patrick.net

savers in theory should have been rewarded by the "free market" for their prudence in avoiding debt. Interest rates should have surged.

No!

The more savers you have, the lower the interest rate they will get.

You can't have savers without debtors, and debtors can't pay the interest they owe as it is.

http://research.stlouisfed.org/fred2/graph/?g=30j

"Ron Paul is criminally insane on health care (just let the uninsured die, or rely on charity, which is the same thing).

But he's totally right about the Fed. The Fed should be abolished."

But do we really want Congress setting monetary policy? Wouldn't aboloshing the Fed just mean trading in one devil for another one that could very well be worse? Do you want Michele Bachmann setting monetary policy?

Dan8267 says

The whole financial crisis was created and deepened by cheap money. Keeping interest rates low and printing money (or "quantitative easing") to save the economy is like trying to save a drowning person by pouring buckets of water on him.

No it's not. It's like trying to eat a jelly donut with chopsticks.

No, it's like trying to put clothes in the dryer in the dark.

Wait, no facile simile is really descriptive of a complicated thing.

Low interest rates are a function of the over-extension -- and the division of the economy into winners and losers.

The winners own all the debt, and the losers owe it. The worse this imbalance goes, the lower the interest rate will be.

Supply and demand. "Savers" have too much money chasing too few yields.

Total debt to GDP is blue line, real interest rate is red line:

http://research.stlouisfed.org/fred2/graph/?g=30o

When real rates were sustained at 6% (late 1990s), total leverage was 50% less than it is now.

You can have return on savings or return of savings, not both.

Bellingham Bill says

The more savers you have, the lower the interest rate they will get.

But interest rates also depend on risk. The real risk to investing in real estate was ignored and people were allowed to buy at very low rates. Now that the risk in lending is more obvious, you would think interest rates would rise to compensate people for that.

I bet the problem is not an excess of savings, but an excess of Federal Reserve cash loaned at 0% for banks, which then turn around and buy US Treasuries with it, getting a guaranteed 1% on 5-year or 2% on 10-year notes at taxpayer expense.

That's just a straight transfer of money from your pocket to the bank's profits.

They don't need your savings when they have Ben loaning as much as they want. They don't need to lend either when they have guaranteed interest from Treasuries.

HousingWatcher says

But do we really want Congress setting monetary policy?

No, I wouldn't want that either. Why do we need "monetary policy" at all? Seriously, it sure hasn't worked out too well for us.

Hey savers,

how many of you have more than two kids? The demographic trends are on the side of the "deadbeats".

No, I wouldn't want that either. Why do we need "monetary policy" at all? Seriously, it sure hasn't worked out too well for us.

Because other countries with a monitary policy would eat our lunch if we gave it up and just let the market set prices without direction. Right now, monitary policy is a major part of foreign policy. Giving it up is like giving up your nukes in the cold war.

Bellingham Bill says

The more savers you have, the lower the interest rate they will get.

This statement is super-correct but for one flaw: Federal Open Market Operations. LOL.

I bet the problem is not an excess of savings, but an excess of Federal Reserve cash loaned at 0% for banks, which then turn around and buy US Treasuries with it, getting a guaranteed 1% on 5-year or 2% on 10-year notes at taxpayer expense.

not only that, they also get a 0.25% interest from the Fed itself on excess reserves deposited at the Fed.

Free money from interest. rent-seeking to the maximum.

Ron Paul is criminally insane on health care (just let the uninsured die, or rely on charity, which is the same thing).

Ron Paul also naively assumes that the people of America have high moral character! Which is why he thinks government interference in health care will not work.

Problem is: big or small government, for anything to work -- people have to be honest and not rig the system. Big Pharma rigs it today.

tatupu70 says

Actually you are 100% incorrect. It was caused by poor underwriting standards and poor understanding of risk.

I'm talking about the root. As Peter Schiff said, the Fed spiked the punch bowl and all the banks drank it, but the first blame rests with the punch spiker.

If money wasn't so loose and leverage so available, the housing bubble wouldn't have happened. If the mortgage rates were even just 12%, the bubble wouldn't have been able to take off like it did.

And yeah, I would have taken a recession back in the mid-2000s rather than the much longer depression we have now.

No, I wouldn't want that either. Why do we need "monetary policy" at all? Seriously, it sure hasn't worked out too well for us.

Yes, but we don't control monetary policy. The Fed does. And monetary policy has worked out quite well for them.

Why do we need "monetary policy" at all?

