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Mortgage QE?
Via Peter Tchir of TF Market Advisors,
There has been more and more speculation that the Fed is getting ready to launch a new QE program, this one targeting residential mortgages. With the data coming in better than expected, stocks back up, and Plosser and Bullard both chiming in that improving data would make them hesitate or question the need for more QE, there is some fear that it is off the table.
I don't think it is off the table, and if anything see growing signs that they are trying to create the political will to get it done. Obviously some Fed members have been vocal about doing more, so the dissenters do have competition. Some of the usual "leak" sources have been indicating that it is possible, but that is not what got me more curious.
Today at least 5 commentators on Bloomberg were downplaying good data and stating that things can't get much better without housing. I agree, but it seemed like a weird day for so many people to refer to housing. There was no housing data out today, and the jobs report was okay so it wasn't obvious to point out the continued weakness in housing. Maybe after weeks of Europe and deficit talks, it was time for a new subject, but it just struck me as odd how often it came up. 2008 was easier, back before Bill Gross fell out of favor with the White House, because you knew whatever he said was an attempt to prepare people for a new policy. It is harder now to figure out who is setting the market up, but I find it hard to believe that it is a co-incident that "the need to fix housing" was on everyone's lips.
So I think Bernanke is trying to lay the groundwork of why it is so important to buy mortgages.
Politically unpopular
There is a strong belief that more QE is politically unpopular. That is true but it also makes sense that the Fed would push more people into talking about how the key to real recovery is the housing market. I am also reasonably sure that Bernanke will do what he wants if he believes it is the difference between turning the corner into real recovery or risk slipping back into daily double dip talk. My guess is the job is less fun than he thought, but he has gone so far, he is not going to be scared by politicians (who have proven their ineptitude) from doing something he believes strongly in. Even if he backs down from full on QE, maybe operation twist can be twisted to purchase mortgages rather than treasuries? Clearly the transfer mechanism from 10 year bond yields into cheap mortgages for everyone is broken. He is creative and seems to get what he wants, so I wouldn't place too much faith in political will stopping him. Maybe it should, and maybe the Fed needs more accountability and some strict limits beyond which he needs Congressional approval, but for now I think he can do what he wants to a large degree. That scares me, but doesn't seem to bother him.
The politicians might be against QE, but many citizens would be less offended by the fed by US residential mortgages than they are by offering global swap lines (and even that didn't seem to generate public outrage). The one asset class that the Fed could buy and make citizens happy is mortgages - especially if it helps create new origination.
Mortgages - liquidity or solvency problem?
I think residential mortgages are now much more of a liquidity problem than a solvency problem. GNMA vs FNMA spreads hit a recent record wide. Many investors seem to be interested in residential mortgages but are waiting for prices to come to them. European banks, who will continue to shed assets in the US do have lots of RMBS paper, they could use a nice aggressive bid.
So the current mortgage market has many of the same characteristics that made QE1 so successful (I liked QE1 but hated QE2 and don't like operation twist). There is a pool of potential investors who won't buy because they think it is getting cheaper. There is a group of quasi-forced sellers. They need to shrink balance sheet and this area is an obvious choice as the losses are in the manageable range and some banks may even be almost properly reserved against the losses. There is no natural buyer. US banks, in spite of a massive rally this week in CDS spreads, still see their bonds lagging (another liquidity problem?) and aren't aggressive adding risk. If the Fed comes into this market it could make a diifference. It puts a floor on the market, as it chases prices up, and European banks have less to sell than is feared, then private investors may chase the market. Investors are talking about 12-14% loss adjusted yields in the sector. It wouldn't take much to spur them to action. Heck, you can almost hear the ETF guys cranking out some new ETF's so retail investors can jump on the bandwagon. If the Fed can use their balance sheet to spur private capital to work, that makes sense.
