The dollar is getting crushed over last week or so. I know Ben is trying to prop up the economy, but doesn't this seem like 4 or 5 years ago when things were about to get bad and the fed just kept trying prop up the markets? It ended up shooting up oil and then we had high commodity prices and a crashing market. Obviously we don't have a bunch of worthless assets like last time, but at what point with the Fed stop pumping up the markets or is it even possible?
Oil will get expensive and that is going to hurt. But a lower interest rates promote investment, a lower dollar encourages export, inflation reduces the effect of today's debt. Probably the #1 thing it helps though is the #1 thing that got into this deep hole, housing values. It's most Americans largest and most important investment, the one that most effects the middle class. If you can restore some home values you give a broad lift to consumer confidence and buying power. Now, here's Northside witht he details:___________________
Record low mortgage rates have done very little to get demand where it needs to be for any sort of housing re-inflation. Not sure why it would be any different this time. The issues in the housing market are too complex and run too deep. I think the only long-term solution that doesn't just kick the can down the road is letting home values correct to their historic norms. Not sure whether it's better to draw that pain out over a decade or just over a few years.
Federal Reserve purchases of mortgage-backed securities (MBS) must signal either concern over mortgage defaults, decreasing demand for mortgages, poor US debt yields or poor employment prospects (unemployment iand underemployment). However, why would anyone want to encourage house purchases through QE for an underemployed workforce? Trickle-down QE doesn't exist. I just don't see the logic behind such low interest rates to the extent that a central bank should buy such large amounts of securities (so many times) almost entirely for the banks' gain. People do not plan on purchasing a house because interest rates have reached historic lows. People purchase houses when they get married, have kids, have a good job, have savings for a down payment, etc. Instead, in this market, young folks are delaying marriage, delaying having kids, believe they have poor career prospects, have very little savings, etc.
The dollar has been dropping in large part due to happenings in Europe - as the ECB has taken taken action to stabilize things there, the Euro rises, the dollar drops, and stocks go up. When there's panic there, the Euro drops, the dollar rises, and stocks go down. This has been going on for a few years now.
man i really suck....what was it just 2 months ago when people were freaking out about the euro dying? i wanted to put on a trade then but just never really got decisive about it even though everything was indicating a bottom. now a couple months later euro has skyrocketed and dollar has dropped. it's a seesaw. probably not a top yet in this euro but maybe if we retest 1.32 versus the dollar then it would be a good time to buy dollars.
FIFY Oh, the folly of looking at the world in terms of C+I+G+NX. But yeah, I look forward to QE4, QE5, and so on. One of these days it'll work!
Why on earth would anybody determine that a decade of a depressed economy more desirable than a few years?
Stimulating demand (inflation) in the housing market restores some of the trillions of dollars of home equity lost to the Average American. It boosts credit and consumer confidence. Mortgage lending, especially new home construction, is one of the ways wealth is created out thin air. This action is one of the few things that are actually possible to do, especially with Congressional gridlock. If the US nets 3% on home loan obligations with money it borrows at 1%, isn't that just good business? Doesn't that actually help pay down the national debt? Especially if it also promotes taxed income? And, I think we can print a lot of money without producing a lot of inflation because so much of that cash is held permanently overseas, by foreign suppliers and US corporations holding money outside of US taxes... but I'm not really smart enough to understand the issue. True worldwide money competes for resources and products but it doesn't seem to effect our domestic market so much where we produce our own food, homes and automobiles for domestic consumption.
I'm referring to a softer landing for home values over a longer period of time most likely with government intervention, or and approach where you just rip the band-aid-off by letting home values free fall to where they should be. I imagine there's pros and cons of each.
What other methods of inflating house prices do you recommend? Other than lowering interest rates, which can't really go much lower.
I'm not an expert, just about semi-knowledgeable. But freeing up money to mortgage lenders is good. I would like to see some way to write down equity values on underwater loans in the sense that if we can give direct relief to banks we should be able to give direct relief to people. The practical problem is that mortgages are 'owned' by a million entities, there is no way to decide how to portion the effort. Maybe there could be a federal short sale/refinance program where people can take a capital loss deduction off their future income tax. Too complicated, too little, too slow though. And it would depend on Congress doing something so that's out. This is a recovery from a greed driven boom/bust. Mortgages, the rock on which the US was built, were exploited as a political and economic tactic to keep the fires of profits and happy electorates burning. Like Tulips, the '29 Stock Market, Dotcom exuberance and natural gas fracking it will probably just take a decade or more to dissipate.
Printing money is inflation. Houses are not demanded because of historically low interest rates. The Federal Reserve acts as a brake: to prevent crashes and accidents in the finance sector. It inflates the money supply to insure against risk and bad credit in uncertain times. The Fed must think we are in the begining of a recession, which I agree with; but I do not think it is a confidence crisis.
The average bull market is about 3 1/2 years historically, that's how long we are into this one. Booms take a disruptive agent (technologies, wars, legislation etc) to generate wealth, raising today's value on tomorrows expected results. When you get used to boomtimes anything but the boom is a recession. And the mortgage finance boom was about as pervasive as any you can imagine. A new energy, gas boom can't effect everyone everywhere at nearly the level as real estate. America is hooked on creating money out of thin air.
That's the second time you have used that phrase. Would you suggest money instead be created out of thick air?
Private industry and consumers are still recapitalizing. I read a while ago that the "mountain of cash" companies have is also attributed to very low borrowing costs. So they're doing both, stockpiling liquid money and issuing debt. Believe it or not, we're in a deflationary period. Other "surplus" nations are continuing to stockpile dollars while keeping their currency at a export friendly rate. This is a game of economic chicken, but if the dollar did deflate, a lot of American debtors would be in a worse world of hurt than they are right now.
The whole brouhaha over inflation is ridiculous namely for this reason. Yes, high inflation is to be avoided, but the simple fact is that deflation would hurt more than inflation. Look at American debt profiles and low savings rates. Inflation punishes savers, but there are precious few of those in America, and if 2008 and the consequences don't produce more, nothing will. Deflation punishes debtors---and there are a hell of a lot of those. http://globalpublicsquare.blogs.cnn.com/2012/02/16/why-america-spends-while-the-world-saves/
If I own 100 shares of stock that I bought for $1 and someone pays $2 on the open market for the same shares, my net worth jumps $100 like magic. Or, if a bank with $10,000 in deposits is allowed to use that as it cash reserve and turn around and make a loan for $100,000, $90,000 is created like magic. But if I own machinery and raw materials that I use to make an automobile out of that is real and tangible asset. Edit* or dig gold out of the ground that people want, or get oil and gas out of the ground, or grow food etc, It's much easier and faster to create virtual money but it is subject to more volatile change. The perception of the market changes and my $2 share falls to $.50 in a day. The maker of the loan goes under and the banks $100,000 asset becomes worthless. But once the car is made it will always have some real value. It's a lot harder to make and you have to compete with Kia but make a good car and you will stay in business. But in America, good steady stable income is never enough. People want to be rich, so our business leaders push the more volatile 'creation' type of economy that by the rule of the greater fool is almost always a Ponzi scheme that is doom to fail once the fools are enthusiastically on board. Everybody gets hooked on the easy money and when it ends, reality looks like a recession.
