The Federal Reserve currently controls mortgage interest rates through its direct purchase of Agency debt. Now that we have given the Federal Reserve this ability, are they going to keep it?
Irvine Home Address … 6 LAKEVIEW 73 Irvine, CA 92604
Resale Home Price …… $700,000
{book1}
Tear down these walls for me
Stop me from going underYou are the only one who knows
I’m holding back
It’s not too late for me
To keep from sinking further
I’m trying to find my way out
Tear down these walls for me now
These Walls — Dream Theater
Today, I want to start with a simple question: What would it be like if everyone in California won the lottery at the same time?
There was a scene in the movie Bruce Almighty where Jim Carry’s character is given the power of God, and with it the commensurate responsibility to answer prayers. In frustration, he answers “yes” to everyone. In the next scene you hear people lamenting how they won the lottery and had to split it with so many people very little was gained.
The combination of kool aid intoxication and lender greed results in access to appreciation through HELOCs and a near-lottery payoff for every homeowner in California. It is as widespread as everyone winning the lottery except: no dilution. In fact, it is the nearly the opposite of dilution — the activities of a few borrowers bidding up prices provides wealth for every homeowner in the area.
The Federal Reserve could make prices go up. They have already artificially increased affordability by 20% or more by lowing interest rates a full point below market value. If the Federal Reserve wanted prices to go up, there is no limit to how low they could take mortgage interest rates. It might be tempting if the Federal Reserve had a reason to do so.
If appreciation returns to California, and if lenders and investors repeat previous mistakes (give away HELOCs like crack to an addict), then the economic stimulus will be huge — It was last time — homeowners borrowed and spent their futures believing tomorrow would never come; it didn’t. People defaulted on HELOC debt and faced no restitution or retribution.
For those of us who did not participate in the bubble, our perception of events and the incentives of the system matters. We know from observation that next time we will face few consequences, and we will be bailed out if it gets really bad. This will change borrower behavior — our behavior — and not for the better.
Federal Reserve induced appreciation is moral hazard leading to a larger Ponzi Scheme.
{book4}
I don’t think our legislators really comprehend the problem. Government financing is a massive Ponzi Scheme, so even if regulators were to recognize the oft ambiguous signs of a Ponzi Scheme credit bubble, I doubt anything would be done. Legislators do not see bubbles as a danger, and they do see economic expansion as a societal good, so if a housing bubble grows the economy, regulators will usually go along for the ride and wait to point fingers and affix blame later.
I have proposed solutions for Preventing the Next Housing Bubble, but anything that limits the ability of lenders to push debt service thresholds higher will be met with fierce resistance. The government does not mind seeing 40% or more of the incomes of its
citizens go toward debt service — the Finance Oligarchs have plenty of
lobbying money with so much of your income going toward their
profitability. Will they use this power to take over? Haven’t they already?
Federal Reserve as God
I am becoming more and more concerned that we will go the road of inflating another bubble to stimulate the economy. What would happen if the FED took mortgage interest rates down to 3%? Since they are the buyer of all GSE debt, they can pay as much as they want and drive rates as low as they want.
What if the Federal Reserve kept control of the real estate market permanently through setting mortgage interest rates? Any time we need to stimulate the economy, the FED can lower mortgage interest rates which will (1) increase prices, (2) increase borrowing and (3) provide stimulus through HELOC spending. When the FED wants to cool the economy down, they can (1) raise mortgage interest rates, (2) decrease borrowing (and appreciation) and (3) reduce the HELOC stimulus to the economy.
Mortgage interest rates can be controlled independently of the Federal Funds Rate (within some constraints) giving the Federal Reserve another tool for managing our economy besides setting the Federal Funds Rate. The “wealth effect” of real estate has proven it can stimulate consumer spending in a recession.
Hmmm….
I don’t know about you, but I think the Federal Reserve with that much power is a bit scary. I also fear that is where we are going. Isn’t the argument I laid out for giving the Federal Reserve permanent control of mortgage interest rates compelling to legislators? The idea has the short term benefit of economic expansion, and any problem — like the fact it is a Ponzi Scheme — can be pushed to a later date. when the Ponzi Scheme does finally blow up, there are plenty of opportunity to blame someone else. It is the perfect solution for a politico.