If US banks get comfortable there is a buyer of mortgage paper, they can maybe be a bit more aggressive on generating new mortgages. They are concerned about the solvency of each individual mortgage, and that has made them possibly too conservative. Freeing up some balance sheet, seeing hedge funds buying up secondary market product, may generate the kick in the behind, that they need. Operation twist was too smart for its own good. This is simple and direct and could be politically popular in the end. Personally I don't love the idea, but it makes more sense than many other proposals out there to improve the situation, and it helps deal with the European bank liquidity problems in a way that is less obvious than lending them money.
How likely?
I'm guessing it is about 75% likely we get something relatively soon. I prefer changing operation twist to buy mortgages rather than outright purchases, but maybe we need another dose of dollar weakness (or it would offset the dollar strength we might see if Draghi turns his printing presses up a notch or two).
I think Draghi is 100% likely to cut rates, probably the day after we get another hand holding moment stating that some agreement in principle has been reached on treaty changes. I think he is only about 50% likely to start printing, but the sterilization is getting more difficult to manage and frankly may be draining liquidity from other parts of the system that could use it. If they start printing, I'm not sure that it can end. Their situation is much more complex than ours. We are playing with some scenarios, but most end up with a realistic chance that more debt of each country and more countries need to get monetized. Weird, and maybe there is a way to stop printing and not go right back to bigger problems, but it isn't obvious to us.
I think there is about a 25% chance that the EFSF raises a slug of money next week, so it can join in the party. The 275 billion euro doesn't fix anything on its own, but maybe it is time to get started. Get 25 billion or so to work in the primary and secondary market and spend less time have intellectual debates on the best way to leverage (without any structured credit intellectuals even involved). They should do something like this, but given how disorganized they are on EFSF, I doubt anything happens.
Who knows what the IMF will do, but I suspect they are ready with some positive announcement after the photo op treaty agreement announcement (the treaty won't ever get changed but no one will care for a week or so).
A group of conservatives is out there trying to stop the IMF. I don't understand why the IMF is so big or has so much of our money at our disposal, but I find it hard to believe that we won't need to pass something to stop money from going to them under prior commitments and congress passing anything is hard to imagine right now.
In any case, it should be another fun filled week. At some point i would love to find out if the swap line cut and china rate cut were co-ordinated or just happened. I think it may have been dumb luck but the central bankers are now clearly aware how much markets liked the idea and will use it again to get cheap thrills.
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Tyler-
Somebody better launch QE mighty quick!
http://www.nytimes.com/2011/12/03/business/global/german-bank-chief-sticks-to-hard-line-on-euro-support.html?ref=global-home
"Only losers pay their mortgage!" -Ben Bernanke
-John
http://johnu78.blogspot.com/2011/11/how-to-get-started-in-amateur-radio.html
I"m a loser. I feel stupid. I pay my mortgage plus, each month. Maybe I should stop paying it and get a bail out.
How about they give me a 4% mortgage so I have more money to spend and can spur our consumer driven economy? Nah. That would only hurt the bankers who rake in my interest each month. Imagine, helping J6P instead of the bankers...
So, they will continue to bail out those who are about to default, which would hurt their banker freinds (yes, friend + fiend = freind).
You SHOULD walk away from your mortgage & lever yourself on short-term credit (I've read Chevy dealers are looking for some buyers). Whatever you do; don't save money as it will be worthless. Eat, drink and be merry !
Finally someone with some sence in this vast sea of pointless analysis!
Eat, drink, be merry...make regular visits to mid-level brothels too, make sure to do that as it'll keep you physicaly and mentally on tip top form
...don't bother with gold, they'll just get it off you one way or another, the collectavists have outnumbered us...don't try
why not low-level or high level brothels, out of curiousity?
