Quantitative Easing, Cyprus and Housing

rcwhalen's picture

"Hope is a wonderful thing. But we also need to remember that changes in the stock market, the housing market and the overall economy have relatively little to do with one another over years or decades. (We economists would say that they are only slightly correlated.) Furthermore, all three are subject to sharp turns. The economy is a complicated system, with many moving parts." 

Robert Shiller

“Yes, We’re Confident, but Who Knows Why”

The New York Times


A safe and happy holiday to all.

Watching the events in Cyprus, one is reminded of the definition of systemic risk coined by the “Counterparty Risk Management Group” spawned by former Fed of New York chief E. Gerald Corrigan.  When the markets are surprised, so the thinking went in August of 2008, a systemic event may occur.


The retail depositors of Europe were certainly surprised when that long convenient offshore banking haven known as Cyprus almost became a test ground for fiscal stringency.  Until now, most of the worst losses in banks have been quietly papered over to spare Europeans the distress of having to admit that their economies are largely de-capitalized.  Cyprus was especially offensive because its wealth – or, at least, liquidity – came from Russia, Europe’s energy provider.  But now it seems that the Russians may have already moved most of their money out of Cyprus, making the bank closures moot. 


With the fiasco in Cyprus, the Europeans have confirmed that they have not the slightest idea how to deal with a real banking crisis – especially on the periphery of what is now considered Europe.  Did EU banking officials really believe that haircutting depositors would be sufficient to restore confidence in Cypriot banks?  The infantile quality of the actions of EU officialdom is mind boggling. Compare the purposeful, serious approach that the FDIC and other regulators in the US have taken to selling hundreds of failed banks with the tomfoolery in the EU.  

But more than anything else, events in Cyprus should remind us all that the supposed economic stability in the US and EU is about an inch deep.  Since every policy aspiration at the Fed is about confidence and virtually all of the major economic relationships we pretended to understand have shifted, the only tangible basis for policy is hope, as per Bob Shiller above.    

This past couple weeks, in fact, we could discern a subtle shift in the Matrix, a change in the narrative coming from some of the more savvy observers on Wall Street.  There is no connection between the real economy and the upward movement of certain asset markets, so goes the thread, markets such as residential real estate.  As a result, goes the narrative, the Fed will continue to buy securities indefinitely via QE, raising the possibility of a further rally in bonds.

The fact that BB rated corporates have rallied more than three quarters of a point in yield over the past several years should not daunt the true believers at the Fed.  Even those members of the Sanhedrin who admit that there is no longer a causal link between home price appreciation (HPA) and the US jobs sector adamantly believe in the power of Quantitative Easing to restore economic prosperity.  It is a matter of faith, you understand, not empirical scientific proofs.  

Fed of New York President William Dudley, a former Goldman Sachs economist, is out saying that the US economy could be galloping by the end of 2013, perhaps 50% above current consensus estimates.  Dallas Fed President Richard Fisher has likewise called a 3% GDP growth rate by the end of the year.  What is the driver of optimism at the Fed?  A rebound in residential real estate prices. No matter that this housing rally is driven by short supply and a growing pile of cash from Wall Street.  The wealth effect, Fed officials and members of the Big media call it.  

But wait.  To convert higher home prices into cash consumption, consumers will need to either sell their homes or borrow.  Q: Is this why all of the larger banks are focused on growing credit card volumes?  Hmmm.  

But of course it would be wrong to blame “institutional capital” for the expanding prices in the US residential housing sector.  Truth to tell, the well-springs of irrational exuberance in, say, Phoenix and the giddy gyrations of Nicosia are identical.  For example, Mom and Pop and smaller players drove the AZ and NV markets higher three years ago. If you were buying homes at or near retail in Pheonix in 2012, you were two years too late. 

What will investors say, the Fed really should wonder, when those nine-ish gross yields promised by late arrivals to the rent trade get cut in half a couple quarters from now.  Reading IPO filings for the REITs that have come to market over the past six months, a sense of wonder results regarding the operating efficiency of some of the newer players in the rent trade.  Truly amazing. 

And as noted earlier, there is virtually no net US bank lending to 1-4 family real estate, this despite the almost 10% rise in HPA over the past year.  Yet so powerful is the word of Bernanke that the mere mention of further policy moves by the central bank sends private equity funds into paroxysms of ecstasy.  Jeff Pintar was quoted in the WSJ this week to the effect that nearly every home listed for less than $400K in Orange County, CA "is being pursued by institutional investor capital." But rents in many communities are now well above what it would cost to buy the home.  Yet another success for Chairman Bernanke and the Federal Open Market Committee.

Next month at American Enterprise Institute, I will be talking about the impact of the Fed’s quantitative easing on the US real estate market.  But the events in Cyprus stem from precisely the same source as the surge in US home prices, namely monetary expansion by the Fed.  