Irvine Home Address … 6 LAKEVIEW 73 Irvine, CA 92604
Resale Home Price … $700,000 
Income Requirement ……. $144,283
Downpayment Needed … $140,000
20% Down Conventional
Home Purchase Price … $689,000
Home Purchase Date …. 9/16/2003
Net Gain (Loss) ………. $(31,000)
Percent Change ………. 1.6%
Annual Appreciation … 0.2%
Mortgage Interest Rate ………. 4.96%
Monthly Mortgage Payment … $2,993
Monthly Cash Outlays ………… $4,090
Monthly Cost of Ownership … $3,100
Property Details for 6 LAKEVIEW 73 Irvine, CA 92604
Beds 3
Baths 2 full 1 part baths
Size 2,366 sq ft
($296 / sq ft)
Lot Size n/a
Year Built 1977
Days on Market 3
Listing Updated 12/3/2009
MLS Number P712738
Property Type Single Family, Residential
Community Woodbridge
Tract Al
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Huge 2,366 sq ft beauty gated home! 3 BR plus office (can convert to a 4th BR). Steps to the lake and desirable lakes in popular Woodbridge. Gated community. Partial Lake views from kitchen, entry and bedroom. Take an evening stroll around the lake in the safest city in the U.S. Lovely 3 bedroom condominium plus bonus gorgeous wall-to-wall cherry wood office (with its own entrance) with lots of views throughout and tons of UPGRADES! Crown molding, granite countertops, real ‘waterfall’ as you enter the home which can be used as koi pond or enjoy its serenity. An entertainer’s delight. Gorgeous interior with crown molding throughout. Lots of open space. This home is huge and has the feel of a SFR. Remodeled bathrooms, office. Hugest garage on the block with above storage in garage. Lagoon, beaches and tennis courts nearby. This model rarely on the market! Walk to Woodbridge Theatre nearby, or Toy Store or Candy Store. This is definitely a ‘dream‘ location and home unlike any other!
Personally, I would very much like to live near either of the lakes in Woodbridge; although, the north lake is my favorite of the two due to the complete shorline walking trail. If I lived in this neighborhood, I would probably go for a walk around the lake each evening, get to know its moods and rhythms. It is one of the few suburban places where you can get a touch of nature; albeit a planned and civilized touch of nature.
The owner’s of today’s featured property had been paying down the conventionally amortized first mortgage, but is looks as if the $150,000 stand-alone second was too much for them.
Foreclosure Record
Recording Date: 11/09/2009
Document Type: Notice of Default
It is possible the owners are having problems with unemployment, and I expect we will see more listings where there is no apparent reason for default. Unemployment is high, and despite the recent one-month decline, we will likely not see a peak in unemployment until mid to late 2010, and it will take years afterward before the unemployment foreclosures are washed through the system.
“Federal Reserve induced appreciation is moral hazard leading to a larger Ponzi Scheme.”
No duh. Why do you think the stock market is up a large 50%+ from its March low?
Unfortunately, Americans deserve this since they’ve screwed up in the last election by having one political party dominating the legislative branch while have the executive branch being the same freaking political party.
What do you get from that? That’s right children: a cesspool of stimuli that will only serve to prolong the pain (see Japan as a perfect example). High unemployment is here to stay regardless of what BLS is telling you. Hyper-inflation will only exist because of taxation and not price inflation. Credit will be hard if not impossible to come by (which is probably good…you can only spend what you made).
Unwind? Don’t even think about it. We’re going to go down this path for the foreseeable decades.
I believe that Peter Schiff has correctly predicted where this is ultimately going to take us; into a currency crisis as our dependency on foreign imports is our Achilles Heal.
The Federal Reserve can also start buying the governments’ Treasury Bonds when nobody else wants those either.
David,
You and Schiff are only right if the unwind happens quickly.
If it happens slowly, there will be widespread economic problems elsewhere while we actually increase ours. This is what slow competitive devaluation can do.
Unfortunately, it seems to be working in reverse.
Here’s to hoping you and Schiff are wrong, otherwise, I hope you have a good food storage.