The great majority of Americans continue to service their mortgages, even if they are underwater. I'm not sure I understand the moral hazard tone frequently voiced when it comes to individual homeowners needing help or principal reductions - it seems to me in a bad mortgage, both sides fucked up. Moral hazard, my ass. The protest about the same moral hazard issue as to the TBTFs lasted about 5 minutes and at least in the media is portrayed as "necessary to save the system" and therefore somehow a noble cause. Puh-leze. I note for the record that few people - even the best credits - actually access these "4%" mortgages, and there is no way that the NINJA home buyers are getting those deals. It's way more likely they are trapped and waiting for foreclosure in a seized up judicial process that is screwed up beyond belief by the greed-crazed documentary sloppiness of the TBTFs in packaging their mortgages in the 2000s. Right now, 33% of the home purchases, an astonishing percentage, don't even make it to closing due to failure to qualify for a mortgage or an under-appraisal of the home due to falling values. The truth about home sales is it will be the last asset to reflate and it will be years before the market "recovers," and that may mean something quite different, and less important to our economy, than it did for the preceding portion of the post WW2 period in the US.
I don't think the QE of mortgages is intended in any way to benefit the consumer - it is intended to benefit the banks by taking these illiquid assets off their balance sheet at a discount which is less than market, with the political cover being the supposed benefit to consumers. Nope, it's yet another multibillion dollar bailout of the banks, and guaranty of bonuses - a gift by the Fed, if you will. No one at the Fed gives two shits about the American homeowner or consumer. Not even one shit.
Restore Glass-Steagall. Amend bankruptcy law to allow judges to cram down lenders in residential mortgages (and student loans, for that matter). In the big picture, comparatively few will elect to destroy their credit and go bankrupt, but if they have to (just like the TBTFs had to seek help) at least there is a way out, and way to clear the debt. This is not hard, unless you're a bankster with a completely different agenda. The banks are not your friend, people. They will destroy you if they can, just for an additional basis point on the bonus calculation.
oh,... the horror! london bridge is falling down?
mario draghi president of ecb
gov. of 'bank of Italy'
managing dir. of 'gs' int'l
*key member/ player of basel financial stability board
ref: ___12/20/2010 http://www.johntrumanwolfe.com/2010/12/financial-crisis-and-the-financia...
PS. i hope merkel gives him a good boot in the ass,... back to gs's basel where the scum belongs!
PS2. if you visit the link,... check out the blog [top sitebar] eg. imf to destroy america 4/28/11 [black pr] **house takes up action on imf 12/2/11
jmo
when the politicians starve only then will there be change that we can believe in.
http://expose2.wordpress.com
Oh, now the Government is gonna own my mortgage?
THAT'S when I'll stop paying on it...........
LW said 3 years ago the govt would own every mortgage in this country!!
Pardon my ignorance but who is LW?
Ummm they are close to owning most of them.....
Is the Bernanke's home under water?
the government in reality has owned your mortgage for 3 years.
Not the Government, the Fed. Big difference.
I think Peter is right, due to the one point he brought up - the spread between Ginnies and Fannie/Freddies. Remember that QE1 was spent predominantly on Fannie/Freddies (way out of proportion to their market share).
Now investors are driving up the spread between Ginnies and Fannie/Freddies again, for various reasons.
So, once again, Bernanke is going to perpetuate the Toxic Twins by supporting the market for their MBS.
Yet another way Bernanke is getting involved in Fiscal, not Monetary, policy, by supporting entities that would otherwise evaporate without his help (i.e. an increasing spread between Ginnies and Fannie/Freddies would push more and more of the market to the FHA, and eventually make Fannie/Freddie obsolete).
Just 1 more bailout for the banks. I think the FED should just pay off every mortgage then i could go buy a new car etc. alittle better then giving more money to the BANKS and WALL STREET to gamble away again they will just come back and the FED just keeps on giving.
Better yet have the Fed back the banks accepting a 750 FICO score for everyone. If they keep the score above 650 for 5 years they can keep it. If they don't they will be shot. 2 problems with the above...it won't be enough as 1. too many people have a FICO of 410 and 2. are numbed from the stress of losing their house, dreams, college education stuff, etc. A lot of people who were and weren't a great credit risk are done thinking about buying property for 7-10 years. The credit bubble was popped and it just has to be replaced with another one. I'm sure it will be managed much better the next time.