The excessive monetary emissions of the US have covered the world in greenback paper dollars.  This sea of paper money has grown much faster than the underlying economy, putting great pressure on asset returns.  Financial repression predates Chairman Bernanke.  Our allies have been forced to allow their own money fiat supplies to expand as well.  The Fed celebrates the end-effect of its pro-inflationary policy as a “success,” but never admits to being the source of the problem.  And you can forget about selling the Fed’s portfolio.  This is a permanent liquidity “add.”  Bubbles made of fiat paper dollars must inevitably create new asset bubbles.  Just remember that when Abraham Lincoln created the greenback to finance the Civil War, the dollar bore interest like a T-bond. Americans understood that paper money was really a form of debt. 

Net, net, there is far too much bad paper money chasing too few real economic opportunities, forcing “leakage” via offshore havens such as Cyprus.  Russian cash found a ready entry point into the EU and far higher rates of interest than are available in the US.  As Andrew Ross Sorkin noted last week in the New York Times:

“If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.”

So let’s not cry for the people of Cyprus or even Europe for being upset over the clumsy handling of this debacle.  At least the Europeans still have a sense of indignation and, more important, a positive real interest rate. Cry more for the Americans, a nation of sheep who live like socialists, but talk about democracy and free market capitalism as the national creed.     

We may take comfort from the fact that we are all united by the fact of drowning in a bitter sea of fiat paper dollars.  Like professions of faith or hope, paper money is cheap and makes everything it touches cheaper as well.  The difference between Cyprus and America is that the Cypriots are angry and offended by the idea of taking a loss, but Americans are mute because they expect to be bailed out by the Fed.  As and when economic reality rears its ugly head in the US and, like the people of Cyprus and the EU, Americans start to doubt the inevitable bailout, look out.


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orangegeek's picture

Philly Housing Index (housing vendor index) has retraced about 60% of it's 2007 fall.




The next move will head down - below the 2009 lows.

Fuh Querada's picture

It is easier to seduce a lesbian than to get rcwhalen to talk about hard assets (pun intended).

GeneralMunger's picture

Consider this:

Boehner: No US debt crisis right now, but it's on the horizon:
"We do not have an immediate debt crisis,” the Ohio Republican said on ABC’s “This Week.”

“We don’t have an immediate crisis in terms of debt,” President Obama said in an exclusive interview with George Stephanopoulos for “Good Morning America.” “In fact, for the next 10 years, it’s gonna be in a sustainable place.”

And in case anyone wonders what going on, just remember the great George Orwell:

"Twelve voices were shouting in anger, and they were all alike. No question, now, what had happened to the

faces of the pigs. The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which."

The Titanic that is America has already struck the iceberg. Prepare your own lifeboat now while the sheeple are still in the bar shouting for bread and circuses whilst swilling scotch, gin, and PBR.

ChanceIs's picture

Memo to Messrs Boehner and Obama,

The Fed purchased more Treasuries in January than the Treasury issued. I don't know what you call a crisis, but I wish that you would stop taking the great ship of the United States of America on these drive-bys past Giglio.

Respectfully One of the not 1%

This calls to mind Elizabeth Warren interrogating a few Treasury lackies: 'When do you make a criminal referral for drug laundering, is it $100 million, $300 million, $800 million? Where do you draw the line? Coke users are sleeping in the Big House while TBTF bankers are in their own beds.'

BTW: I consider Elizabeth Warren a socialist, but every clock is correct twice a day. God Bless her.

azzhatter's picture

Fuck you Bernanke and Fuck that little prick Sorkin

Zer0head's picture

"Cry more for the Americans, a nation of sheep who live like socialists, but talk about democracy and free market capitalism as the national creed."   


not so much this talk of free market capitalism anymore - capitalism is afterall the root of all evil, no?

just give me my SNAP card, disability check or alternatively a few hundred million for running a company into the ground


the clock is ticking on this epoch AKA the Statue of Liberty is buried in debt, not sand -- God Damn you, God Damn you all to Hell


bunnyswanson's picture


Militias exist apparently.  It would seem that they are not on message boards talking about it.  These individuals may be the target, you know. 



StarTedStackin''s picture

When BRIC forms a new PM backed reserve currency, what do you think will happen to hard assets like RE and commodities?

old naughty's picture

they haven't revealed that template yet, have they?

It will be some form of CONfistication, no?

Mototard at Large's picture

Actually, the Bank of England and the FDIC have written a joint paper on how they will use depositors insurance money to bail out the bank instead of the depositors. Spanish govt also putting new taxes in place on savers.  After Mr Dieselboom's comments, savers everywhere should beware.  http://tinyurl.com/c2e8zs5



Iocosus's picture

nearly every home listed for less than $400K in Orange County, CA "is being pursued by institutional investor capital."

The banks will eventually own most real estate, then, an engineered crisis will follow. The government will bail out the banks and essentially own the real estate market. I believe that is called communism, and I believe that is the aim.

masterinchancery's picture

One little problem in a good article--the haircut in Cyprus is going to be a lot bigger than 10%.

StarTedStackin''s picture

lol, that's old news, but kudos for knowing the difference bt then and than..........

Never One Roach's picture

House prices are still dropping albeit slower since Wall Street is buying many boxes for rentals. In fact, my old neighborhood is becomming a slum due to all those rentals. Sad to see it happen.


