0
0

The Fed vs Savers


 invite response                
2009 Mar 22, 1:25pm   13,939 views  108 comments

by Patrick   ➕follow (59)   💰tip   ignore  

fed

I just don't get how the Fed's shameless murder of the free market for Treasury bonds influences what banks are willing to pay me in CD interest.

I understand that the government issues Treasury bonds, and then "primary dealer" banks buy them from the government at a discount from 100%, paying the government less than face value now (say 95%) in exchange for a promise to get paid back 100% of the face value later. When the Fed wants to lower interest rates, it buys those bonds from the banks, driving up the price of the bonds up closer to 100%, and therefore driving down the Treasury bond interest rate, which is the difference between the bond price (say 98% now) and 100%. The Fed creates cash out of nothing to pay for the bonds, which is disturbing.

When the bonds mature, it all cancels out: the government pays the bond holder (often the Fed) 100% of the bond face value, and the cash disappears back into the bowels of the Fed, whence it came. That part is nice.

Now can someone tell me exactly how that influences the rate banks are willing to pay me on a CD? I know I'm getting screwed here, watching my interest earnings fall so that some idiot can pay a lower interest rate on his McMansion's adjustable mortgage. The money I don't get in interest is the money that fool doesn't have to pay. I just want to know the mechanics of the connection between Treasury bonds and mortgage rates.

Patrick

#housing

« First        Comments 58 - 97 of 108       Last »     Search these comments

58   justme   2009 Mar 24, 1:43pm  

Seems to work again?

59   OO   2009 Mar 24, 1:57pm  

The fall in housing price is too small compared to the "fair value" before the runup. Since 2001 alone, the houses in "fortresses" have gone up at least 50%, if not more, and 2001 is not even fair value, so far they have come down what? 10%, 15%? Oakland came down 70%, but would you want to live in Oakland even if it is free? If you save money and park in CD, it will still be hard for you to save enough dp because now we are looking at 25%. Anything minimally decent in Bay Area still cost at least $800K, and how many working couples can easily save $200K dp aside from 401k and other IRAs?

Back in mid 90s, similar home that cost over $800K were selling at $400K or so, so any hardworking double income couples who save can have a fair shot of buying in a decent house in a decent neighborhood and achieve their share of the American dream.

When the government starts dicking around with mortgage rate and the value of the currency, saving alone cannot get you that far at all. You could be saving for years yet still lagging behind in terms of purchasing power.

60   tannenbaum   2009 Mar 24, 2:01pm  

CNBC's Jim Cramer says 99 days from today (June 30th) until the official "housing bottom" and CNBC's Larry Kudlow was pointing to this economic "mustard seed" of a bottom that was released by the government today:

http://www.ofheo.gov/media/hpi/MonthlyHPI32409.pdf

Look at Figure 3 especially.

61   FormerAptBroker   2009 Mar 24, 2:45pm  

Patrick Says:

> I just noticed the blog part of the site was down, and that
> there were no comments from 10am to 7:30pm. Anyone
> have a problem getting to it today, or was it just down for
> a moment?

I checked in twice today before noon and after 6 pm and I could not see the comments either time...

62   tannenbaum   2009 Mar 24, 3:14pm  

This article is particularly relevant since it discusses San Francisco:

http://news.yahoo.com/s/nm/20090325/us_nm/us_usa_economy_housing

63   Malcolm   2009 Mar 24, 3:57pm  

You beat me to it, my brother just sent me the same link. Great article isn't it?

64   tannenbaum   2009 Mar 24, 4:03pm  

Yes, good article, but short on specifics. I have a hard time believing that the rent for a "tiny" San Francisco apartment is the same as that of a mortgage for a 4-bedroom Victorian unless the couple put down an extremely (to put it mildly) hefty down payment. There was no mention of any of this info - the sales price, down payment, previous rent, nada.

I do, however, have no doubt that renting is likely more expensive than buying in the cheaper and otherwise more undesirable parts of California.