Chuck Ponzi
Slow competitive devaluation is a pipe dream just like real estate was going to have a minor correction. This will turn into a currency crisis. We’ve been exporting inflation for a long time and all those dollars are coming home.
“Slow competitive devaluation” aka INFLATION – sure it will give us jobs in about 10 years and balance us economically, but people with dollars in bank accounts smile as they explain it to me.
I hope Schiff is wrong too.
Some of us remember Jimmy Carter and the subsequent 18% yields on CDs.
There is enough damage done to this coutry in the last eight years to keep repair crews busy for the next ten years. I see plenty of work for people: full employment. I don’t think that “It’s different this time(tm).” The recession is over, and typically, the rebound is going to lead to quite a large boom. Forget about you nightmare scenarios.
“The bulls shall lay down with the bears, and the sheep shall abide together.”
Wow, look at that cherry wood office! I didn’t know there was anyone left who still held on to CRT monitors and televisions; I thought everyone in the country upgraded to LCDs, especially with all the home equity available.
I thought everybody used laptops or netbooks.
Not really. I used nice used Dell desktops for my dual 4.5TB file servers and for the HTPC in the den. My son also uses a Dell desktop (he also has a Panasonic touchbook). I bought all my latest batch of computers used. (Yes, we do have four Dell 6300s as well). Amazing what a recession does to the prices of almost new computers (XP Pro and Linux only..)
Oh, our laptops are on docking stations and hooked up to large monitors. Of course.
Aren’t the rates the Fed control at zero or near it (like 0.5% or something)? Due to costs and risk and a profit margin, I believe it’s basically not possible to have interest rates much lower than they currently are. 3% is impossible.
Take a look at the mechanism by which the Federal Reserve controls the Federal Funds Rate. They go out into the open market and either buy or sell short-term Treasuries to either inject liquidity or withdraw it. There is no limit to how much the Federal Reserve can buy — they are the entity authorized to control our currency (print money).
Right now, the Federal Reserve is exercising the same mechanism in the mortgage market. They are paying well over market value for GSE securities. This in turn allows the GSEs to insure loans at less than 5% interest rates because the GSEs know the Federal Reserve is going to buy whatever they underwrite.
It is exactly the same mechanism as subprime lending. The Federal Reserve us providing a warehouse credit line to the GSEs just like Wall Street syndicators of CDOs provided money to subprime lenders. The only difference is the underwriting and where the losses will fall. Any losses that can be shifted to the balance sheet of the Federal Reserve can be papered over. The complex system in place serves to clean up the toxic waste, and put a slightly less toxic version on the FEDs balance sheet.
Is anyone else buying GSE securities? Who will they sell to once the fed stops buying? Are mortgage security mutual funds still getting new money into them to buy securities? With overall rates so low, and people even more risk averse, are they buying mbs’s looking for a little more yield than treasuries?
“Is anyone else buying GSE securities?”
No, that is the problem. If you click on the link in the post, the FED governors are concerned about how far they are from a market-clearing interest rate. All your other questions relate to the implications of the first, and the answers are as you would guess.
In the FED’s defense, providing some level of support to prevent a downward spiral from taking over. When market prices are in free fall, the risk premium becomes infinite, so some level of price stability is necessary before lending will resume. This usually requires properties to fall to all-cash levels, but such pricing would flatten housing for a generation just as it did in the Great Depression.
Someone is buying a lot of stocks out there – look at Bank of America floating shares so it can pay back its TARP “borrowings.” So there are buyers for all kinds of shady-looking stuff. I don’t think the Fed is the only purchaser of bad debt; just the biggest purchaser of unambiguously labeled bad debt. It’s got a prettier package if you’re a hedge fund manager.
watch out for your 401K….
Hi IR, I agree with you,
Well, just one nit to pick. The Federal Reserve doesn’t actually pay “well over market”. They actually basically pay just over market (make that 1 penny or whatever).
As an aside, mortgage rates can still go below 3%…
It all depends on if we’re pushing on a string for a long time and how our culture reacts to debt. See here for a short history:
http://www.dailywealth.com/archive/2009/mar/2009_mar_17.asp
Listen to the writer’s explanation:
I think the writer’s correct. I know some people who got Japanese variable mortgages at 1% 4 years ago. That’s not bad.
