ISF Logo   IS Forum
Forum Index Register Members List Events Mark Forums Read Help

Go Back   International Skeptics Forum » General Topics » Economics, Business and Finance
 

Notices


Welcome to the International Skeptics Forum, where we discuss skepticism, critical thinking, the paranormal and science in a friendly but lively way. You are currently viewing the forum as a guest, which means you are missing out on discussing matters that are of interest to you. Please consider registering so you can gain full use of the forum features and interact with other Members. Registration is simple, fast and free! Click here to register today.
Reply
Old 26th September 2012, 09:54 AM   #1
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Fed to buy mortgages?

http://www.cnbc.com/id/49018964/?Fed...to_Lower_Rates

This article says that the federal reserve is going to buy a whole bunch of mortgage backed securities, in an effort to drive housing prices up.


Am I misunderstanding something, or are they on drugs?
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 26th September 2012, 09:57 AM   #2
ravdin
Illuminator
 
ravdin's Avatar
 
Join Date: Oct 2005
Posts: 4,992
Yes- the beatings will continue until morale improves.
__________________
Take the risk of thinking for yourself. Much more happiness, truth, beauty, and wisdom will come to you that way. -Christopher Hitchens

Believe what you're told. There would be chaos if everyone thought for themselves. -Top Dog slogan
ravdin is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 26th September 2012, 10:52 AM   #3
Beerina
Sarcastic Conqueror of Notions
 
Beerina's Avatar
 
Join Date: Mar 2004
Posts: 24,412
It's been pointed out that under Bernanke the Fed has assumed a dual mission. It has always, since Volker, and then Greenspan, been about keeping inflation low so as to preserve the currency as a stable source of value.

Now it is also being used to try to manhandle the economy, something that is arguably at cross purposes, and is much more political.

Expect hard lessons to be learned.
__________________
"Great innovations should not be forced [by way of] slender majorities." - Thomas Jefferson

The government should nationalize it! Socialized, single-payer video game development and sales now! More, cheaper, better games, right? Right?
Beerina is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 26th September 2012, 12:56 PM   #4
kevsta
RBL CHeck Failed
 
kevsta's Avatar
 
Join Date: Jun 2007
Posts: 3,140
Originally Posted by Meadmaker View Post
http://www.cnbc.com/id/49018964/?Fed...to_Lower_Rates

This article says that the federal reserve is going to buy a whole bunch of mortgage backed securities, in an effort to drive housing prices up.


Am I misunderstanding something, or are they on drugs?
you have it completely correct. drugs.
__________________
"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous
kevsta is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 26th September 2012, 04:01 PM   #5
Sceptic-PK
Illuminator
 
Join Date: Jun 2010
Posts: 3,031
Originally Posted by Beerina View Post
It's been pointed out that under Bernanke the Fed has assumed a dual mission. It has always, since Volker, and then Greenspan, been about keeping inflation low so as to preserve the currency as a stable source of value.

Now it is also being used to try to manhandle the economy, something that is arguably at cross purposes, and is much more political.

Expect hard lessons to be learned.
If you actually look at central bank “mission statements” they have always been about more than just inflation. For instance, my central bank:

Quote:
The Reserve Bank of Australia is Australia's central bank. Its duty is to contribute to the maintenance of price stability, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet a medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation's banknotes. The Bank provides selected banking services to the Australian Government and its agencies, and to a number of overseas central banks and official institutions. Additionally, it manages Australia's gold and foreign exchange reserves.
http://www.rba.gov.au/about-rba/index.html

The Fed's:

Quote:
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
https://www.chicagofed.org/webpages/...background.cfm

Now we can all argue about how successful (or not) these goals are/have been, but that’s not the point of what central banks are designed to do.
Sceptic-PK is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 26th September 2012, 06:33 PM   #6
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
But what the Fed is doing in this case is trying to drive up housing prices by purchasing securities without regard to the risk of these securities. By doing this, they are ensuring that banks can write large loans without worrying about risks. Banks are therefore willing to lend more, which means people who shouldn't qualify for loans, will.