65   tannenbaum   2009 Mar 24, 4:11pm  

Actually, the article is more confusing the more I read it. She allegedly comes out "even" renting her apartment versus buying her home, but later it says that renting her (presumably) new home is the same as the mortgage payment on her new home. It is probably the latter, but the article is confusing nonetheless.

66   DinOR   2009 Mar 25, 12:22am  

Headset,

True, but you live outside of the high cost areas where 'saving' still may actually translate into financial success. OO points out that many of us could be saving for years and really just treading water.

My point more broadly is that the various asset classes have merged in terms of risk to reward so there's very little distinction any more. We've had numerous internal emails circulated that warned of nearly insolvent banks offering above market rate CD's to shore up their reserves!

The Auction Rate Securities ( peddled as a cash substitute ) are essentially a bust and we had several money markets go under. Truly, I wish it wasn't this way and I realize it's become popular to slam equities but not everyone that participates in markets is looking for wooing, casino action or is of need for drowning sorrows.

67   FormerAptBroker   2009 Mar 25, 1:04am  

tannenbaum Says:

> This article is particularly relevant since it discusses
> San Francisco:
> http://news.yahoo.com/s/nm/20090325/us_nm/us_usa_economy_housing

This article was obviously written by a Real Estate agent hoping to drum up business.

It leaves out a lot of info such as where the roomy four-bedroom Victorian home is located (my guess is in a gang area of Vallejo).

It says: “San Francisco was also one of the worst-performing
cities in terms of year-over-year declines in December, with
home prices dropping an average 31.2 percent.”

It was the “San Francisco MSA” (with most sales in crappy areas of the East Bay) that dropped 31% not the “city” of SF.

It then says (without adding that Carmichael is a Realtor desperate to drum up business to avoid getting a job at Starbucks to pay the bills): “Carmichael said that
in California's foreclosure-plagued Inland Empire, Riverside and
San Bernardino counties east of Los Angeles, the average monthly
rent for an apartment is $1,157 and the average after-tax monthly
mortgage payment on a median-priced single-family detached home is $971”

Here is a link to over 60 San Bernardino rentals ranging from $485 to $800.

http://www.apartmenthunterz.com/california/apartments/San-Bernardino/San-Bernardino.html

As a landlord that rents apartments in Sacramento (a garden spot compared to San Bernardino) I can tell you that there is no way the “average rent” in SB is anywhere near $1K (I just did a quick search for “luxury” apartments and didn’t see any $1K + rents)

68   tannenbaum   2009 Mar 25, 2:23am  

Good points FormerAptBroker. If renting is still even somewhat cheaper than buying in places like Sacramento and San Bernardino, there is no way in hell that buying is cheaper than renting in San Francisco and other "fortress" areas. You are also probably right that the property that the couple bought in the article likely isn't ven in SF proper (didn't even cross my mind). Even if buying is supposedly cheaper now, tell me landlords won't be lowering rents in tandem.

Of course, people read these things and just accept them at face value. The same article is prominently displayed on CNBC's home page:
http://www.cnbc.com/id/29875913

69   justme   2009 Mar 25, 3:17am  

Tannenbaum,

Do you remember the CBS5 "42 offers" misinformation campaign from about 2 weeks ago. That one was also thoroughly de-bunked.

What is the leson of all this: The realtor portion of the REIC sleazeballs are back in full propaganda mode, after laying low and trying to let banks and mortgage brokers take all the blame from the bubble.

70   OO   2009 Mar 25, 3:42am  

Just heard from a colleague whose dad is in the construction business that the Sunnyvale downtown refurb project is gone. I am talking to about the Mathilda Ave project that involves blocks of condos and shopping.

I wonder when the condo buyers will start to get their deposit back.

71   DinOR   2009 Mar 25, 3:43am  

justme,

Right my friend! And it never should have been off them for a minute. Of course the MB's were in Full Bunker Mode for a good year too. Then again, if the realtwhores can drum up business for them, they'll be only too happy to fill out the credit application!