Another way is to solve both the immigration and housing problems in 6 months by offering citizenship to undocumented folks who buy a house and keep it paid up for 10 years and voila Soy Americano Cabrones!!.
Or even one better, the Fed could, if they were really feeling aggressive, buy long-term bonds of banks that accept FICO scores of more than 100 but not over 600. Wouldn't it be nice?
Meet the new drug. Same as the old drug.
this is not a druggy on the loose, it's the bankers and financial destricts Janitor, Benny Bernanke, the super pooper scooper here to scrape up the dumps of Blankfein and Dimon et al
there's Trillions of Tons of shit for Benny to clean-up but he's never happier knee deep in steaming crap ... it's what the Fed is for afterall
The Feds primary mandate is socialism ...to backstop and bail out the gambling junky losers of bwanking
Peter, the other reason for the jawboning on "fixing housing" or whatever, is the renewed push to get Fannie/Freddie to reduce principal balances. Most Americans will go apeshit if this happens (most don't understand what the hell the Fed does, but they sure will understand their fat, deadbeat neighbor getting a break that they didn't).
So this needs to be "sold" heavily before it happens.
yes, I would be one of those who who indeed would lose fecal matter if they pulled such a stunt, seeings how I bought and have been faithfully paying on a home mortgage that was way below what I could afford. Of course this means I've had to tolerate the spousal grief that accomopanies such a strategy (until relatively recently that is, when recent events has made my spouse start to realize that maybe I wasn't so paranoid and crazy after all.....)
I would be unhappy too. However a rising inflationary tide lifts all houses, so no one with real assets loses. No one in debt loses.
The only losers are people who save in dollars or have fixed incomes. Howevver if someone has to get kicked out of the lifeboat to save the rest of us, then those people are sharkfood.
It has always been that way since the new age of fiat.
I guess cash instead of presents will be sliding down American's chimneys this holiday season and it will be dropped out of a helicopter instead of a sleigh. BAD SANTA.
mr. spectrum - you've been had. me too. i feel stupid. the gov is buying out all non-payers in full. please take whatever money you have, buy ipods and riot at walmart. we're suckers.
believe me - these people will end up in their homes for 5 or 6 years more (at least until obama well into second term) without ever having paid a cent.
infact - they will probably end up finding some good lawyers to sue the big banks for having given them mortgages they couldn't afford, (regardless of whether the lied about credit/income etc.) - because of the mental duress - having to move their kids, god only knows what the 'victim' culture can come up with. so - we'll all be paying for that for a long time.
these people get it. you and i don't. i worked in mortgages - the number of people that were restructured - many down to fixed 2% mortgages - and still didn't make a payment. now - give them principal reductions? sure. and then what. they won't pay. they gamed it.
it's funny..... :(
I kept reading until I threw up, then stopped. I can't believe td published this tripe.
Give them a break it is friday. I and most everyone else were getting tired of simone the sovereign man.
But I and the SEC love your name so here is a greenie.
I actually signed up on a midget dating site. I have pretty much done everything else a straight man can do and still claim to be straight...but that is another story. Sadly no responses so far.
So what.... Underwater is still gonna be underwater
No its not.
Inflate slowly. Hold to maturity. Problem solved.
may as well buy all the mortgages, no one plans on paying them any more
While I am on the subject, the gov't, in the form of either the FHA or Fannie/Freddie, is basically the only game in town on mortgages. Why the fuck is it competing with itself by keeping the FHA, Fannie, AND Freddie going?
Shut down Fannie and Freddie, and jack up the FHA insurance rates, and take advantage of the monopoly pricing power. Only the government could fuck up a monopoly position.
If that happens home sales go to 0. Outside all cash investors the FHA loan is the only way anybody can get a house. FHA loans already cost $4k up front and $60 a month to insure the loan. That is on top of closing fees and the 5% down payment. Getting a FHA loan on a $200k home can cost up tp $20k cash.