Has this been tried before? I think I read about this happening once before.

Ahhh....but this time there is a key difference. Since this time the Fed is buying the securities, they are being purchased with newly printed money. That will work out much better than last time.

Quote:
Expect hard lessons to be learned.
Teacher, can I skip this lesson? I already read the book, so I know how it ends.
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 26th September 2012, 07:03 PM   #7
balrog666
Eigenmode: Cynic
 
balrog666's Avatar
 
Join Date: May 2004
Posts: 2,974
Originally Posted by Beerina View Post
It's been pointed out that under Bernanke the Fed has assumed a dual mission. It has always, since Volker, and then Greenspan, been about keeping inflation low so as to preserve the currency as a stable source of value.

Now it is also being used to try to manhandle the economy, something that is arguably at cross purposes, and is much more political.

Expect hard lessons to be learned.

Right now, it is all about preserving the worst parts of the banking system at the expense of the currency.

May the good times roll!
__________________
A person who won't think has no advantage over one who can't think. - (paraphrased) Mark Twain

Political language… is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. – George Orwell
balrog666 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 26th September 2012, 11:29 PM   #8
kevsta
RBL CHeck Failed
 
kevsta's Avatar
 
Join Date: Jun 2007
Posts: 3,140
Originally Posted by balrog666 View Post
Right now, it is all about preserving the worst parts of the banking system at the expense of the currency.

May the good times roll!
close.

it is, as it always has been, about frantically trying to stop the ongoing deleveraging of the shadow banking system
__________________
"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous
kevsta is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 27th September 2012, 10:51 AM   #9
ServiceSoon
Graduate Poster
 
ServiceSoon's Avatar
 
Join Date: Oct 2007
Posts: 1,087
The stated purpose of the Fed buying mortgages is to lower the interest rates, thereby lowering umemployment. I read an article a few days ago that explained that the banks are taking advantage (higher profits for banks) of the increased spread between mortgages and bonds so the mortgage rates have not declined to where they could be. The article was called Enigma of mortage rates or somethig to that affect. I don't fully understand how this works. Please explain if you can. Basically a bank sells a mortgage with an interest rate of 4%, then sells into the bond market that pays 3.25%. By my math, which is the universal language, they would lose .75%. The difference is 3.25% now rather than 4% over 30 years, but a loss none-the-less.

I really like the name “shadow banking system.” It has a certain doom-laden appeal to it.
ServiceSoon is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 27th September 2012, 12:26 PM   #10
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Originally Posted by ServiceSoon View Post
The stated purpose of the Fed buying mortgages is to lower the interest rates, thereby lowering umemployment.
If lower interest rates caused high employment, we would be at record high levels of employment. We aren't. They don't. The policy is stupid.


Quote:
I read an article a few days ago that explained that the banks are taking advantage (higher profits for banks) of the increased spread between mortgages and bonds so the mortgage rates have not declined to where they could be. The article was called Enigma of mortage rates or somethig to that affect. I don't fully understand how this works. Please explain if you can. Basically a bank sells a mortgage with an interest rate of 4%, then sells into the bond market that pays 3.25%. By my math, which is the universal language, they would lose .75%. The difference is 3.25% now rather than 4% over 30 years, but a loss none-the-less.

This part I get. The issue is the relationship between price and yield. When finance whizzes try to explain it, they tend to confuse the issue, and no one understands it. I'll try to simplify the issue.

Suppose a bank loans someone $1000 for a period of one year. At the end of the one year, the borrower agrees to pay $1040. That's an interest rate, APR, of 4%.

