Benanke plans to print more money to buy mortgages
The federal reserve is dominated by Keynesian economists who all have one thing in common: when their policies fail, they believe doing more will somehow succeed. If the definition of insanity is repeating the same behavior expecting a different result, then all Keynesian economists and all federal reserve officials are certifiably insane.
Jan. 11 (Bloomberg) — Ben S. Bernanke is signaling his willingness to double down on a three-year bet that’s failed to revive housing, showing the extent of the Federal Reserve chairman’s effort to wrest a recovery from the deepest recession.
The policy so far has failed to reflate the housing bubble, which is what Bernanke wants. I’m sure in his mind the policy has been somewhat successful because house prices are higher than they would have been if he had allowed interest rates to rise to properly price risk. Higher prices make for greater capital recovery and smaller losses at the federal reserve’s member banks. Does that make the policy a qualified success? Certainly not for prospective buyers wanting to pay a lower price.
Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that’s being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion.
Even as Bernanke and fellow U.S. central bankers consider expanding their efforts, they are acknowledging their inability to turn around the housing market without help from the rest of the government.
Bernanke underscored the importance of residential real estate, which represents 15 percent of the economy, in a study he sent to Congress last week that said ending the slump is necessary for a broader recovery.
“They’re definitely frustrated and disappointed,” said Stephen Stanley, chief economist at Pierpont Securities LLC and a former Federal Reserve Bank of Richmond researcher. “I’m sure they would have anticipated they would have gotten more bang for their buck.”
While the Fed has helped push mortgage rates to record lows of less than 4 percent, home-loan borrowing in 2012 is forecast to decline to the least in 15 years.
That is great news. Americans are deleveraging. …
Property SlumpMonetary policy hasn’t been enough to prevent house prices from continuing their more than five-year long slide, with Pacific Investment Management Co.’s Scott Simon, the bond manager’s mortgage head, forecasting further declines of 6 percent to 8 percent.
An S&P/Case-Shiller index of property values in 20 cities dropped 3.4 percent in the year through October. Existing home sales remain 18 percent below their 10-year average and Dudley estimated properties seized by lenders may rise to 1.8 million this year, and the same number next year, from about 1.1 million last year and 600,000 in 2010.
Dudley, a federal reserve governor, is expecting triple the number of REO in 2012 as compared to 2010. That’s huge! If they do take back 1.8 million homes, what are they going to do with them? With sales rates being 18% below their 10-year average, they will be owning houses for a decade if they don’t flood the market with REO.
Potential first-time buyers are particularly hurt by tightened credit, Bernanke’s paper said. Lenders are avoiding making risky loans for government programs on concerns that Fannie Mae and Freddie Mac may force them to repurchase the debt if there’s an underwriting error or delinquencies will prove costly for servicing departments.
Only about 85 percent of lenders are offering loans eligible for guarantees by Fannie Mae and Freddie Mac, which were seized by the government in 2008, to borrowers with 680 credit scores and 10 percent down payments, according to LoanSifter Inc. data cited by the study. Fewer than 50 percent are making loans in the companies’ lowest credit tier, the Fed’s Duke said last week.
Although Fannie Mae and Freddie Mac’s ability “to put back loans to lenders helps protect the taxpayers from losses, an open question is whether the costs of the associated contraction in credit availability outweigh the benefits” of lower losses, she said.
Since the costs are being absorbed by taxpayers, and since the benefits accrue to loan owners and banksters, I don’t think there is much question what the best policy option is. I would prefer my money be saved rather than being wasted on the parties to a private transaction that screwed up.
Though the bigger ideas in Bernanke’s report may sound good, “repercussions” would include further entangling banks and the government in housing, said Jim Vogel, a debt analyst at FTN Financial in Memphis, Tennessee. That could limit financial companies’ access to capital and make it impossible for the U.S. to unwind its involvement in mortgages for decades, he said. The study said it avoided discussions of “longer-term restructuring of the housing finance market.”
“They say they’re not going to think about the future of the system, but that leaves such a large, empty spot in the white paper,” Vogel said.
They don’t want to think about the future because they know they can’t unwind the GSEs any time soon. Right now the entire housing market is completely dependent upon this subsidy. If the props were removed, interest rates would go way up, lending standards would tighten further, house prices would crater, and strategic default would wipe out the banking system. I know it sounds like a dream come true, but it would be very disruptive to the economic system if done too quickly.
“There should be no confusion, no mistake, that we’ve put duration risk onto the Fed’s balance sheet,” Sack said in 2010. “These decisions are being made to produce economic outcomes” rather than “to produce a certain return on the portfolio.”–With assistance from Caroline Salas Gage and Pierre Paulden in New York and Lorraine Woellert and Craig Torres in Washington. Editors: Pierre Paulden, Rob Urban To contact the reporter on this story: Jody Shenn in New York at [email protected] To contact the editor responsible for this story: Rob Urban at [email protected]
The federal reserve has no business meddling in the housing market irrespective of whatever benefit they believe it will have. Their mandate does not include bailing out parties to private transactions who failed to heed the risks.