Chuck
IMHO, the puzzle of why Federal Reserve did so many wrong things in last 20 years is quite simple. I use my methodology to solve this puzzle and therefore accomplish modest financial success in last 10 years.
In short, FR is an election machine (and have been used as an election machine), it is at least 2nd powerful organization other than White House. It controls the world economic, it blow the bubble to help Bush reelected. And now it will help Obama to run for 2012, and the prices we pay is more debt to our children.
While $ down 30% to other major currencies this year, but to Chinese Yen is actually down 10%, while Obama does not mad when he went go China? Yes, he will keep bash China but he actually know that if China keep buying US debt is the necessary step for his 2012 and therefore he will rather Chinese Yen weak, and therefore he is so humble in China.
This is typical two hands method Obama do, he bashes Wall St. so he can give more money to Wall St. He hesitated to re-nominate Bernanke, but he knows Bernanke is the key for 2012 therefore last week he praise the economic and gesture pay attention to job creation. And at meantime Bernanke said he will consider raise interest rate. But I can assure you the Bernanke will do least no early than Nov 2010. And he is trying to re-inflate the bubble and timing with election. At 2012 Feb, the rate won’t higher that 2% and At 2012 Nov, the interest rate will be around 3.5%. This is best scenarios for election but the actual inflate maybe running at 6% or even higher, also consider US dollar down so much already, but with China low Yen policy’s help. The inflation won’t be too high, only our debt is growing and this is jobless recovery, since most jobs are absorbed by China and India.
Bernanke is a shame as GD scholar, he study GD but he use this as reason the print money and let US debt grow.
Just look FED is an election machine, you will able to the last puzzle and good luck for your future financial venture.
Actually, FED is a non-election machine – tightening at an inopportune time has cost a few presidents their re-election.
If, however, the federal circus over Bernake gets really bad and the politicians do sort of take over the Fed – then they will treat it like an election machine … taking tax and spend to print and spend and a whole new level of bubble.
“Actually, FED is a non-election machine – tightening at an inopportune time has cost a few presidents their re-election.”‘
In the ideological world this is true, and this works before Alan Greenspan, and that’s why US has no debt to the world even with surplus. Therefore, most Fed chiefs do not stay in the office for long time because it may jeopardize President’s interests.
But with AG everything changes, he stay in the office for almost 20 year, every president likes him and our debt grow immensely at the end. And now Obama choices Bernanke to be our next Alan Greenspan.
Also to clarify,
1. Congress is voting for Bernanke re-nomination now.
2. Chinese Yen actually down 10% to USD
3. Obama just has a trip to China last month (He is even humbler when he in Japan, not that he has any regret to Japanese, this is his typical way to mask why in China he is so humble)
4. The roadmap to 2012 for Obama is simple:
a. China willing to continue loan US
b. Bernanke to re-inflate the bubble
c. Support from Wall St
d. Pretend to stop the war
e. Purpose the Medical reform and not done in time to blame Republican
The prices we will pay
a. More US debt
b. Jobless recovery
Sounds pretty much spot on. Per #3 – that bow to the Japanese emperor was perfect cover, all the press and uproar seemed to focus on that and ignore the Chinese part of his trip.
Yeah, truth to the matter is how Volkner was Obama’s economic advisor during the campaign – but now is off in a corner. Proof of the pudding …
I read an interesting article the other day that used gold rather than USD to demonstrate how much real estate and the stock market have truely dropped. I think it said something like 70%+. Although using USD the government has been successful at artificially inflating home prices and the stock market but if you compare how many ounces of gold it took to purchase the average home 2 years ago and how many ounces it takes now one sees a much different picture. It’s hard to believe that creating massive inflation is not their strategy.
I think you’re on to something, Shevy. We actually NEED massive inflation to combat what otherwise would be massive DEFLATION in house prices, wages, etc.
Did the article on ounces of gold also look at ratios of income to house prices? That’s another comparison to analyze the credit-worthiness of housing debt.