Now, though, suppose the bank doesn't hold on to the loan. Suppose they want to sell it. Someone buys it for 1010 dollars. The borrower still pays exactly what he would have paid. A year after the borrower borrowed the money, he pays 1040 dollars to whoever bought the loan. As far as the borrower is concerned, it's still just a plain old 4% loan. Now, though, look at it from the buyer's point of view. He paid 1010 dollars. A year later, he got 1040 dollars. His yied is 3% (neglect roundoff error, of 30 cents more or less). The difference between the 3% that the bond buyer paid and the 4% of the loan interest is a 1% "spread".

Now look at it from the banks perspective. They made a $1000 loan, and sold it for $1010. That's a ten dollar profit on a loan that they made and immediately sold. They never got a penny of interest. They got a gain from selling an asset.

What the Fed is doing is promising to buy a bunch of loans in that fashion. For the banks, it's awesome. They get a guaranteed buyer for their product. They loan $100,000 to a home buyer, package it up with a whole bunch of other mortgages, wave a magic wand and utter some incantations, and the Fed gives them $101,000. Cha Ching!

And the best part is what happens if the home buyer loses his job. The bank had to make sure he was creditworthy, or that his house could be sold for enough to cover the loan, because they could lose their shirt if the guy can't pay it back. That could really suck. Unless of course they could just turn around and sell the loan to a willing buyer who wasn't paying attention.....like, say, the Federal Reserve Bank. Now, why would the bank care if the home buyer can pay it back the mortgage. By the time the mortgage goes belly up, it will be sold to some sucker.

And that is exactly what caused the "housing crisis" four years ago. Usually, more than four years pass before we forget the lessons of history, but it looks like short attention spans are all the rage these days.
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin

Last edited by Meadmaker; 27th September 2012 at 12:30 PM.
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 27th September 2012, 02:00 PM   #11
ravdin
Illuminator
 
ravdin's Avatar
 
Join Date: Oct 2005
Posts: 4,992
Originally Posted by Meadmaker View Post
And that is exactly what caused the "housing crisis" four years ago. Usually, more than four years pass before we forget the lessons of history, but it looks like short attention spans are all the rage these days.
Housing bubble? What housing bubble?

YouTube Video This video is not hosted by the ISF. The ISF can not be held responsible for the suitability or legality of this material. By clicking the link below you agree to view content from an external website.
I AGREE
__________________
Take the risk of thinking for yourself. Much more happiness, truth, beauty, and wisdom will come to you that way. -Christopher Hitchens

Believe what you're told. There would be chaos if everyone thought for themselves. -Top Dog slogan
ravdin is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 27th September 2012, 02:19 PM   #12
Beerina
Sarcastic Conqueror of Notions
 
Beerina's Avatar
 
Join Date: Mar 2004
Posts: 24,412
If the difference between actual house cost w.r.t. build and "what the market bears" on a sale is way out of line, banks need to refuse the loans.

Or convince social assumption of risk through government. One of the two lets politicians stand on boxes 8 out of 10 years and talk about how they are increasing home ownership.

Which way will we go?
__________________
"Great innovations should not be forced [by way of] slender majorities." - Thomas Jefferson

The government should nationalize it! Socialized, single-payer video game development and sales now! More, cheaper, better games, right? Right?
Beerina is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 27th September 2012, 02:56 PM   #13
mhaze
Banned
 
Join Date: Jan 2007
Posts: 15,718
Originally Posted by ServiceSoon View Post
....Please explain if you can. Basically a bank sells a mortgage with an interest rate of 4%, then sells into the bond market that pays 3.25%. By my math, which is the universal language, they would lose .75%. The difference is 3.25% now rather than 4% over 30 years, but a loss none-the-less.

I really like the name “shadow banking system.” It has a certain doom-laden appeal to it.
Look, this is not complicated. The FED buys mortages that means they get the interest. What interest do Tbills earn? Tiny to nothing. If the FED prints money, then earns 3.25 percent or so, they are doing better than buying T bills at the cost of having driven out of business the entire mortgage industry.

Banks cannot "own mortgages" on residential property. They can on commercial. For residential, they act as a dealer or storefront for loans.