72   OO   2009 Mar 25, 3:46am  

Sunnyvale downtown will be a gigantic eyesore for years to come.

I heard that the project was internally halted by the committed retailers a couple of months ago, but they still paid to get the facade work going on (with no crew working on internal refurbishment), hoping that the credit market would improve. They eventually pulled the plug.

73   Peter P   2009 Mar 25, 3:57am  

I wonder when the condo buyers will start to get their deposit back.

I thought they have not started selling them yet.

74   justme   2009 Mar 25, 4:00am  

Ritholz is arguing that we should not overly be concerned with the 165M nonuses versus the 180B AIG bailout. I disagree.

**

If someone went to BankOfAmerica and robbed their main vault for 180B in cash, and then later agreed to return all the money except for 165M they would get to keep for being such nice and reasonable bank robbers, would we then also say that the 165M was peanuts or fleas on the elephants behind? Or would we say that we were rewarding bank robbers for robbing banks?

I know which view I think is reasonable. If we do not confiscate the 165M, we are basically saying the following: Hey, you’d better lose a really HUGE amount of money, because then we will ignore that you are keeping 0.1% of the losses as a premium for your criminally reckless activity.

Yeah, that’s the ticket.

75   OO   2009 Mar 25, 4:01am  

Really? Then good news for the prospective buyers. I saw some sign boards there so I thought they presold some units already.

76   Peter P   2009 Mar 25, 4:04am  

Really? Then good news for the prospective buyers. I saw some sign boards there so I thought they presold some units already.

I don't know...

They mis-timed the market badly.

77   Peter P   2009 Mar 25, 4:05am  

I am against the bailout. But I do not want the government to start busting private contracts out of populism and smugness.

AIG employees *SHOULD* get their bonuses.

78   OO   2009 Mar 25, 4:08am  

I was pissed when Sushi Maru (originally in Town Square sunnyvale) had to move to Milpitas because of this Sunnyvale Santana Row project. It was like 2.5 years ago.

Now 2.5 years later, Sunnyvale downtown will be left with a permanent scar without knowing when this scar will heal. Probably not for another decade given where we are heading towards.

79   OO   2009 Mar 25, 4:09am  

Once AIG is taken over by the government, its contracts are government contracts, not private contracts any more. The government can do whatever it wants with a company it owns, as simple as that.

If AIG wants to set its own salary, it should return the government funding immediately, then I don't give a crap how much bonus it wants to pay out.

80   Peter P   2009 Mar 25, 4:16am  

Once AIG is taken over by the government, its contracts are government contracts, not private contracts any more.

Not if the private contracts pre-date the government take-over, right?

81   Peter P   2009 Mar 25, 4:18am  

Sunnyvale Santana Row...

LOL!!!

The "real" Santana Row is fake enough. Why would people even want that?

82   justme   2009 Mar 25, 4:38am  

Santana Row in San Jose is the perfect Fake Tuscan (TM) Village. It get's suburban American chicks all hot and bothered. What can I say.

83   Peter P   2009 Mar 25, 5:01am  

No thanks...

I rather go to Westfield Shopping "Town"...

84   Peter P   2009 Mar 25, 5:04am  

BTW, I just got back from OC...

No sign of a recession whatsoever.

85   justme   2009 Mar 25, 5:06am  

Orange County? I have heard things are really bad in OC.

86   justme   2009 Mar 25, 5:13am  

BofA and Citi are already gaming the system of the Geithner plan:

http://www.businessinsider.com/it-looks-like-citi-and-bank-of-america-are-already-gaming-the-system-2009-3

Is there no real that the banks can only unload already existing holdings, as in holding that they already owned as of (say) 2009-01 or that they originated, or something like that?

87   HeadSet   2009 Mar 25, 5:48am  

justme says:

If we do not confiscate the 165M, we are basically saying the following: Hey, you’d better lose a really HUGE amount of money, because then we will ignore that you are keeping 0.1% of the losses as a premium for your criminally reckless activity.