Do you know many people looking for a $200k home with $20k in their pocket?
Three?
i could. easy. but would i want to do that? it kind of sounds like i might have to actually pay something.
If you don't have $20K in your pocket to put down on a house then you should not be looking for a $200K home. In fact, you should have 20% down to buy a house. That's $40K on a $200K house.
20% down and a 30-year fixed-rate mortgage works. Weirdo financing so everyone can speculate in real estate is asinine. A primary residence is an expense, not a money-making investment.
If the Fed says it's a "money making investment", it is. After all, isn't that what the stock market rallies are all about? The Fed always has your back - you should pile on as much risk as possible.
And then watch the housing market, where 95% of the mortgages exist solely by government largess, be completely destroyed. It's barely squeaking by on the current pricing and terms. Not against that, mind you, but your "inflate slowly and hold to maturity" solution mentioned above will be measured in time spans more typically used to describe geologic events, like the movements of continents. Not to mention the instanteous death of a gazillion banks, pensions funds, etc. all of wehom will be holding now worthless "mortgage-backed securities." The crux of the matter is that the value of an asset in our system fluctuates according to the terms of what it would take to borrow to finance its purchase - if the costs to borrow rise, the value of the asset declines. If you can get financing at all, the asset might have some sort of theoretical, "intrinsic" vlaue, but is is otherwise worthless execpt for a severe discount to cash buyers.
There are no private lenders to speak of right now in the mortgage space.
this week's Fed Reserve balance sheet highlights something ZH focused on re last week's balance sheet
last week, as Tyler pointed out to everyone, there was a material reduction in the bank's so called reserves at the FED, offset by a corresponding big increase in the FED's 'other' liabilities.
This week another material move occurred, but the beneficiary changed. Other liabilities dropped by $63 bn, while the Treasury's checking account at the FED increased by $51 bn.
Bernanke testified before Congress in mid 2010 that the write up in bank reserves was simply a data entry function. When the FEd wanted to buy Treasuries they typed up bank reserves to cover the increase in the asset side.
Since the FED now purports NOT to be engaging in QE, have they simply found a new method of data entry to cover Treasury operations? They type down bank reserves and transfer the 'money' to the Treasury, who will subsequently spend it. And the FED will cover the Treasury's checks by a new set of data entries typing bank reserves back up. The intermediate use of the 'other liability' account in this flow provides a level of misdirection to cloak what is happening.
Rinse and repeat.
Data entry on bank reserves (printing by typing) creates the subsequent wherewithal to fund government spending even while allowing the FED to pretend that it is not engaging in QE or monetizing government borrowing/spending
I still don't understand how this will help. The probelm is that investors won't buy MBSs? Or that investors won't buy real estate bexause they think it will get cheaper? That's the problem?
Wasn't too many investors chasing real estate and the lax standards allowing speculation to run rampant the problem?
The government already owns or guarantees the values of 78% of the mortgages in the US already right? If the FED buys the rest and the government owning 100% is supposed to fix the problem? That will cause banks to lend money? Or will they just lend money to investors who will then bid up property prices in a vain attempt to one up each other and that will fix the problem?
The policy makers seem to think the problem with housing is that the valuations have fallen and that is what needs rescued. They have absolutely no clue. I mean Jebus frickin christ is the only thing the people running the show think will fix anything is inflating asset valuations?
I can't take the mind boggling insanity anymore.
All their strategies have one thing in common, provide ample liquidity and maintain low but positive inflation....ok that was two things....but that plus can kicking until nominal values match the loan amount is the game plan.
Kick the can, ignite a little inflation, and hope nominal growth erases our sins and re energizes animal spirits.
It is a race against time. I enjoy the front row seat at zero hedge, but this sporting event is taking too damn long to finish.
BS, this is not about stimulating the economy by helping lower interest rates (ZIRP 4'eva proves that). since mortgage rates are around 4% and have been for quite a while and people are still not buying proves that cheap housing will not stimulate this economy because people need jobs, not mcmansions. this is all bout selling more toxic assets from the TBTF to the Fed at the expense of the taxpayers.