Where this is headed is the federal government owning the mortgages, hence owning, a large percentage of all property. What they will do then is only write adjustable rate mortgages.

Last edited by mhaze; 27th September 2012 at 02:57 PM.
mhaze is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 27th September 2012, 06:58 PM   #14
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Originally Posted by mhaze View Post
Banks cannot "own mortgages" on residential property.
Huh?
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 29th September 2012, 08:45 AM   #15
mhaze
Banned
 
Join Date: Jan 2007
Posts: 15,718
Originally Posted by Meadmaker View Post
Huh?
yep.
mhaze is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 29th September 2012, 06:54 PM   #16
ServiceSoon
Graduate Poster
 
ServiceSoon's Avatar
 
Join Date: Oct 2007
Posts: 1,087
Originally Posted by Meadmaker View Post
If lower interest rates caused high employment, we would be at record high levels of employment. We aren't. They don't. The policy is stupid.
Low interest rates should decrease unemployment because people will either refinance their homes and have more money to spend each month from the savings (this increase in disposable income could be spend elsewhere to stimulate the economy) or more people will purchase homes thereby increasing new construction and all of the services that support this activity. I see the dominos and how it could work. I also understand it's not 100% effective because you have the human element and who knows how each individual will re/act.

Originally Posted by Meadmaker View Post
This part I get. The issue is the relationship between price and yield. When finance whizzes try to explain it, they tend to confuse the issue, and no one understands it. I'll try to simplify the issue.

Suppose a bank loans someone $1000 for a period of one year. At the end of the one year, the borrower agrees to pay $1040. That's an interest rate, APR, of 4%.

Now, though, suppose the bank doesn't hold on to the loan. Suppose they want to sell it. Someone buys it for 1010 dollars. The borrower still pays exactly what he would have paid. A year after the borrower borrowed the money, he pays 1040 dollars to whoever bought the loan. As far as the borrower is concerned, it's still just a plain old 4% loan. Now, though, look at it from the buyer's point of view. He paid 1010 dollars. A year later, he got 1040 dollars. His yied is 3% (neglect roundoff error, of 30 cents more or less). The difference between the 3% that the bond buyer paid and the 4% of the loan interest is a 1% "spread".

Now look at it from the banks perspective. They made a $1000 loan, and sold it for $1010. That's a ten dollar profit on a loan that they made and immediately sold. They never got a penny of interest. They got a gain from selling an asset.

What the Fed is doing is promising to buy a bunch of loans in that fashion. For the banks, it's awesome. They get a guaranteed buyer for their product. They loan $100,000 to a home buyer, package it up with a whole bunch of other mortgages, wave a magic wand and utter some incantations, and the Fed gives them $101,000. Cha Ching!

And the best part is what happens if the home buyer loses his job. The bank had to make sure he was creditworthy, or that his house could be sold for enough to cover the loan, because they could lose their shirt if the guy can't pay it back. That could really suck. Unless of course they could just turn around and sell the loan to a willing buyer who wasn't paying attention.....like, say, the Federal Reserve Bank. Now, why would the bank care if the home buyer can pay it back the mortgage. By the time the mortgage goes belly up, it will be sold to some sucker.

And that is exactly what caused the "housing crisis" four years ago. Usually, more than four years pass before we forget the lessons of history, but it looks like short attention spans are all the rage these days.
Thank you. I understand now. It appears the banks would rather have $10 profit now, rather than $40 profit in 30 years. Not to mention they get the majority of the loan, principle back sooner. What do you think the banks are going to do with the money they are getting from these Fed bond purchases? All I know is it's a great time, profitable time to be a banker!!! And it's all being done under the guise of what's best for the nation.

Isn't this policy similar to the Fed printing money? Accept these new monies are distributed through a different channel.

