building is filled with nothing but idiots, however this takes the cake. Someone swamped with a $4,000 mortgage to “buy” a bubble-priced house is relieved that their gasoline costs will drop $30-40 a month?
Market correction (recession?) on the way (2008-2009). Twenty five percent of jobs are based around the housing industry. Only retail construction is holding up right now, and I’m literally betting that housing will spill over there too. GDP is slowing.
NO, not 2008-09, but early 2007 for recession and Depression would be in full swing by 2008 with the worst to take place in 2009-10.
Jas Jain
NYT columnist Paul Krugman doesn’t work there (he’s a Princeton prof) but he did correctly call the top of the housing bubble in August 2005. “That Hissing Sound”. Google it.