I presume you know by now how Obama et al are seriously backpedaling about recovering those bonuses. No method, tax or otherwise, will be used to force repayment. We will just see some well advertised voluntary paybacks by a few, which I believe will be quietly reimbursed to those generous souls by some mechanism in the near future.

88   OO   2009 Mar 25, 5:51am  

The government is not revoking the contract, it is slapping on retro-active taxation, which actually is NOT UNconsitutional and NOT without precedents.

So as long as the government still pays out the bonus, yet at the same time slap on as much punitive taxation on it as they wish, I am all for the decision.

89   DinOR   2009 Mar 25, 6:05am  

"It get's suburban American chicks all hot and bothered"

Where is this place again?

"They mis-timed the market badly"

No way to argue that, but again, at any point in the economic cycle there are bound to be developments in mid-project! Sure it looks simply awful but I keep wondering when the Seek Shelter Siren would be sounded to everyone's satisfaction?

That would ensure everyone from corp. execs to young couples contemplating marriage could put their plans on hold and spare us 'their' embarrassment.

90   justme   2009 Mar 25, 6:08am  

HS,

That remains to be seen. I was simply speaking out against those who FAVOR or want to justify bonuses.

91   Peter P   2009 Mar 25, 6:30am  

I have heard things are really bad in OC.

How so? People still _look_ rich.

The hotel was packed. Restaurants were full.

I have seen more exotic cars in a day than ever:

Enzo
F40
McLaren SLR
Maybach 57S

Not to mention a pretty Gulfstream G550 at SNA.

92   Peter P   2009 Mar 25, 6:33am  

So as long as the government still pays out the bonus, yet at the same time slap on as much punitive taxation on it as they wish, I am all for the decision.

Taxation is bad enough. Retroactive taxation is just plain wicked. I will not wish that on my worst enemies.

How can you even advocate punitive taxation? That is the last thing we want to see. Do you want the government to decide who deserves what? I don't.

93   OO   2009 Mar 25, 7:25am  

DinOR,

Santana Row actually has a very interesting history.

It was built during the height of the dot com years from 1999(?) to 2001, and as you can already see, timed the market very poorly. In fact, as far as I recall, it was scheduled to launch right after 911.

So after 911, we were like, uh oh, is this place gonna go mid-project forever? It was about 75% finished at that point. Then, came the BIG FIRE that basically burnt down everything, so the developer recouped all its development expenses by the insurance company, how convenient. Interestingly, there was no charge of arson or even investigation, partially because leaving such a big project idle will be to nobody's advantage, that nobody obviously include the city. Then the developer started building again as the real estate bubble picked up, and this time on borrowed time and money, it was successfully launched.

Now I am going to predict a big fire that will burn down the half finished part of the Santana Row Sunnyvale. Or maybe not, because the project is not even 25% done.

94   OO   2009 Mar 25, 7:28am  

From wikipedia:

On August 19, 2002, during construction, the largest building at Santana Row (Building 7, "Santana Heights") caught fire. The fire eventually caused $120,000,000 in damages, and spread to at least 13 apartment buildings downwind of the shopping center on Moorpark Avenue, across Interstate 280. The main fire spread to five alarms, while the secondary fires required six alarms. It was the largest structure fire in San Jose's history.

Btw, I do remember that the original launch date was delayed from shortly after 911 to much later due to the economy.

95   justme   2009 Mar 25, 9:46am  

DinOR,

They are getting hot and bothered about all the luxury goods in the storefront windows. Santana Row would be much more useful if it was the other kind of hot and bothered, but alas....

http://www.santanarow.com/

96   justme   2009 Mar 25, 9:48am  

To put in another way. Santana Row is an "if I hang out here, I'm worth this much more myself" kind of place.

97   Peter P   2009 Mar 25, 9:59am  

In short, Santana Row sucks.

You know, I am an advocate of luxury goods. Still, I hate the people there.

And I wish food is better there.

« First        Comments 58 - 97 of 108       Last »     Search these comments

Please register to comment:

api   best comments   contact   latest images   memes   one year ago   random   suggestions