If the Fed owns my mortgage and I can't pay, does the Fed come after my house? Perhaps they hire a 3rd party.
ServiceSoon is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 29th September 2012, 07:02 PM   #17
ServiceSoon
Graduate Poster
 
ServiceSoon's Avatar
 
Join Date: Oct 2007
Posts: 1,087
Originally Posted by Beerina View Post
If the difference between actual house cost w.r.t. build and "what the market bears" on a sale is way out of line, banks need to refuse the loans.

Or convince social assumption of risk through government. One of the two lets politicians stand on boxes 8 out of 10 years and talk about how they are increasing home ownership.

Which way will we go?
Interesting that you mention that. I was able to purchase my house, which was build in early 2000, for $40,000 less than it would have cost me to build today.

It doesn't matter which political party is in power, both of them praise higher home ownership figures. The plan they would implement to reach that goal is different.
ServiceSoon is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 29th September 2012, 07:25 PM   #18
ServiceSoon
Graduate Poster
 
ServiceSoon's Avatar
 
Join Date: Oct 2007
Posts: 1,087
Originally Posted by mhaze View Post
Look, this is not complicated. The FED buys mortages that means they get the interest. What interest do Tbills earn? Tiny to nothing. If the FED prints money, then earns 3.25 percent or so, they are doing better than buying T bills at the cost of having driven out of business the entire mortgage industry.

Banks cannot "own mortgages" on residential property. They can on commercial. For residential, they act as a dealer or storefront for loans.

Where this is headed is the federal government owning the mortgages, hence owning, a large percentage of all property. What they will do then is only write adjustable rate mortgages.
What amount does the Fed get for T-bills? Zilch if the Fed is who ends up buying them. The more I think about it the more I think the Fed buying mortgages is just another way for the Fed to increase the money supply, which they believe is necessary to meet their dual mandates.

I'd like to see some information confirming your comment that banks can not own residential loans.
ServiceSoon is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 29th September 2012, 07:44 PM   #19
mhaze
Banned
 
Join Date: Jan 2007
Posts: 15,718
Originally Posted by ServiceSoon View Post
What amount does the Fed get for T-bills? Zilch if the Fed is who ends up buying them. The more I think about it the more I think the Fed buying mortgages is just another way for the Fed to increase the money supply, which they believe is necessary to meet their dual mandates.

I'd like to see some information confirming your comment that banks can not own residential loans.
First of all, I overlooked something. Of course they can own interim financing loans on property ("builder's loans"). Also, they could easily make anything in the order of a 5 to 7 year loan.

What I was thinking of was the typical 20 or 30 year residential single family loan in the USA. Banks just don't do this, they act as a dealer or immediately sell the loan off at a discount. On looking in Google, I find references to banks being able to hold such paper in their portfolios. But they don't. I've been told by bankers that they can't have loans longer than 5 to 7 years on property, then they renegotiate the loan. But that's always commerical, nobody buying a house would do that.

So there are some questions as to "why the lending practice is this way" that I don't know the answer to. I'll ask some guys.
mhaze is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 29th September 2012, 09:56 PM   #20
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Originally Posted by ServiceSoon View Post
What amount does the Fed get for T-bills? Zilch if the Fed is who ends up buying them. The more I think about it the more I think the Fed buying mortgages is just another way for the Fed to increase the money supply, which they believe is necessary to meet their dual mandates.

I'd like to see some information confirming your comment that banks can not own residential loans.
That's right. They are increasing the money supply by buying those mortgages.

And I see mhaze has corrected his statement about banks and mortgages. It's perfectly legal for banks to hold them, but it is increasingly less common for banks to actually do this. Most mortgages get sold.