I read the whole thing. Peter Tchir is a complete fucking moron.
really? peter tchir is a moron? and last monday or so he said the fed would print and buy euro trash?
and guess what - we printed and bought boatloads.
Why can't that stupid Ben gay stop messing around the free market? He is completely politicalized. As a non-elected head of a private entity, he possesses way too much power. He is basically a financial hitler.
Dude - you are spoiling the free money party. Ease up man.
Woudn't you want to buy residential mortgages too if you knew that they were going to ALL be paid down via the equivalent of a stimulus check that can only be used to pay off primary residence debt.
http://tradewithdave.com/?p=8549
http://tradewithdave.com/?p=8518
That should be enough for Silver going to $80 at least.
Give it up man. Silver is never going above $50 as long as JPM is still afloat. Their two fates are directly and irrevocably tied together.
You might be correct but there won't be any physical silver available under $50. Paper silver will be in abundance at any price.
fair enough, if it means end of JPM, than be it.
I think that with the MBA purchase and refi applications crashing last week they will definitely do it. Yellen was calling for it.
MBA Purchase and Refi Applications Collapse – Down 33% and 41%
http://confoundedinterest.wordpress.com/2011/11/30/mba-purchase-and-refi...
Don't get me wrong, I like to read the guy. But did you guys do a stock swap and he gets 3 articles a day?
I have a different solution. The Fed prints up a pile of FRN's and gives $1 million to each tax-paying individual in the U.S. The only requirement is that the money must first be used to pay all debt; they could use the rest for whatever they wish. That way persons not in debt would also benefit since all of the money they receive would be at their disposal. The banksters would be out of the mortgage/credit card/student loan problem, and we could re-start the ponzi. If the banksters fail for other reasons at least the citizens do not have to be squeezed to death by them. There would also be a benefit for any European banks still holding U.S. mortgages.
This may sound like a lot of money, but it would be less than we would spend in the next few years trying to prop up the banks anyway. At least the money would go to the 99%, who could use it.
Of course some people would gamble/waste/lose their money, but it would be a great stimulus to the economy.
OK Junk away!
Do you understand that all money IS debt? That in a fractional reserve fiat banksing system ALL money is born from debt and that if all debts were paid there would be a contraction in the money supply?
No debt = no money.
Fractional reserves are made up of existing debt. So the system is Debt backed by debt. There is no gold standard.
You do understand all this?
that is FED's idea anyway...1 million notes with picture of Mr Bernanke, and loaf of bread around 500 thousands.
This is called the Angel Gabriel scenario. Imagine if the Angel Gabriel answered the prayers of everyone asking for more money and instantaneously put a million dollars in everyone's account at midnight. What would happen?
People would take their money and run to stores and buy up everything in sight before anyone else could. Realizing that everyone has more money, stores would raise prices immediately and try prevent their shelves from going bare in the buying panic. The ones that delay (consumers or retailers) get screwed. It's basically whoever is first to the feeding trough wins.
You can make up "let's announce it and then..." or roll it out in a different fashion, but the results are the same. You can't win doing this. You only create inflation and misery
>>>This may sound like a lot of money, but it would be less than we would spend in the next few years trying to prop up the banks anyway. At least the money would go to the 99%, who could use it.<<<
That's precisely why it will never happen. They don't care about making life stable for 99%. They want to keep the game going so they suck everyone dry as quickly as possible. Shortsighted? Yes, but,
Parasites often kill the host.
I thought that's what we had Fannie and Freddie for.
You know, I monitor a lot of forums, and when people start talking mortgages, rates, Freddie, Fannie, yada, yada, most of this is beside the point. I see the problem really being one of income, or in reality documentable income. I work in the IT industry and salaries in my work category (IT Business Analyst) have fallen at least 10% in the just the last year in the countries best labor market.