Patrick,

Here's the thing: you can either seek price equilibrium (which can be very disruptive, this is what happened during the Great Depression) or you can seek monetary equilibrium. Price equilibrium has a lot of collateral damage (severe business disruptions, layoffs in the present environment) whereas monetary equilibrium is not so disruptive. It is hard to achieve monetary equilibrium though, you need unconventional monetary policies to achieve that.

Monetary equilibrium seeking also has unintended consequences: such as what if we had runaway inflation? can we control it meaningfully?

Riksbank Sweden controls monetary policy meaningfully: See this - http://macromarketmusings.blogspot.com/2011/06/what-successful-and-unsuccessful.html

But then they have only a single mandate: price stability.

Austrians seek price equilibrium, which is why gold is favored as money. If the money supply was constant, price always seeks an equilibrium.

see this: http://macromarketmusings.blogspot.com/2011/10/market-monetarist-or-austrian-you.html

As a saver, it is understandable that you want price equilibrium for houses. It is always a good thing to not pay interest and buy the house outright. But you have to keep the systemic impacts that may arise due to the severe deflation in the picture as well.

HousingWatcher says

Wouldn't aboloshing the Fed just mean trading in one devil for another one that could very well be worse? Do you want Michele Bachmann setting monetary policy?

LOL that's a valid observation.

Politicians controlling monetary policy is a very bad idea. Zimbabwe, Argentina etc. come to mind.

Independent Central bank is relatively better, if the bank can do meaningful intervention that can actually benefit the people more than the banks.

Dan8267 says

If money wasn't so loose and leverage so available, the housing bubble wouldn't have happened. If the mortgage rates were even just 12%, the bubble wouldn't have been able to take off like it did.

The analytical error here is confusing boom for bubble.

Lower interest rates and the 2001-2003 tax cuts did push up home prices -- this was the housing boom of 2002-2004.

2005-2007 was the bubble, and this had nothing to do with policy and everything to do with failure to police the "free market".

New forms of suicide lending (negative amortization, teaser rates, hidden YSPs, SISA/NJNA), appraisal fraud, the entire REIC not doing any fiduciary duty for buyers, the ratings agencies failing to police the back end.

All of that crap turned the boom into the bubble that killed us.

http://research.stlouisfed.org/fred2/graph/?g=30v

And yeah, I would have taken a recession back in the mid-2000s rather than the much longer depression we have now.

Easy for you to say, you didn't have Roberts and Alito standing ready to replace Rehnquist and O'Connor in 2004. I think the conservative system was going to pull ever lever it could to prevent W from hitting the same rough patch that his father did in '92.

austrian_man says

people have to be honest and not rig the system. Big Pharma rigs it today.

Drug costs are a pimple in the scheme of things. The dominant reason we're paying twice the Eurosocialists per-capita is hospitalization costs.

"As homeowners refinance, investors who bought mortgage bonds will be given back their money and will have little option but to reinvest at far lower yields. The transfer is the difference in yield."

I'm a little confused by this whole plan. If I purchased a 100k mortgage bond back in 2004, I highly doubt it would still be worth 100k, with all the losses the housing market has suffered with foreclosures. (Bonds CAN lose money, even the principal) I'm thinking it be worth 80k if that. Now if the this program is giving me back my original 100k, I'd be thrilled, and steer clear of investing in mortgage bonds again. Or are they forcing me to redeem my bond at it's current value and only giving me the 80k market value for the bond?

Deadbeats? What I've read so far indicates that the program requirements include being current on the loan to be re-financed. With the current politcal situation where both parties are not going to do anything against an important interest of the finance industry, the idea that Fannie and Freddie were going to put-back hundreds of thousands (or millions) of loans is unrealistic. This should work to reduce default guarantee payments by the Treasury (owners of F and F). This is not a subsidized principal reduction program. In the cold light of day, I doubt this will prove to be a huge success, since it is still going to leave millions of borrowers in a position where defaulting would be their best option. The term deadbeat doesn't even make sense in this conversation as most of these loans have provisions within them that clearly allow exchanging title of the property for the otherwise owed stream of future payments. It is not being a deadbeat to recognize that in some situations that that stream of future payments has much more value than the property does and the fact that these situations are very common right now is not the fault of the individual borrower. This program reduces the value of the future payments making the property relatively more attractive. If the nation doesn't want that, this is a bad program, but otherwise it is helpful, if not as big a deal as some were hoping for.