And as you alluded to, the holders of mortgaged back securities, whether it's the Fed, or an institution, or the bank that created the security, does not go after your house. They "hire a 3rd party". When a mortgage gets sold, there are complicated arrangements about who will collect the money from the borrowers, foreclose on unpaid mortgages, and generally service the loan, turning over the money to people who created the mortgage backed securities, who in turn make sure that money gets to the owner of those securities. Needless to say, everyone involved in the process skims some off the top as they transfer the money. In practice, I'm sure it takes many pages to explain who does what and who gets the money for it, but in principle it is simple. You, as bondholder, will eventually get the money paid on the mortgage, but you will have to pay a fee to the entity that actually does the work of servicing the loan.
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 30th September 2012, 06:00 AM   #21
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Originally Posted by ServiceSoon View Post
Low interest rates should decrease unemployment because people will either refinance their homes and have more money to spend each month from the savings (this increase in disposable income could be spend elsewhere to stimulate the economy) or more people will purchase homes thereby increasing new construction and all of the services that support this activity. I see the dominos and how it could work. I also understand it's not 100% effective because you have the human element and who knows how each individual will re/act.
The problem with the "increase in disposable income" theory is that interest payments transfer money from point A in the economy to point B in the economy. If A has more money, then B has less money. A will now spend more money, stimulating the economy, but B will spend less, depressing the economy. The net change is zero. A lot of people make the same mistake when they consider taxes. People act as if tax hikes or tax cuts magically make more money for someone, and that someone (either taxpayers or government, depending on which party is involved) will then use the money to create jobs. That would work, if the money appeared from nowhere. But it doesn't.

The problem with the "increasing new construction" theory is that we don't have a housing shortage right now. There are plenty of vacant homes without buyers. That was a big part of the housing bubble of a few short years ago. There were, indeed, tons of jobs in the construction business as people paid too much for homes, so much so that everyone wanted to be in the business of selling them. Unfortunately, bubbles burst and you are left with all this unsold property. John Maynard Keynes famously noted that you could improve the economy by paying some men to dig ditches and others to fill them in. He was wrong, and so obviously wrong that is should have been a sign of the flaw in his theory. Paying people to build houses right now would be a lot like paying people to dig ditches and fill them in. We don't need new construction. However, it's a little bit worse than that. By building new houses, you depress the housing market, so it would be taking money away from existing property owners.

The usual theory of why lowering interest rates will create jobs is that it lowers risk for new or expanding businesses. If I want to start a business, and hire people for that purpose, I have to borrow money. It's a lot easier to make a profit if I am paying 3% on that loan instead of 7%. However, interest rates are currently at historic lows already. Pushing them down just a tiny bit more isn't going to help.
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 30th September 2012, 06:17 AM   #22
kevsta
RBL CHeck Failed
 
kevsta's Avatar
 
Join Date: Jun 2007
Posts: 3,140
Originally Posted by ServiceSoon View Post
It doesn't matter which political party is in power, both of them praise higher home ownership figures. The plan they would implement to reach that goal is different.
I disagree, IMO the government will end up owning the rest of housing market too whichever puppet reads the teleprompter

http://en.wikipedia.org/wiki/Federal...nd_Freddie_Mac
__________________
"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous
kevsta is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 30th September 2012, 09:17 AM   #23
mhaze
Banned
 
Join Date: Jan 2007
Posts: 15,718
Originally Posted by Meadmaker View Post
....I see mhaze has corrected his statement about banks and mortgages. It's perfectly legal for banks to hold them.....
This is not accurate. "Legal" doesn't describe what a business must or should do to move forward through a morass of complicated regulations which are often at cross purposes.

If I've been told (numerous times by different bankers) that they can't do loans fixed rate over 5-7 years on property there's obviously some reason they say that. It may be how items are placed on their balance sheet as liabilities or assets, that sort of thing.

As an aside, consider that the very existence of Savings and Loans, and Credit Unions, was to cover exactly these areas where banks did not provide needed services. Having said all this, it certainly is the case that banks "appear" to do residential loans - but they really act as a storefront dealer for another party when mortgages are involved. And they should, they can't possibly have expertise in such an area.
mhaze is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 30th September 2012, 09:20 AM   #24
mhaze
Banned
 
Join Date: Jan 2007
Posts: 15,718
Originally Posted by kevsta View Post
I disagree, IMO the government will end up owning the rest of housing market too whichever puppet reads the teleprompter

http://en.wikipedia.org/wiki/Federal...nd_Freddie_Mac
Why shouldn't they want to own the housing market? IF they can get 4% there on the creation of money, and if they can at the moment of their choosing and to protect their rights of hyperinflation, go to adjustable rate mortgages strictly....

