Tag: interest rates

Is the Administration waking up to the predicament of the U.S. debt load?

Bloomberg relays the epiphany:

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

You don’t say.

Sorry folks, but China is already tired of buying Treasuries. The world economy is slowing drastically, which means the king of exports is feeling the pain too. And they’ve got plenty of their own to take care of.

I’m not sure which is scarier: the thought that China may run out excess capital at some point in the future, and be altogether unable to buy US government debt despite whatever politicking the US throws their way; or that while these bold statements about the ‘unsustainable’ government debt load are being made officials are endorsing the largest budget deficits in history.

Just another case of ‘do as I say, not as I do’? Or prima facie insanity?

A weeks worth of housing-related links

The first brush: Almost a Quarter of U.S. Homeowners Are Underwater – stats were taken from a report by Zillow.com.

Barry Ritholtz clears things up a bit – in reality, 33% of Homeowners w/Mortgages Are Underwater.

Meanwhile, the luxury market is beginning to suffer like subprime did two years ago.

But, UK homeowners are getting a free pass, and a free mortgage.

There is no zero-rate for US home buyers (0% is reserved for the banks), but rates are at all time lows. Is it a good time to buy, or is the market just in the second inning of a long-term demographic shift?

Joint Statement by Central Banks

The FRB:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

They got the “reduction in inflationary pressures” part right, but I’m not sure this is going to increase economic activity (unless you consider a few banks lending to each other to keep capital ratios in line for another 24 hours economic activity).

Personally, I believe jobs and rates partially decoupled from their “Econ 101” inverse relationship back in 2001. Then, rate cuts resulted less in job creation and more in speculation (mostly in the housing market). Sorry that yet more intermediaries (i.e. real estate agents, mortgage brokers, and investment bankers) may lose their “jobs”, but at this stage it might make more sense to let rates rise, setting off spectrum-wide price adjustments that turn stagnant real wage towards the upside.

U.S. Interest Rates & Inflation

Inflation is a nasty bug:

To reiterate, the last time Producer prices were this high, the Fed had rates up in the double digits — not at 2%…

Here’s a chart of the prime lending rate (as published by the WSJ) during “modern economic times” (each color change represents a rate change – click for larger view)…


I’ll bet few running around today remember how ugly things were in the midsts of that mountain-in-the-middle. But Paul Volcker was scrambling (and let’s note that he has been more vocal as of late too).

Producer prices have been rising for a while, but they held off passing on costs to consumers. That game is over. So, the highly leveraged are getting killed by plummeting home prices and the savers are getting killed by just about everything else.

And you can thank your Federal Reserve for that.

When the housing boom got started

The open question is why?

The consistent sound bite seems to be “the housing boom that began in 2001…as a result of subprime mortgages”. Even today, Paul Krugman gives cover to Fannie Mae and Freddie Mac while trying to pin the problem on sub-prime post-millenia. It’s hogwash. As the chart below shows, the boom really began in 1995:


I initially graphed homeownership against the S&P 500 for shits and giggles, but it does depict how liquidity rolls. What happened in 1995 to set off the explosion?


The 30-year fixed mortgage rate dropped significantly during the early ’90s, but was accompanied by little corresponding uptick in homeownship. Rates rose just over one percentage point in 1994, but soon corrected themselves.

Yet beginning in 1995 homeownership skyrocketed. Earnings followed, and so did stocks. The 2001 recession, triggered by the internet stock plunge and exacerbated by the the 9/11 terrorist attacks, took a swipe at the S&P. The Fed began hammering short-term rates to save people’s IRA accounts, and the byproduct was a continued run-up in housing on the back of more exotic mortgages combined with increasingly lackadaisical lending standards.

The juggernaut was long since in motion. But why?

UPDATE: I dug this up, which seems to claim affirmative action was partially to blame. While the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 did provide for certain low-income mandates and give additional oversight powers over the GSEs to HUD, it seems the actual amount of loans purchased by the GSEs nary broke 1% of their total in any given year since. So while the GSEs touch almost half the overall mortgage market, it’s difficult to see how affirmative action could have gotten such a big ball rolling.

An exercise in discontinuity

From The Big Picture comment section:

When the bank for the British royal family (RBS) is “forecasting” continued credit market troubles … when the European Monetary Union is essentially declaring war on the Fed with threats to drive the exchange rate value of the dollar into the depths of hell … you must appreciate how these are, indeed, extraordinary times in which we are living.

“Declaring war?” Sounds like a lack of cooperation to me.

Fed to start raising rates soon!

Headlines are sometimes veiled in sarcasm.

In the world according to this Bloomberg columnist, the Fed might start raising rates again really soon.

Sure they will.

In other news sure to make you feel warm and fuzzy, pharma company Bristol-Myers Squibb discloses they’re taking a hit from investments in sub-prime mortgages. And bond insurance big boy MBIA says it’s keeping its triple-A rating. S&P has other ideas.

UPDATE: I noticed the same Bloomberg columnist was recently tooting the horn of banking stocks. Of course, anything can look profitable when the SEC endorses your smoke and mirrors approach to loss disclosure.

Preliminary conclusion…the fed won’t be raising rates by summer’s end, and I wouldn’t own a banking stock if someone paid me to hold it Japan-style.

UPDATE 2: At least the analysts are getting a clue about those bank stocks.

Topping off a bubble with more bubbles

Negative real interest rates didn’t help Japan much either.

Rate cuts, history, and panic

Sticking to hard data, this morning’s Fed Funds rate cut of 75 basis points was the deepest on record. Who’s record? The Feds own record, dating back to 1971.

Note that there are several occasions where the Fed raised rates (either the discount or fed funds) by 3/4 of one percent: the summer of ’73, September of 1980, and November of ’94. But they never lowered it so significantly in one kick.

The Dow recovered roughly 2/3rds of its opening losses, ending the day down 128.11. I can’t remember such a harsh reaction on the part of equities to a rate CUT. It was hardly graceful.


More Fed Opinions

The Economist calls the latest move desperation. With only a week to go until the next meeting, a 75 bip cut might make an investor think the Fed knows plenty they don’t.

UPDATE: It’s funny that oil for March delivery had punched 7-week lows when the Fed made the announcement – I’m not sure how long that will last now. You’d almost think the Fed wants $5 a gallon gas.