Additionally with the Euro's reputation badly damaged there is really no other currency around to make investments in. Couple that with the very weak growth off of a significantly reduced base of economic activity in this country and interest rates are going to be real low even without the Fed doing very much. The reason that savers are howling is that there is nothing much out there that will give them better yields - but that's symptom of the overall situation. When I read that savers are moving large sums into Portuguese debt or similar I'll be more respectful of their complaints.

I'm not sure why, but I'm really surprised by a lot of the responses here. I think this is a good plan, and long overdue.

People overpaid for houses. Now they're underwater. So what? Some people are happy where they are and will continue to pay for their overpriced house, which is good for the economy because bank losses deleverage our currency. Their problem is that their rate is, say, 6% and payments are tight.

The obvious solution for these people is to reduce their rate to current 4% rates. This reduces their payments and increases their spending capability. They clearly have no financial sense so this will go right back into the real economy.

But the banks won't refinance them because they can't - they sold the note as part of an MBS (mortgage backed security). So they would have to issue a new loan at more than market value to pay off the bonds, which their risk models won't allow.

Now the government housing entities are going to absorb these losses anyway, so under this plan they just tell these bondholders that they're not going to get their high rates because they're going to do the refinance. Again, so what? The people who bought these MBSes are part of the problem as well - right? They created the demand for the products that gave the banks more liquidity that allowed them to write more loans that drove up prices, etc. etc.

Once these higher-yielding bonds are redeemed, these investors ("savers" in the parlance used in this thread) will now have cash that they need to put to work. Why is freeing up cash a bad thing? Maybe this time, that money will go to something more productive than some overpriced box rotting in a field.

The Fed should be abolished.

Yes, and don't forget poverty, starvation, global warming, corruption, and all crime should be ended too.

Seriously though, I don't totally disagree, but global finance is complicated, with the dollar as the reserve currency.

If the fed were to be eliminated, or changed, the time to do it would be either when times are good (also the time to balance govt budgets), or after the financial Armageddon, when everything is being reassembled from scratch. Although I certainly hope that doesn't happen.

Bellingham Bill says

New forms of suicide lending (negative amortization, teaser rates, hidden YSPs, SISA/NJNA), appraisal fraud, the entire REIC not doing any fiduciary duty for buyers, the ratings agencies failing to police the back end.

True. IT's almost understandable that the average idiot might feel real estate will always go up, and that they better get in now or they never will. But On the lender side, and the securitization side, the fact that they lost all sense about what they were doing, or the risk (to others) as well as themselves is the amazing part.

It's a pretty darn good example of how humans can fuck themselves by believing whatever they want to believe. That is believing whatever is in their own personal best interest is fine for us all.

Man a lot of you have it wrong. Rates are not influenced by how much saving is deposited in a bank or demand for loans ( although thats how it should be). Currently the way the system is set up banks can borrow to infinity from the fed at practically 0%, which is called the fed rate and is set by the fed. If the fed raises the fed rate banks have to pay more therefore they will raise the rate it charges borrowers. It don't matter if the bank has any depositors with cash. Furthermore there is something called fractional reserve banking, google it! you are doubting this, think about it. The average savings per person is like $1000. Compared to how many outstanding debt there is. I mean I hate to burst your bubble but that's why we have "run on banks". Because banks don't have the money they lend out. It doesnt come from deposits. It comes out of thin air. On top of that all the money (liquidity) the fed has given to banks to lend out isn't being lent out cuz the fed pays banks interest to keep it in it accounts. So banks are happy to just let it sit at the fed and collect interest. And the rabbit hole gets deeper. Every time money is printed out of thin air it debases the currency. The more of something the less value it has. This holds true for dollar bills, greenback, fed note, whatever you want to call it. It's called taxation via inflation. Whenever the fed buys tresuries to fund government spending guess who pays for that? Everyone holding and recieving income in $USD's.

The question is - Usury, Capital? Shit I guess thats where all the Bed, Bath and Beyond and Linens and things. Room's to Go, Macys come from. I know I have at least 8 of each in my town. Labor from loan. Built all of these malls and filled them up. Bonded servitude staff's them.