Then after they've bottomed out the Tbill market, there is simply nowhere else to go.

Collective ownership of property is of course the goal of socialists, and it never can be the goal of capitalists. Keep that in mind when you hear politicians talking about being "pro business".

Last edited by mhaze; 30th September 2012 at 09:23 AM.
mhaze is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 30th September 2012, 09:47 AM   #25
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Originally Posted by mhaze View Post
This is not accurate. "Legal" doesn't describe what a business must or should do to move forward through a morass of complicated regulations which are often at cross purposes.
"Legal" describes "legal", as in "not being illegal".

It's perfectly legal for banks to originate and hold 30 year residential mortgages. Whether or not they care to do so, and how regulation affects that decision, is a separate issue.
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 30th September 2012, 01:11 PM   #26
mhaze
Banned
 
Join Date: Jan 2007
Posts: 15,718
Originally Posted by Meadmaker View Post
"Legal" describes "legal", as in "not being illegal".

It's perfectly legal for banks to originate and hold 30 year residential mortgages. Whether or not they care to do so, and how regulation affects that decision, is a separate issue.
Yeah. What I'm implying is that "legal" doesn't come close to describing the process of attempting to be in some sort of reasonable compliance, a due diligence process, with a couple hundred thousand pages of regulation.

I'm not directly refuting your comment, and I'm not sure this is a matter of much interest, but here is a comment in a letter to the Fed regarding the "Basil 3" regulatory process that illustrates something of the matter.

http://www.federalreserve.gov/SECRS/...44429146_1.pdf

One particularly odd aspect of Basel III is the fact the rule will create a heavier risk weighting for a 5-year balloon, residential mortgage, vs. a 30-year fixed rate mortgage. Community banks generally write 5-year balloon payment mortgages for our local residential loan customers if the loan is retained on our books. This is done to alleviate interest rate risk, obviously. A 5-year balloon loan has much less interest rate risk than a 30-year fixed rate loan would, yet it is risk weighted at 100%, vs. a 30-year loan which would be weighted at 50%.
mhaze is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 1st October 2012, 01:44 PM   #27
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 7,723
Originally Posted by Meadmaker View Post
And I see mhaze has corrected his statement about banks and mortgages. It's perfectly legal for banks to hold them, but it is increasingly less common for banks to actually do this. Most mortgages get sold.
This lack of skin in the game is why lenders were so quick to give out so many bad mortgages. They make more on the turnaround for a lower quality loan because it’s got a higher interest rate so there was and probably still is an incentive to push people towards loans they have a higher probability of not being able to pay back.

At the height of the housing bubble it could actually be very difficult to know you were actually taking out a sub-prime loan because the lenders disguised them to look like products aimed at low risk borrowers.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 1st October 2012, 01:56 PM   #28
lomiller
Philosopher
 
lomiller's Avatar
 
Join Date: Jul 2007
Posts: 7,723
Originally Posted by mhaze View Post
Yeah. What I'm implying is that "legal" doesn't come close to describing the process of attempting to be in some sort of reasonable compliance, a due diligence process, with a couple hundred thousand pages of regulation.
Their management won’t allow it because it’s a bad business decision to carry that risk when they don’t have to. The regulation banks are objecting to are rules that would force them to hold onto a portion of mortgages, something they very much do not want to do.
__________________
"Anything's possible, but only a few things actually happen"
lomiller is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 2nd October 2012, 08:52 AM   #29
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Originally Posted by lomiller View Post
This lack of skin in the game is why lenders were so quick to give out so many bad mortgages.
Indeed, and that's why this Fed move is so very, very, bad. The Fed doesn't have any "skin in the game" either.