Congress Is the Drunk at the Fed’s Punch Bowl: Roger Lowenstein
Dec. 7 (Bloomberg) — The U.S. Congress wants to ride herd over the Federal Reserve. It wants the power to scrutinize the Fed’s interest-rate decisions. It wants to look into how the Fed decides to lend to individual banks.
Like a lot of their constituents, legislators are angry at the Fed’s handling of the financial crisis. They want to know why the Fed permitted such a huge financial bubble to develop — and why, when it burst, it bailed out so many banks.
Many of the criticisms of the Fed are valid. Former Fed chief Alan Greenspan, who oversaw the economy during the boom years, has admitted he placed too much faith in the ability of bankers to monitor their risks. Ben Bernanke, the current chairman, has been overhauling regulatory policy in the hope of preventing a repeat.
But here’s the thing. The changes that Congress is urging would make things worse. If anything, the Fed has been too sensitive to public opinion. And in the recent past, it was too eager to satisfy the public with an easy-interest-rate and easy- mortgage policy.
Last week, when Bernanke testified before the Senate Banking Committee, which is deliberating whether to confirm him for a second term, senators let him have it. Jim Bunning of Kentucky, more famous for throwing a perfect game in his baseball career than for his central banking expertise, called Bernanke “the definition of a moral hazard.” Bernard Sanders of Vermont, a state with fewer bankers than cows, is vowing to block Bernanke’s reconfirmation.
Serious Threat
Bernanke will surely be approved. But the threat to rein in the Fed’s power is serious. The Fed was created as an independent agency precisely so it could make politically unpopular decisions. A Bernie Sanders is unlikely to push for higher interest rates when they are needed. And history shows that political meddling in the Fed has led to serious problems for the nation’s economy.
William McChesney Martin Jr., who headed the Fed longer than anyone else, famously declared that the role of the chairman is “to take away the punch bowl just as the party gets going.”
Appointed by President Harry Truman, Martin served from 1951 to 1970. Even he succumbed to pressure. Toward the end of his tenure, he knuckled under to Lyndon B. Johnson and failed to raise interest rates as inflation was heating up. Johnson wanted cheap money to finance his domestic agenda as well as the war in Vietnam.
Cheap at a Price
And cheap money is what the country got. In the ‘70s, the U.S. experienced runaway inflation. Martin’s successors at the Fed were even weaker than he was. It wasn’t until Paul Volcker took over, in 1979, that the Fed showed the necessary toughness. By 1980 — an election year — Volcker had jacked the fed funds rate up to 20 percent. The U.S. suffered a terrible recession.
Volcker held firm even when congressional leaders demanded relief. Inflation was licked and hasn’t been a serious problem since.
Greenspan, Volcker’s successor, was just as independent. But he made major mistakes. His first big error was in tolerating the dot-com bubble. Then, in the 2000s, he kept interest rates very low, even as the housing market was soaring. In 2003, the fed funds rate was only 1 percent, and as late as 2005, the housing bubble’s peak, the rate was only 2.5 percent.
Even worse, the Fed failed to crack down on speculative mortgages, including subprimes, no-docs and full-purchase loans.
Congress is now proposing various changes. The House Financial Services Committee has approved a measure to direct Congress to, for the first time, audit the Fed’s interest-rate and lending decisions. That would increase pressure on the Fed to keep rates low and perhaps fuel the next bubble.
Feeling Pressure
Bernanke has already felt a hint of such pressure. Early in his tenure, he proposed that the Fed announce its inflation target publicly. Representative Barney Frank opposed him. Frank feared that if the Fed was committed to a specific inflation target, it would result in higher interest rates. The Fed backed off.
Meanwhile, the Senate Banking Committee is debating legislation that would transfer much of the Fed’s regulatory authority to a new consumer financial protection agency. This, too, would be counter-productive. Consumers naturally want all the credit they can get, and Congress and agencies under its control tend to think they are protecting consumers by pushing for maximum credit availability.
Bernie Sanders is on at 9:30 am on AM 1150 every Friday. You can call him with questions if you want.
That’s why the Fed should be independent with its only objective being “price stability”, just like European Central Bank or the former German Bundesbank. Would prevent these roller coaster rides driven by the Fed playing politics and ensure a long term strategy rather than chasing the next election.