I don't see the incomes in this country supporting a better housing market for many years...if ever. Here in the DC area with massive subsidies from 6 figure Government jobs and contractor jobs, the market is still so so. My GF is a mortgage banker and she tells me that the regs are very tight today. The days of no doc loans are over. No, the rates do not matter if income is stagnant or declining. Unless the government can give all the unemployed steady 6 figure jobs, we can forget about a viable housing market.
So, hear's the little secret.....psst....it's the income!
Heck. Why not overtly buy stocks too and help prop up the equity market? Then they could have a nice balance between AA+ US Treasuries, Questionable Euoropean Debt...and underwater mortgages.Oh don't forget about struggling municipal debt. Buy that too. Whatever they do they should NOT buy gold and put it on their balance sheet because gold is just a silly tradition and it has no place in a modern Central Banks balance sheet. It would just bog it down with value, security, and liquidity.
Good point. Any financial advisor would point out they are way too conservative with their bond portfolio. They should be investing in at least 70% stocks, commodities and derivitives.
They do buy S&P futured to prop up the equity market. Ever heard of the Plunge Protection Team?
What does the Fed care if the mortgages are underwater? They printed the money out of thin air to buy them, and at firesale prices.
Spot on again however the key to launching QE3 wo hurting the American tax payers is for the Fed and US banks to continue attacking Europe and conclude that the European crisis is unsolvable and the only way to avoid US contagion (conspiracy theory) is to print money. Of course those clever people know that US needs more help than Europe and that's precisely where the new money will go once again to the US banks's coffins...not to their European counterparts..got the message everybody?
Most likely the Fed will hint this on it's statement on January with the view to print money in June 2012. So get ready for real gold price which today should be worth already 2,000 USD a troy ounce but the suckers at JP Morgan, HSBC Americas and the highly leveraged WS Casino of 1 to 600 in derivatives known as Goldman have been manipulating its real price and the same goes for Silver
Well, speaking as an American Taxpayer, I welcome the opportunity to throw some money at the Euro-bank Liq/Solv problem.
Seems like ages since we last bailed out any Purposefully Incompetent Financial Behemoths 'round THESE parts.
Awesome. Bring in on Ben.
For 3 years now the financial world has been holding housing-related financial paper on their books at pre-housing-collapse value hoping for a QE-driven housing market recovery.
But all QE did was debase the dollar, partially offsetting a horrifying 50% drop on home prices to a net 30% net drop, while the housing market did collapse 50% in real terms.
QE generated no recovery effect whatsoever, and the debased dollar took more wealth from potential homebuyers, making the housing collapse worse rather than better.
So here we are now 3 years later, housing hasn't recovered at all, it's actually collapsing further, putting enormous downward pressure on all that housing-related financial paper still held on their books at pre-housing-collapse value, creating a growing risk of all out crash, wiping out most major financial institutions in America plus enraging foreign wiped-out holders of that paper to the point of going to war over it, economically, militarily, maybe both.
Yes, 3 years later the multi-hundred-trillion-dollar Amercian residential housing ponzi scheme is about to come apart at the seams. They held it together 3 years past the point it would normally have crashed, and now the crash will be far worse.
In a last desparate attempt to put off the crash a little longer large financial institutions are begging Bernanke to do something to boost the housing market.
But Bernanke is powerless at this point. He can't reduce interest rates that are zero already. If he launches another QE to buy up more MBS it will debase the dollar further robbing more wealth from potential homebuyers.
Banks are powerless too. Banks would have to reduce mortgage interest rates 50% down to the 2% range to spawn any meaningful activity in housing, but a 50% drop in mortgage interest rates would destroy what little profit banks are making and they'd collapse that way.
It's either balance sheet crash or P&L crash at this point. Pick your poison. Either way, the financial world is headed for the biggest crash in human history from the housing market, dwarfing any crash from the sovereign debt market.
QE does have one advantage; it accelerates the demise of the Fed as an institution. The more they print the better (=
When the MBS market crashes it will be the end of any Fed credibility hence the end of any US dollar credibility. Both will die.