I went to the grocery store yesterday. I don't know if its what I write or my writtings. But fucking people were heading in my direction all over the store in a "not so nice way". Like fucking zombies. That said I am sure some of you have had to experince some dodging yourselves. Not to worry. It's a little painful, true the mumblings, laughter. Your general over all uncomfortable feeling. Thing to do is not get upset. Laugh a little yourself at the bonded, debt ridden lackey's. I hate usury and bonded servitude (they should give out by the day and not make you wait 2 weeks they own your nights, too sweat and worry.) I always will hate those things and despise the people that are the usuor's. Screw them. LET MY NEIGHBORS GO

Eric377 says

Additionally with the Euro's reputation badly damaged there is really no other currency around to make investments in

Swiss Francs, baby!

Philistine says

Eric377 says

Additionally with the Euro's reputation badly damaged there is really no other currency around to make investments in

Swiss Francs, baby!

You may want to try to keep up:

http://www.huffingtonpost.ca/2011/09/06/swiss-national-bank-pegs-_n_949887.html

Better link:

http://www.guardian.co.uk/business/2011/sep/06/switzerland-pegs-swiss-franc-euro

I think these low rates are helping to ruin the economy instead of helping it. When savers get no return they have less money to spend into the economy. Also many of them will try to save even more to make up for the lack of return.

Also, trying to prop house and stock prices with super low rates has been a big failure. Against the fed's massive will (and ego), prices have come down in most areas to prebubble levels (about 2001 prices). The low interest rates have only slowed the desent creating terrible damage (more foreclosures)on the way down. In my area I saw houses that sold for $400,000 in 2007, foreclosed and resold for $350,000 in 2008. Then in 2009 it was again foreclosed and resold for $300,000. And in 2011 foreclosed again and sold for $200,000.

Now, no one can know what the real asset prices should be until interest rates normalize.

Bernanke and crew went to Princeton, Yale, Harvard, etc. and this mess is the best these "smart guys" can come up with?

austrian_man says

Ron Paul is criminally insane on health care (just let the uninsured die, or rely on charity, which is the same thing).

Ron Paul also naively assumes that the people of America have high moral character! Which is why he thinks government interference in health care will not work.

Problem is: big or small government, for anything to work -- people have to be honest and not rig the system. Big Pharma rigs it today.

They can only rig it as long as there is huge government backing the money and loans. That goes away, prices will drop significantly.

FED has got to be audited and removed, they haven't done anything right.

I spent my entire life living below my means, saving and investing prudently, avoiding debt and repaying what debt I took on in as short of time as my finances would allow.

Through thrift and sacrifice, I have been able to accumulate a reasonable nest egg.

However, since I started planning for retirement in the 1980's, my plans have been predicated on the ability to earn a relatively risk free return of about 6%. Starting with Greenspan and continuing today, the FED has systematically transfered billions if not trillions of dollars from Savers to Spenders, and ultimately to the Banksters in an ongoing effort to keep the economy on life support. Today, savers and particularlyprudent retiree's, soon to be retirees or retiree wannabes are literally being starved to death to support the Commercial and Investment banks.

I am surprised that "the Grey Panthers" haven't joing the OWS crowd to express outrage at this travesty. I suppose with CD rates at 1%, none of us can afford the gas to get there.

Spokaneman says

However, since I started planning for retirement in the 1980's, my plans have been predicated on the ability to earn a relatively risk free return of about 6%.

Where in the hell did you get the idea that you could earn a risk free return of 6%?? That's idiotic.

You should be concerned with your inflation adjusted return which has never been 6% risk free..

Spokaneman says

my plans have been predicated on the ability to earn a relatively risk free return of about 6%.

Spoken like a true leech. For you to get 6% someone has to pay 6%.

Gentleshinobi says

Because banks don't have the money they lend out. It doesnt come from deposits. It comes out of thin air.

No, it comes out of deposits, that's what the "fractional" part of fractional reserve means. The problem with fractional reserve lending is that money can exist as check money in two accounts.

Non-fractional reserve banking would require bank accounts to be locked down like CDs.

Hey tatupu70...I couldn't agree more! I must have missed Spokaneman's complaint about his Portuguese debt. But seriously, we are in deflation. Getting 1% is not bad when many "nearly riskless" investments (like CA housing, perhaps) have been returning maybe -10%.

Nothing wrong with earning interest...that doesn't play out in the arab world but muni bonds certainly don't hurt. Towns/cities get money for projects that they wouldn't get the money otherwise and the investor gets a largely tax free return (granted it isn't that high).

The problem comes down to a few concepts

1) Debts are fixed but assets are variable

2) Privatizing the gains but socializing the losses.

tatupu70 says

Where in the hell did you get the idea that you could earn a risk free return of 6%?? That's idiotic.