First, the Fed has been buying treasuries. And the Fed has been buying lots of treasuries. and the Fed is financing the buying of treasuries by other central banks by buying agency debt from the other central banks. The Fed has been buying massinve amounts of treasuries with one or two weeks of the auctions through POMOs.
Second, the Fed is NOT sensitive to public opinion. The Fed is sensitive to the executive branch because that is who apoints him. The Fed is beginning to be sensitive to Congress because Congress is starting to remind that the Fed that the Fed’s existence es dependent upon the Congress’s charter of the Fed. The Fed is mostly sensitive to the member banks who own the Fed.
The Federal Reserve exists solely to enrich and increase power of the member banks. If you look at every action the Fed takes within that framework, every action the Fed takes makes perfect sense and becomes prodictable.
Independence of the Federal Reserve? What kind of a joke is that?
There is no need for a central bank or fiat currency or fractional reserve banking, except to enrich banks and bankers and politicians at the expense of taxpayers. The definition of money should be determined by those who use it.
1) “Second, the Fed is NOT sensitive to public opinion. The Fed is sensitive to the executive branch because that is who apoints him.”
Executive branch is VERY sensitive to public opinion. As the Fed chairman is appointed by the executive branch the Fed is also sensitive to public opinion.
2) “The definition of money should be determined by those who use it.” I am not sure what you mean. Independence (starting with the Fed chairman not being appointed by the president but being selected based on qualification such as academic/etc. credentials) would prevent the Fed from making decisions based on populism, as it currently does (resulting in the next bubble being created).
The executive branch is rarely sensitive to public opinion. The executive branch is sensitive to campaign contributors, and engages in superfluous acts to appease the public, but acts to appease his handlers.
You and I should be able to determine money to be whatever we want it to be, ie. a silver coin, a shell, a car. That is the basis of a free market and there can not be a free market as long as money is defined by fiat decree.
Sorry about all the spelling and grammatical errors. I forgot to check.
“Although using USD the government has been successful at artificially inflating home prices and the stock market but if you compare how many ounces of gold it took to purchase the average home 2 years ago and how many ounces it takes now one sees a much different picture. It’s hard to believe that creating massive inflation is not their strategy. ”
That brings up an interesting question. How many ounces of gold did it take to buy a house in 1996, the bottom of the last SoCal housing bubble? What about any other point in history? That would be interesting to see.
When gold peaked in the early 1980s it took roughly 80 oz of gold to buy the US median home price. Last time i checked we were at about 175 but gold has gone up a couple hun since then.
You can price it in other things too. The nominal (US Dollar) value is essentially meaningless.
What happened to IHB forums tab on the top of the page…discontinued?
The forums have been shut down. They are “read only” now. you can still see them at irvinehousingblog.com/forums
Why did they shut down the forums? That was the best part of this site.
Agree completely. Was trying to add to one of the posts about favourite floorplan (specifically about Paloma plan 4) but couldn’t find the forums.
Sorry but rest of this post is offtopic here.
I’m told that all new phase releases of this plan is being gobbled up by Full Cash buyers. Can’t believe people with 700K cash want to live in a attached unit with no yard!!!
Posted this is the sparsely attended weekend post, but thought I would do so again here:
Well that hugely sucks!! Why in the world would they do that? I certainly hope it’s temporary and due to some technical issue.
If it was intentional and just part of the gradual transition away from Irvine Housing Blog towards Ideal Home Brokers, I’m very disappointed, as the IHB forums were an extremely useful resource.
I can’t imagine that the numbers of daily visitors that Larry and Shevy crow about in the “Thank you from the IHB” post from the other day will stay as high if we’re no longer allowed to have discussions here.
I like reading all these comments, they are very educating…keep em coming. Back to housing…what will the Fed’s actions do to housing prices in the next few years? Can they keep rates ultra low for the next few years and keep air in this bubble? Or will the Fed decide that saving housing isn’t a priority anymore? What will happen then, will we get our long overdue next leg down.
Everybody knows housing is still inflated, but I guess the powers that be will keep pumping air in this balloon because it’s in their best interests. This is going to be a very slow waiting game, many weak hands will give in.
