patrick.net

It has not worked before and it will NOT work again.

It should opposite. The idiots should be PAYING the savers in the form of high interest rates.

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

But in reality, we don't have a free market for interest rates. Instead, we have the Federal Reserve doing central planning of interest rates, and punishing responsible savers to bail out banks that made really stupid lending decisions.

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.

Instead, we have the Federal Reserve doing central planning of interest rates, and punishing responsible savers to bail out banks that made really stupid lending decisions.

But that's where the ideology is wrong. The Fed (or "FED" as teabaggers often say, probably because they think it's an acronym) does not engage in central planning. It has an influence on rates by setting its own rate and by buying and selling Treasurys, but it does not set rates.

Think about the indices you commonly use:
prime rate -- influenced by the Fed's rate but officially set by banksters who could determine that it should be more points above the Fed's rate (even if it's typically 3.00% higher)
LIBOR -- wholly set by banksters
Treasurys -- determined by auction, of which the Fed is merely one buyer

On top of those indices, private lenders determine what the spread should be based on risk.

The problem is that people treat things as absolutes. The Fed does not and cannot engage in central planning.

I know the Fed does not just announce what interest rates will be, but not sure you can cleanly distinguish between the banksters and the Fed. The Fed is owned by the biggest banks.

LIBOR was also recently accused of being set by corrupt means.

http://www.bloomberg.com/news/2011-03-15/ubs-says-u-s-is-investigating-possible-libor-rate-manipulation.html

How do you really know what % of Treasuries are bought by the Fed?

(just let the uninsured die, or rely on charity, which is the same thing).

That would take the gauranteed profit motivation out of health care and leave health care to practitioners and profesionals. With out the insurance administrative side, and finance investors expecting handsome profits on the back end. Health care would be a 9th of what it cost today. Charity would be a lot easier.

A scenario like this wouldn't sound so silly then...

" Hey let's all pull our money together and buy Uncle Harry a new Kidney, Ralph's Surgery Expo is having a sale on them for only 8K. "

While I think this might actually work if orchestrated correctly, it's just another bank bailout in disguise. The bond holders squeal about getting all their money back to reinvest in lower yields, but at least they're getting their money back to do with it as they like. Taxpayers will pay for the banks' refusal to underwrite properly and make sure the loans they gave out were sound.

I find it irritating that time and again people that either rent, or buy houses they can afford, or save are constantly left out of the equation. But even from a basic level its also irritating that its ALWAYS homeowners, and especially homeowners with kids that get non-stop handouts from tax write-offs to bailouts and other means to "save" them and often times save them from their own stupid financial decisions. That and the housing bust is referred to as a "crisis" when for the millions who stayed out of the bubble its more of a benefit.

My guess is that people who are stuck in homes with kids tend to what I assume be ideal consumers: They buy a house that more or less locks them down and then they start the same pattern of looking for the best schools, the safest cars, the best colleges... and the list goes on and on and on. But the key is to get em' to become anchored and to become predictable spenders whether its for mortgages, buckets of paint, soccer mom-mobiles, college, property taxes, and so on. That versus renters that can pick up and move, don't pay property taxes, don't make mortgage payments, or buy buckets of paint. So in other words its probably seen as more economically beneficial to help aid that money-spending machine- the US homeowner- versus encourage frugality and maybe even sensible spending habits.

I too don't see this really working. For one those that are in deep trouble won't likely qualify. The problem still remains that people grossly overpaid for houses, they can't afford them, and no amount of financial engineering will stop what must occur- a return to prices that make sense.

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.

I have no reason to believe that the Federal Reserve even attempts to serve the interest of the people or the U.S. economy. As they are a private cartel of bankers with no accountability, it is only reasonable to presume the Federal Reserve will gladly inflict mortal wounds on the U.S. economy in order to make a profit for themselves.

Why does anyone believe that Ben Bernanke or Alan Greenspan had any allegiance to the people of the United States?

edvard2 says

That versus renters that can pick up and move, don't pay property taxes, don't make mortgage payments, or buy buckets of paint. So in other words its probably seen as more economically beneficial to help aid that money-spending machine- the US homeowner- versus encourage frugality and maybe even sensible spending habits.

Ding, ding ding... we have a winner!

edvard2 says

The problem still remains that people grossly overpaid for houses, they can't afford them, and no amount of financial engineering will stop what must occur- a return to prices that make sense.

They are just trying to help more people on the fringes... For every 2006 home buyer.. There's probably an early 2004 home buyer that is just starting to feel the sting of approaching 20% underwater... That's gotta hurt.. you've been dutifully paying your mortgage for almost 8 years.. and are still underwater... I think anyone that bought in 2006-2007 has jumped ship... it's about saving those that are on the margins now.

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

But in reality, we don't have a free market for interest rates.

I sincerely doubt we have a free market for almost anything nowadays. American capitalism has always been about rigging the market.

Every once in a while, things get so bad that a progressive movement is formed out of sheer desperation. Seems that we are about at that point now. I wonder if the Occupy Wall Street movement will become a coherent progressive movement or just another Tea Party full of people frustrated but too dumb to understand why and how they are being fucked.

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.

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

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

I'm not sure I see the logic behind that one. As people get foreclosed on, debt levels are actually decreasing. And there is still lots of money out there looking for investments. Less demand for debt = lower interest rates. Which is what we're seeing. Interest rates should have been higher in 2007 when there was a huge demand for loans.

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.