Tax lien certificates are like that. Either the person pays off the note and the percentage or the investor gets the house. Either way there is a net gain. Now there are some ways to tell if someone is more likely to pay it off but that should be examined prior to the auction. The percentages can easily go well beyond 6%.

Low interest rates as a concept only help temporarily. It is better to pay a higher interest on a lower priced item then a lower interest on something more expensive. A Camry at 6% is cheaper than a Jaguar at 1%.

mdovell says

Low interest rates as a concept only help temporarily. It is better to pay a higher interest on a lower priced item then a lower interest on something more expensive. A Camry at 6% is cheaper than a Jaguar at 1%.

If those were your only two choices, of course. The real world doesn't work like that, however....

mdovell says

Tax lien certificates are like that. Either the person pays off the note and the percentage or the investor gets the house. Either way there is a net gain. Now there are some ways to tell if someone is more likely to pay it off but that should be examined prior to the auction. The percentages can easily go well beyond 6%.

I know very little about tax lien certificates, but I can almost guarantee that they don't offer risk free return of 6%+....

Everyone needs support when they are very young. And everyone gets old. The system exists so when you are no longer able to be productive you can still have your dignity. If you pay into the system it might pay you back even if they have to print it. The young provide support services for the old primarily because only they have the ability. And by design, the young have a lack/need of money. It can't work any other way, unless you want a barbaric society. What I find appalling is those of all ages, that through corruption, take millions and billions for themselves while producing nothing of value to others. And laws, that they pay politicians to enact, allowing them to keep the ill gotten gains.

bgamall4 says

Ron Paul voted against the repeal of Glass-Steagall, but recently came out against the law entirely. He wants the casino to fly unhindered!

I'm not going to claim that I can read his mind, but a sovereign has every right and duty to protect its currency; this is what Glass-Steagall provides. But in a monetary system based on a hard currency without leverage such protections may be unnecessary.

Eric377 says

Deadbeats? What I've read so far indicates that the program requirements include being current on the loan to be re-financed.

Yes, this was discussed on NPR this morning. This is only for underwater Fannie/Freddie loans (fewer than 50% of all underwater loans) where people are at least 6 months current. As a result, all the loans are already federally backed, so if this prevents mass defaults, it's actually helpful. That makes the program less objectionable than some of the other programs.

http://www.npr.org/2011/10/26/141712536/how-and-who-does-new-refinancing-rule-help

Spokaneman says

However, since I started planning for retirement in the 1980's, my plans have been predicated on the ability to earn a relatively risk free return of about 6%.

Well there's your first problem -- bad assumption. History isn't an indicator of future performance, and interest rates were quite high in the 80s.

Zakrajshek says

Bernanke and crew went to Princeton, Yale, Harvard, etc. and this mess is the best these "smart guys" can come up with?

Imagine what would have happened if we let the dumbasses try.

Philistine says

Swiss Francs, baby!

Yes, because the Swiss economy is doing so well... As cc0 said, you haven't been following the news very carefully. The Swiss franc is now pegged to the Euro. Their biggest problem was that the Swiss franc was getting way overvalued as a safety haven for the Euro. It's not a good situation because it's hurting their exports. The Swiss government certainly doesn't have the resources to back it up either.

On this mortgage program there is a rush to judgement in a lot of folks right now and I think it mostly is being a manifestation of nervousness over the possibility that the taxpayer might eventually splurge on subsidized principal reductions. I'm getting less nervous all the time over that: this has been an obvious goal of many folks for over 2 years now and if it hasn't gotten traction yet I doubt it ever will. But it is still being talked about a lot so it is on people's minds. This program sounds should actually marginally reduce agitation for principal reductions as it is going to make it easier for some borrowers to make sense about not defaulting even at some moderate level of negative equity. I guess the main thing that Fannie and Freddie will give up would be the right to put back defective mortgages that are re-financed. But this happening in a big way on Sec. Geithner's watch is way dubious....that's exactly what his 12/24/09 announcement concerning the uncapped nature of the Federal assumption of Fannie/Freddie losses was telling us. It just stands to reason that the risk of default on a >100% LTV debt is lower at 3.5% interest than 5.9%. Of course with this crew it bears studying the details, but an immediate negative reaction seems unjustified.

Eric377 says

I guess the main thing that Fannie and Freddie will give up would be the right to put back defective mortgages that are re-financed.

This is a very important right, actually. I'd love to know the effect on this, especially since we're now seeing lawsuits and settlements based on this kind of fraud committed my banksters.