Posted on 12/03/2008 10:59:02 PM PST by Lorianne
Recent comments by Fed Chairman Ben Bernanke suggest that he is prepared to monetize debt as the government continues to flail about searching for a way to mitigate the current financial crisis. One thing is for sure, the Fed and Treasury have yet to regain control of credit markets and therefore the crisis is far from over.
Government purchases of US treasuries with freshly printed dollars bolsters the argument that the Fed is heading down the path of quantitative easing -- a likelihood first raised on this page late in October after Fed funds were dropped to 1%.
Since then, the effective Fed funds rate has dropped to around 0.33%. With Fed funds futures for Dec trading at 0.3925, another 50bp rate cut is fully priced in -- and then some -- for the upcoming FOMC meeting on 15/16-Dec. If the Fed does indeed cut, it is likely to drive the effective rate below 0.25%.
The contents of the policy statement are going to be interesting to be sure. It seems unlikely that the Fed will directly refer to quantitative easing and/or debt monetization within the statement. My guess is that they come up with some new esoteric language to describe these new monetary policy initiatives, perhaps even some new acronyms. I like, MEaTPF (Monetary Expansion and Treasury Purchase Facility).
The Bank of Japan utilized quantitative easing early in the decade, lowering interest rates to 0% in 1999 and then flooding banks with excess liquidity in the hope of stimulating lending. This policy was somewhat successful in stabilizing the banking system in Japan -- by providing the banks with a large supply of excess reserves. However, it was largely unsuccessful in stimulating borrowing and lending, leading to what is now referred to as Japan's 'lost decade.'
During the lost decade the Japanese government also thwarted their own best efforts to revive the economy by subsidizing failing banks and businesses, creating what became known as 'zombie businesses.' Does this sound at all familiar?
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I’m sorta beyond despising Bernanke by now. After all, the original justification for the Fed was to pump in money and bail out rich people when they were in a jam (thanks a lot, J.P. Morgan). Why should I expect anything different now? Darned if I’m not turning into a fatalist, but so long as we have a central bank, we’re doomed to more and more bubbles and more and more downturns.
I am now hearing that Paulson (et al) is floating the idea of improving loan terms for borrowers in peril. This is a very good idea if you wish to abandon the principles that we have not only built this country on, but the principles of common sense.
Someone slap me and tell me where I'm wrong: any governmental assistance is essentially a reward or incentive for prior behavior. We are now hearing that borrowers in distress may be able to refinance at low interest rates, and first time buyers may be able to take advantage of these rates. How is this any different than what got us here in the first place?
Would it not be more prudent to provide favorable conversion rates to prime borrowers, freeing up more capital to gobble up the distressed properties? And when I say "gobble up", I mean invest in, leaving willing dwellers in place.
Saps like me are current on payments and refuse to bail on obligations, even if we may be underwater or close to it. If there is relief to be had, entice me with investment opportunity. I'm overpaying (from a point-in-time perspective) for my sole real estate investment, but I'm living up to my commitment.
Why give the preferred rates and terms to those who have demonstrated an ability to default in alarming rates; why not provide favorable refinancing incentives to those who have demonstrated a commitment, freeing up that new capital to invest in the distressed properties?
During the boom times, people would buy the most house they could get for $x monthly payment, rather than the absolute price. Low interest rates helped people afford a higher priced home. When interest rates go up, the price they can afford goes down.
Now prices are declining on their own, but that is causing millions to be in illiquid assets. What they are trying to do is put a floor on the declining housing prices, by lowering the interest rate considerably, and stimulating demand. It might stimulate demand, but I don't think it will cause more damage. The bubble has already been popped, and isn't coming back in a generation.
If Bernanke wants to stimulate the economy, he should give $30 billion to one of the banks taken over by the FDIC, and use it to refinance credit card debt. If people can refinance a 28% loan into a 10% loan, it will free up money for consumer spending.
I think we're on the same page, but why would we implement a policy that would stimulate demand from high-risk borrowers? Would it not be better to stimulate demand among low risk borrowers? We already stimulated (heck, metaphorically the stimulation was pornographic) demand among those who couldn't fulfill the promise.
It just seems to me that every "solution" is a bailout, rather than an incentive for others to make a killing. And when I say killing, I mean that in the most positive way.
My central question in all of this mess is: when does the deflation stop and the hyperinflation begin? ( So I know when to convert money into something else)
The lending standards are now higher than they were in the bubble, so if they can qualify today, they are probably not high risk borrowers.
Auto sales are probably a pretty good early indicator.
Ok, you are wrong, the ideal is to try and put a floor on the declining real estate value. It has nothing to do with the few mortgage foreclosures. We have millions of unsold new homes and no buyers. Which means the value of all the funny money mortgages that congress failed to regulate have no value.. The mortgage foreclosure is the cover story for wall street inventing money, about 44 + trillion.
The attempt will fail, laws of supply and demand.
Every bail-out version I’ve heard draws a line in the sand regarding the individual home owners. They must be living in the house and making a documentable effort to stay current in order to qualify for any scheme that reduces the interest, the principle or both. I am not saying that I agree, just stating my understanding of the ‘deal’.
While I am against all bailouts, if the Feds had taken all of the bailout money and applied it pro rata to every mortgage in America, with a similar reduction in the monthly payment, we would be in better shape. The banks still would have received the money. Many of the toxic mortgages would have become viable again. Homeowners would have more equity in their homes thereby reducing the incentive to walk away. And, the reduction in the monthly payments would have been an immediate boost for the economy. Finally, those of who work and pay for all of this would have, at least got something for our money.
Start now.
I think they are TRYING to monetize it. The question is, Can they?
I agree, and for the same reasons I support a mass refinancing of credit card debt. If the bailout money was used to refinance 18%-28% credit card debt down to 10% or so, people could agressively pay down the debt, and then spend on other things, reviving the consumer segment of the economy.
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