We must destroy the Housing Market!!!

[cthulu2016]

This spike in mortgage rates is not due to increased demand. It is not due to inflation. It is not due to expectations of inflation. It is not due to any prediction that the economy will explode upward any time soon.

This is caused by Ben Bernanke not being forceful enough in saying:

1) I said all Fed policies would remain in place until we reach 6.5% unemployment and I meant it.

2) Whatever dumb RW members of the Fed board say on CNBC is meaningless because votes by the board of governors are merely advisory. I am the Chairman. The chairman makes Fed policy unilaterally. And I said nothing will change until we reach 6.5% unemployment.

3) The Fed raising rates next year, or the year after, would be a calamitous error of historical proportions. Anyone calling for such a thing is an honest-to-god idiot. Please ignore such persons.

When smart people get into power they feel a constant pressure to do the dumb things the powers that be think they want.

Bernanke knows that the entire point of current Fed policy is to convince the markets that it is irresponsible. That's the point of Krugman's Japan paper that Bernanke understands very well, and used to teach.

The markets must be convinced that the Fed has promised to be irresponsible and will keep that promise. That is the only way to gain monetary traction in a liquidity trap. To make promises against future traction... to promise to under-react at a later date when inflation does restore traction.

The fact that the Fed controls future policy is one of the few cards the Feds holds in the present.

Bernanke made a promise to be irresponsible if the alternative was between being responsible or keeping his promise (to not alter policy until we got to 6.5% unemployment.) It is hard for a Fed chair to say, "Yes, I will do X in 2017 even if t appears to be a mistake in 2017."

But that is the whole strategy! The promise must be so believed that it serves as a basis for economic activity. He cannot blink.

Background:

That Terrible Taper
Paul Krugman
http://krugman.blogs.nytimes.com/2013/07/07/that-terrible-taper/

[The Velveteen Ocelot]

1. It's still pretty low - anybody remember when it got up to 15% in the early 80s?

[cthulu2016]

4. Not interest rate is low or high

No interest rate has meaning except when compared to inflation.

Those old 15% mortgages were probably a better deal than a 4.5% is today, given what was known at the time.(Looking backward, inflation went down throught the 1980s, making those rates too high in retrospect, but that future was not a known thing when mortgages peaked in the early 1980s.) They were set in a less distorted market where the 0% lower boundary wasn't a factor.

If our inflation rate was -2.5% a mortgage still wouldn't be at 0%. That zero boundary applies an upward pressure on rates that doesn't apply in a high inflation environment.

[The Velveteen Ocelot]

10. Good point. Still, those interest rates were pretty painful at the time.

[cthulu2016]

12. I agree, though my money was in a money market checking account making 8%

or something crazy like that, so it all gets down to circumstances.

Every economic condition has winners and losers.

For instance, people who had a steady job during the depression at a steady wage made out very well, though seldom talked about it out of common decency.

And every time someone like the Joads had their farm sold at auction for peanuts, somebody was getting a farm for peanuts. Winners and losers.

[FreakinDJ]

6. Doesn't matter - its the same preditory lending practices that Tanked the Economy

If the Fed is purposefully leaving interest rates low trying to help the economy recover and banks are trying to invoke "Panic Buying" once again as they did in 2004. Then the Federal government should step in with repressive and punitive measures to insure those Banks Do Not have the ability to make loans to consumers

[JEB]

2. The banks will capture the bulk

of any housing recovery through high rates. The dice are loaded.

[HooptieWagon]

14. The housing recovery in FL...

...is largely being driven by banks and funds snapping up houses for rentals. Rent prices never saw the housing bubble bust....they just continued to go up.

[byeya]

3. The spike in mortgage rates is due to the "market" anticipating an early end to the $85Billion of

bond purchases per month by the Fed. Bernacke allowed himself to be quoted as saying that as unemployment approached 6.5%, the Fed would taper off its purchases and this has caused what many say is the end of the 30 year bond bull market.
Bernacke is a student of the Great Depression and knows that deflation is harder to fix than inflation. In the absense of meaningful fiscal stimulus, I don't think QE3 will end this year or next.
There is a reason why U-6 went up last month when cheerleaders here were pumping up the 190,000 jobs added. The Household Survey noted that 300,000+ people were forced to work part time jobs in lieu of permanent employment. I think mortgage rates over reacted and will decline.

[cthulu2016]

5. Yes. "Taper" is vague and threatening when what is needed is concrete reliability.

[byeya]

16. "Taper" is threatening when it seemed to come out of the blue. Only a few months ago

the FED was saying 2015.