What a difference a decade of wars, spending out of control and massive fraud makes.

StarTedStackin''s picture

Prices have stabilized and are SAID to be climbing here on DMV. and I've got a cuppala nice offers on my former marital home to back that up! Buyers were just looking for some closing cost help. Of course I am in the agricultural ring of a multi megaloptical area......

RhoneGSM's picture

Anybody recalulate the return on an 80%  "give back"?  LOL

The 22nd Prime's picture

Quantitative Erasing, Cyprus and Housing.


There fixed it for ya.

otto skorzeny's picture

sorkin needs to get benny the hebe's pecker out of his mouth- liesman wants a turn.

bank guy in Brussels's picture

Seems an historical error in the above article by Chris Whalen (RC or Richard Christopher Whalen), where he writes:

« ... when Abraham Lincoln created the greenback to finance the Civil War, the dollar bore interest like a T-bond ... »

That does not seem to be the case. Seems that during the US Civil War, the idea of interest-bearing currency was discussed but rejected. The US did issue some interest-bearing Treasury notes to the public somewhat bypassing the traditional banking apparatus.

Excellent historical discussion of the whole Lincoln greenback process, the various stages and personalities involved, at the link below -

... including banker Salmon P. Chase moving from Treasury to being Chief Justice of the US Supreme Court, ha! ... Seems that America has been a 'bankster' state ever since the Imperial Empire party defeated the States' Rights rebels

Good piece, 'The Civil War and Greenbacks'


USGrant's picture

Both the US and the CSA issued notes that paid interest. And your reference "thegoldstandardnow" seems riddled with inaccuracies. http://en.wikipedia.org/wiki/Compound_Interest_Treasury_Note

LawsofPhysics's picture

Exactly.  Now all those same states are "right to work" states and Texas wants their gold back.  Things have the potential to get very interesting shortly.  I wonder what happens when a few states with real resources and truly productive capital decide to fend for themselves and tell the Fed to fuck off.  Many of these same states also control nukes and have a large percentage of their people serving in the armed forces already.  Don't be limited in your visions for the future folks.

pparalegal's picture

Maybe Janet Napolitano over at Homeland Security knows something. She ordered some nice new tanks and a few billion rounds for her FedFunded goons. 

bunnyswanson's picture

Initially, I was convinced 12/21/2012 was going to be the end; that would justify the absolute disregard for the rise of unscruplous business practices.  That's not the case.


Then I thought that China was going to attack to take possession of the collateral for their loans.  And they were preparing for the day...

Or N. Korea and it's unstable govt and hate for the west...

but now, after hearing this interview, I think the loan is going to be called due.  Keeping arms in the citizens hands would be of great help in times of chaos.  Especially the trained personnel in security. 

http://www.youtube.com/watch?feature=player_embedded&v=Vjxu4I2jxXg#! (vet gets weapons confiscated because he refused psych evaluation before spinal procedure at a VA hospital.  Police aggressively respond and cause the family even more problems than back pain and a collapsing economy, he now has legal bills and has realized he is open to being barged in on (condensed)

Door to door is how it may be.  The heavy artillery must be for the survivalists who may gather into a quasi-community. 

brettd's picture

At some point people will start putting pressure on state govs---especially in states that have a population that "sends" to DC more money than they get back.

What's tricky here is that because DC can print money, it literally can send to EVERY state more money (in grants/Social security/highway/education money) than that state's taxpayers "pay-in".  

What a gnarley situation....

Won't change till the people themselves rise up.  The leader's won't/can't do it....

StarTedStackin''s picture

Dolts believe that people in the blue states 'send more money to the feds than the get back' when in fact it is big business suppying the lion's share of the 'sent' ducats

disabledvet's picture

Eeeks. Wonderful title and fascinating tidbits ("sprinkles" as former Defense Secretary Rumsfeld used to call them.) still...the zero bound rate policy is all about funding Government operations..."buying time" as it were...and as such is contradictory in nature. HENCE we must first have a policy discussion before we go full frontal on the whole "where does Wall Street fit in."

Imminent Crucible's picture

"the zero bound rate policy is all about funding Government operations"

If only that were true. The ZLB is first and foremost about the ongoing recapitalization of the wrecked TBTF banks, whose asset books continue to deteriorate with every month and every fresh decision by an underwater homebuyer to "Screw the mortgage payment, we're going to the mall".  Thus, they need both ZIRP and QE; ZIRP grants them (almost) free money to play the Treasury carry and gamble in the equities markets, while QE takes $45 billion in impaired mortgage-backed securities off their hands at face value and makes them the taxpayers' liability.

Whalen is correct. There's no selling the Fed's portfolio, there's no "exit strategy" and there never was. Dallas Dick said so himself: "No central bank has ever successfully navigated its way back to normalcy from where we are now. We are in uncharted waters."

Simplifiedfrisbee's picture

That is one shipwreck that will be passed up by many "savers" after its inevitable crash. That is of course, "savers" who know what value is and where to place it.