>>>But all QE did was debase the dollar, partially offsetting a horrifying 50% drop on home prices to a net 30% net drop, while the housing market did collapse 50% in real terms.<<<
I am not sure what you are trying to convey here.
This is the chart I use to disuade addle-minded friends and family from running out to buy a house.
Look at REAL home prices (see below) --adjusted for inflation...(yes, you have to adjust for inflation or you're a sucker.)
http://4.bp.blogspot.com/-DvmIW5cdYfA/TqhH_Cc9j0I/AAAAAAAALBw/_4C-8WlAvuM/s1600/RealHousePricesAug2011.jpg
This is a chart few people ever see because they don't bother to look for it---and realtors hope you never see it...because it's always a GREAT time to buy a house (and the prices always go up.)
When those declining lines dip below 90, we stand a chance of stabilization and perhaps rising prices, but only then--another 4 years perhaps?...if things remain stable which is unlikely.
Some are arguing that those prices need to shoot well below 90 by a standard deviation or two first, which could happen in one fell swoop if/when Europe blows up..and I agree. (It will be very ugly.)
So, much for the mythical intrinsic value of American residential real estate.
The seemingly endless price rise in housing we experienced as adults (1999-2005) was large built on fraud and inflation.
At least our parents experienced a genuine, though modest REAL rise in asset value when adjusted for "official" CPI
http://www.theburningplatform.com/?p=15875
If that first linked chart (at the top of this post) were adjusted for shadow (true) inflation (not the government formula) from 1990 forward (when the formula began changing to mask inflation,) the disconnect between true inflation adjusted REAL home prices and what people were actually paying and the recent decline would make your head spin. I hope Shiller stumbles upon SGS someday.
Example--shadow inflation NOW is north of 7%; officially it is a "modest" south of 4%.
http://www.shadowstats.com/alternate_data/inflation-charts
This a great plan. Buy real estate with money that you can print whenever you need some. Convert always-getting-smaller dollars to real assetts. Sell the assets to your corporate friends at fire sale prices. Get rid of the mortgage write-off for homeowners. Rent the serfs the houses that they used to own.
+1... Correct analysis...
This wouldnt be good news for the PrimeX trade
Yes, the key to the recovery of the US economy is the housing market. And we have known this for quite a while, i.e. the Resolution Trust during the S&L debacle ring a bell?
But what I find interesting is that this problem could have been solved 3 years ago with QE1, but wasn't. And the question is why? Here is my take. The private ownership of US housing creates a "stake holder" element in our society. But I don't think the present administration is interested in stake holder equity elements in our society ("negative rights" in Constitution and all that garbage). Nicely explains the obsession with taking away the interest expense tax deduction. So what we have is a problem that is easily solvable, not being solved up to now.
So what's changed? With the economy in the shi'a (like the East Enders would say) because Porkulus didn't have the desired effect (remember all those shovel ready projects), and the relection of our useless community organizer in chief/administration/political party looking like the Titanic heading for the iceberg (again - remember 2010), the troops are being mobilized to right the ship (at least until the poll numbers recover).
And for that reason, I agree with Peter that we will likely see Operation Twist redirected into the housing market. However, the "unwanted" consequences will be USD strengthening and the end for of Obama's supposed "Wirtschaftswunder". Oh well, the price for reelection is throwing materialist socialism under the bus. To paraphrase a famous line from the first Dirty Harry movie, "sacrifices have to be made, Mister":)
"I think residential mortgages are now much more of a liquidity problem than a solvency problem."
Where's the -5 Button?
What a fucking shill...
Tyler: At least SOME integrity as a prerequisite to guest posts...
SP500 bull vs bear battle reverts to bearish bias after price action on Friday and more downside expected.
My long term indicators have continued to warn of US Dollar strength and EURO weakness and these signals have increased since 2009. The overdue dollar rally should be substantial.
http://stockmarket618.wordpress.com