I agree with the viewpoint that mortgage rate can go much lower than today if Fed continues to push QE to fight deflationary pressure, a situation, as other astute observer already pointed out, happened in Japan, where 1- 2% mortgage rate did not avert a 15-year long RE market decline. Many think Bernenke is trying to “reinflate” a bubble, but I think it’s more likely he is just desperately fighting the onslaught of deflationary tidal waves. We have to consider the following conditions:
1. The continued credit contraction in the US and the rest of western world that guarantees weak aggregate demand for goods and services across most of industries.
2. China’s expansion in capital investment and production thanks to its own massive fiscal stimulus. As long as China continues his push on the “supply” side when the whole world is still plagued by overcapacity and excess supply, and stubbornly pegs RMB to USD, price inflation will be unlikely. Chinese strategy will force other nations into a competive debasing of their own currencies competing for a dwindling demand worldwide. Remember the direct outcome of the global credit bubble is the excess supply in virtually every industry and sector (housing bubble is merely the culmination of it all). To fix the problem two things have to happen (a) debt destruction, and (b) eliminate excess capacity and supply and rebalance the global economy and trade. But unfortunately neither is happening.
Thus the stage has been set for a long global stagnation underscored by central bankers’ repeated effort and failure to get things “right”.
This precisely why I decided that I couldn’t wait out the Fed. They have unlimited amount of power and time to manipulate this market.
At least nearly all of the fraud equity is gone, now we are just left with plain vanilla bubble equity (for now).
I put 10% and I’m at a tight but comfortable DTI.
The most important question will be whether we can have inflation without subsequent wage inflation. If we don’t have wage inflation but imports rise dramatically (think the oil bubble) we could be in for a very serious crisis.
Bernanke is out declaring Mission Accomplished today trying to get the masses in the mood to go shopping.
CNN reports the official story: makes no mention of what the critics say.
My new favorite show is Million Dollar Listing. Last night I was watching and a home”owner” was yelling at his realtor because the realtor dared to tell him that since nobody was looking at his house with a $4.6M price tag that he needed to drop below $4M. I guess it’s the agent’s fault.
I saw a piece of that episode. The owners were acting as if the listing agent was asking them to give up $700,000. What a joke! It was only $700,000 in their own minds; the market never validated that number. Those people have what they have, the agent is merely telling them the truth. Of course, the agent probably lied and told the people he could get $4,600,000 to get the listing and created the whole situation, so he is probably getting what he deserved.
Sellers (especially in this price range), simply have high expectations. They refuse to acknowledge WTF happened over the last 2 years. What pisses me off more than anything is the Federal Reserve is doing everything possible to make make these sellers forget about americas stupid train wreck.
This leads us back to the moral hazard question.
I don’t think we should abolish the Federal Reserve Bank, but I also think their power to artificially create asset bubbles should end. They should simply follow their charter~
a) Maximize employment
b) Stable prices
c) Moderate long-term interest rates
d) Promotion of sustainable economic growth
“With Great Power, comes Great Responsibility” ~ Ben Parker (Spider Man Uncle)
This is something the current and past Fed Chairman do not understand. They are political weasels, unprepared to govern and unprepared to place America on a much needed diet.
JMHO~
I think the Fed’s days of having unquestioned authority is coming to an end. Ten years ago, Alan Greenspan was admired by most Americans, often referred to as The Maestro, yet I read a poll the other day that only 21% of Americans are in favor of Bernanke being reappointed a 2nd term. Most mainstream politicians (republicans and democrats) want the Fed ponzi scheme to stay in tact, but the politicians at the fringes, are asking lots of questions, and I think their message is starting to resonate.
Example
Here’s the link
Interest rates should not be controlled by anything but the free market.
This entire manipulation of the economy through perpetual lowering of interest rates is a proven disaster.
The ideal tyranny is that which is ignorantly self-administered by its victims. The most perfect slaves are, therefore, those which blissfully and unawaredly enslave themselves.
When a well-packaged web of lies has been sold gradually to the masses over generations, the truth will seem utterly preposterous and its speaker a raving lunatic.
Donald James (1931-2008)
Thanks for this.