[NoOneMan]

8. "I think mortgage rates over reacted and will decline"

I've entertained this idea as well. OTOH, QE could end and maybe they just won't give a damn if the economy falls into a downward spiral. Maybe they've come to the conclusion there is nothing they can do about it anyway long term other than kick the can down the road. Despite all the rosy signals the US is sending, especially compared to the rest of the world, Im still not sure anything is "better" yet or will ever be (yet I'm not 100% our trusted leaders care about the alternative of easy money).

Honestly, I think the people with the reigns don't really know what they are doing (and never have). Fiscal policy has put first world countries on a steep path with danger on every side and no real way to fix any problem without creating worse ones.

[byeya]

17. If QE ends abruptly then the economy will reel and may go into a deep spiral.

There are Friedmanites who are recommending that very thing.

[NoOneMan]

20. Its increasingly likely that both Friedman's and Keynes' models were disasterously wrong

There are other reasons to be for or against further stimulus beyond what your party's chosen economist would recommend.

But if what I suggest is true, it also implies the economic gurus at the reigns for the last half century were truly winging it and clueless of how the real world works. This is what I am leaning towards these days

[Cleita]

7. Right now I wish we went back to how banks were regulated before the seventies.

That would solve a lot of the mortgage problems we have today.

[NoOneMan]

9. Maybe, maybe not

I don't think the housing bubble was due specifically to banking regulations though, which were exploited to game and cash in on an unregulated, arbitrary marketplace driven by human emotions. It basically all comes down to affordability at the end of the day (which is linked to employment and wages). Unless you regulate housing prices (which will never happen) by tying them to wages and rent ratios, asset bubbles will always have the potential to form in serious ways (look at Canada for example, which is worse than the US ever was with "better" regulation).

[Cleita]

11. It's not specifically to banking regulations, you are right.

I think banking regulations would help. Also, here in California, our real estate market got out of hand with the passage of prop 13 in the seventies that lowered property taxes to 1%. It cause a real estate boom with people selling their homes for three to four times what they paid for it because speculators were then coming in to buy up the properties with the 1% tax rate inflating the market even further. Then those newly rich former owners went to places like Oregon and Washington and they would buy three or four houses with that money starting a real estate boom in those states.

I really think the 5% rate should be brought back for luxury mansions, second homes, and out of staters like Mitt Romney who own homes here. It would slow down things considerably. I personally have never been able to afford my own home because every time I got close to having the cash and income to do so the market place would put that out of my reach again. Also, we used to have the GI bill so returning vets could buy homes. I don't think it's there anymore.

[byeya]

18. Yes and No...mainly Yes. Banks were not required to keep the % reserve they had been forced to

keep for many years.
Then there's the repeal of the Glass/Steagal regulations...

[NoOneMan]

21. But how does that cause a mass frenzy of real people buying more house than they could afford...

with their crappy wages derived from increasingly non-union, non-manufacturing service jobs? Isn't this the real core of the asset bubble (the very asset that bubbled with debt beyond the ability to be serviced by a faltering economy)?

All those shiny products would of been fine if the people were able to make their payments. You would of never heard of them. They cause the banks to go under, but they didn't cause the people to (though, they may have created incentive to trick the people into over-leveraging).

A huge portion of the industrialized world had a housing bubble BTW, without necessarily the lack of regulations. I don't think this is a clear-cut 1 answer thing. It was a perfect storm (probably engineered). It was cultural (but who controls the cultural message). It was due to a faltering economy as well, which pushed many young men into building.

[cthulu2016]

13. Yes and then later, no

The housing market managed to bust out of supply/demand constraints by turning highly levered mortgage derivatives into a hot-money investment, which led to (profitable at the time) transactions in houses that were built and sold three times without anyone ever moving in.

Very much the tail wagging the dog.

But those mortgage-backed securities were products of an existing housing bubble. Without the 10% annual gains in housing there would have been no impetus to create them.

So the housing bubble developed as it developed in a way that would have been tough to regulate on the banking level, but then got into the "blow-off top" bubble phase through crazy leveraging that could have been constrained somewhat by regulation. Maybe some investment banking rules capping the collateral value of MBS bundles using old-fashioned real-estate formulas or something.

[NoOneMan]

15. BTW, check out what is going on up North without derivatives and all those cool regulations

It can never happen there.

Thats due to temporary easy money, a culture that is obsessed with housing and a risk free lending environment (government assumes all risk for mortgages). The low interest rates (3.69% fixed 10 year) make it easy for any Joe Schmoe to qualify (according to lending regulations) for a $350-380K mortgage to afford an average home (until their mortgage is up for renewal).

Banks don't have to be complete crooks to set people up for a painful, devastating financial tsunami

[reformist2]

19. The recent spike reveals just how much Bernanke & Co have been covering up how sick the economy is

The moment it looks like they might back off, everything is going to go kerfphlooey. An economy that still needs intensive care after 5 years is probably terminal, I'm afraid to say. We need a major restructuring as big as the New Deal - maybe bigger.