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Is The US Fed Out Of Tricks?
Fed a US housing fantasy
Peter Morici
Published 10:42 AM, 24 Oct 2011 Last update 9:55 AM, 24 Oct 2011
Federal Reserve officials are flailing about for new tools – more quantitative easing, for example, or a better communications strategy – to jump start the economy. Sadly, the Fed has few arrows left in its quill, most are crooked, and chairman Ben Bernanke appears to not know where the target is.
The legend on Wall Street is the economy remains dormant because depressed housing values prevent homeowners from refinancing their mortgages to free up disposable income and boost consumer spending.
From November 2008 to this past June, the Fed suppressed mortgage rates and helped put a floor under housing prices by purchasing mortgage backed securities and long-term Treasuries. More recently, under Operation Twist, it has sold short-term Treasuries to purchase long-term Treasuries – a manoeuvre aimed at accomplishing similarly low mortgage rates.
Still, sales of existing and new homes sales remain depressed, and most of the modest increase in residential construction is in multi-unit housing. Young Americans are more frequently renting rather than taking the plunge into home ownership, and many older Americans can’t sell their homes for what they paid.
During the boom years, thanks to “creative mortgages” that encouraged individuals to speculate in real estate, more homes were built than were needed, and the resulting oversupply will take years to work off.
The pace of foreclosures and number of homes banks place on the market will pick up through 2012, because banks are working through the legal morass created by robo foreclosures. Though banks face civil penalties or an expensive settlement with the States’ Attorneys General, most homeowners not able to make payments will have to move out and their homes will hit the market. This extra supply, realtors’ hype notwithstanding, will keep housing values depressed for at least the next two years.
A second recession could drive down values, already off about 31 per cent since their July 2006 peak, another 10 to 20 per cent.
Considering the risks, renting and postponing homeownership makes sense for young people not blessed with Wall Street or high tech jobs, and not working in cities like New York and Washington where the housing recession has passed in upscale neighbourhoods.
For most young people, it would only be rational to invest in a home if they could obtain a mortgage at zero or negative interest rates.
Currently, the rate on five-year adjustable rate mortgages is about 3.2 per cent. If the Fed could get the investors who buy Fannie and Freddie bonds to accept interest rates of minus 3 per cent, then young folk could be offered mortgages with appropriately negative interest rates. To accomplish that feat, the Fed would have to buy all those bonds itself. That’s right – the Fed would finance all federally guaranteed mortgages and write off 3 per cent a year. I can just hear Ron Paul now.
For these reasons, with or without cheerleading from the Fed, a housing recovery is not going to lead economy out of its current funk.
The US economy does suffer from too little demand, and another popular myth is that this is also caused by households saving too much. Although the personal savings rate did jump from 2.4 per cent in 2007 to 6.2 per cent just before the recovery began in mid 2009, it is now down to 4.5 per cent.
The net impact on aggregate demand of the 2.1 percentage point increase in the savings rate is about $275 billion. This pales by comparison to the $550 billion drain on demand imposed by the trade deficit.
Moreover, Americans can only get along without saving a reasonable amount if they expect their government to borrow, forever, large amounts from foreign sources to finance their retirements. Greece has demonstrated how well that model works.
Nope. To jump start the economy, the trade deficit – which is almost entirely the deficits with China and on oil – must be addressed. That requires confronting China’s undervalued currency and mercantilism, and finally developing America’s abundant oil and gas resources.
Bernanke is not permitted to communicate those facts, because those issues are the purview of the Treasury and Energy Secretaries. But don’t look for help from those gentlemen, because their boss 'knows' taxing millionaires is the answer.www.businessspectator.com
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the US International Trade Commission.
Now with a 210 Trillion $ Infrastructure spending in place around the world over 5 yrs!! If they did this.. the Fed creating more money to support banks then would work! world trade is set to grow at an average rate of 6.1% every year between 2010 and 2030 and world trade is set to grow at an average rate of 6.1% every year between 2010 and 2030, and exports is set to jump from $37 trillion in 2010 to $287 trillion in 2050 Missing would be Jobs around the world and and with infrastructure jobs in place the Fed creating more money to support banks then would work!
The us needs to set up a new taxing system similar to Canada and in Europe also ,then what you would find out is that your debt could be easily sustained and with infrastructure jobs in place the Fed creating more money to support banks then would work!
75 trillion dollars of derivatives one Bank…and one more Bail out is needed in the Us and Goldman is right 30 trillion is needed to fix this mess and if the US get there banks down to 25 ..and then it would work!! and set those banks up like Canada and set up them like Insurance Companies and cauterize them in that way on what those banks are allowed to lend in a corperate controlled government round table on making sure its working and the Fed creating more money to support banks ,then it would work, and all 25 banks then with 30 trillion would be a power house goldman would have to be allowed to be run like the Royal Bank in Canada and JP like CIBC…and then the Fed creating more money to support banks would work. and 30 trillion $ would do it over 5 yrs!!
It’s time to dissolve the Federal Reserve. Period. Then it’s time to dissolve this freakin’ disaster of a “government”.
The final trick for these zionist bankers will be to turn paper into gold before the cycle begins again.
Land would seem like a good way to preserve wealth but you first need to ask yourself who realy owns the land when they can tax you on the land.
Greece has already seen home owners hit with massive bills for home owners and France is trying the same trick.
I would use oil to store wealth if i had the storage room so the next best thing for me is joining Max Kisers, buy silver, crash j.p morgan
The USA has no chance of getting better when no one dare even audit how many bankers, politicians come from Isreal because they are told it’s racist well it’s racist to have such people over represented in controlling the finances of the american public so stick that in your race pipe and smoke it.
Max Keiser is the man.
But the truth is that silver and gold are problematic when the government can sign a decree and confiscate what you have at a compensation rate *they* set. Just like what happened with Roosevelt’s executive order in 1933.
They confiscated our grandparents gold and then immediately re-valued gold higher. The ultimate fraud by presidential decree. And the corporations and banksters danced all the way to the bank.