Securities markets only work if everyone involved is dealing with risk and reward.
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 3rd October 2012, 12:28 PM   #30
Pooneil
Scholar
 
Join Date: Oct 2011
Posts: 86
The Fed is buying MBSs for various reasons, one of which is to provide more liquidity to banks. The money that comes out of the securities will be deposited in banks, for at least some amount of time. Another effect is to raise the price of MBS (lowering the interest rate) to make owning them less appealing compared to bank deposits. Thus more cash in the banks. Bank liquidity is still very important to them, suggesting that our big banks may be less well capitalized that the regulators are letting on and that they need to be prepared in case of a massive bank collapse in Europe. Something that Europe so far has been willing to throw billions of euros at to prevent.

Buying MBSs does bolster housing prices by keeping interest rates low and it also keeps government interest expense low and allows corporations to refinance maturing debt and unprecedented low costs. My opinion is that the Feds actions are mostly designed to stop deflation. Something that plagued Japan for years after its real estate market burst because artificially low interest rates designed to promote growth had caused a huge real estate bubble in the 80's. We are in the latter stage of repeating their mistakes.
Pooneil is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 17th October 2012, 04:17 PM   #31
Puppycow
Penultimate Amazing
 
Puppycow's Avatar
 
Join Date: Jan 2003
Posts: 18,340
Originally Posted by ravdin View Post
Yes- the beatings will continue until morale improves.
Morale improving:

http://online.wsj.com/article/SB1000...255566972.html
__________________
“Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them. With Major Major it had been all three.”
― Joseph Heller, Catch-22
Puppycow is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 18th October 2012, 01:07 AM   #32
kevsta
RBL CHeck Failed
 
kevsta's Avatar
 
Join Date: Jun 2007
Posts: 3,140
Originally Posted by Puppycow View Post
lol! oh look just in time for the election what a happy coincidence

and if you print enough money everything will go up, it has zero to do with a sound fundamental economy and everything to do with Gideon Gono
__________________
"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous
kevsta is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 18th October 2012, 07:04 AM   #33
Puppycow
Penultimate Amazing
 
Puppycow's Avatar
 
Join Date: Jan 2003
Posts: 18,340
You know, mentioning Zimbabwe in a thread about monetary policy is the intellectual equivalent of Godwinning.

Bernanke is not Gono any more than the president is Hitler. The United States is not going to have Zimbabwe-like inflation. It just isn't. Not even anything remotely comparable to that.
__________________
“Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them. With Major Major it had been all three.”
― Joseph Heller, Catch-22
Puppycow is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 20th October 2012, 02:48 AM   #34
kevsta
RBL CHeck Failed
 
kevsta's Avatar
 
Join Date: Jun 2007
Posts: 3,140
Originally Posted by Puppycow View Post
You know, mentioning Zimbabwe in a thread about monetary policy is the intellectual equivalent of Godwinning.
well if you'd read the link Gono himself was commenting on Bernanke's path, and in this instance I suggest that he is more qualified than Bernanke to comment on likely outcomes.

Originally Posted by Puppycow View Post
Bernanke is not Gono any more than the president is Hitler.
oh, oh, I know this game.. "Greece is not Argentina", "Spain is not Greece" etc

Originally Posted by Puppycow View Post
The United States is not going to have Zimbabwe-like inflation. It just isn't. Not even anything remotely comparable to that.
interesting, being as nobody knows this, we are in completely unchartered territory now, with witchdoctors at the helm. here's what one (overly truthy) member of the Fed said about it recently

Quote:
Keith Fitz-Gerald writes: Dallas Federal Reserve President Richard Fisher recently offered a stunning assessment about our policymaking central bankers down in Washington.

Quote:
"Nobody really knows what will work to get the economy back on course. And nobody-in fact, no central bank anywhere on the planet-has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank-not, at least, the Federal Reserve-has ever been on this cruise before."
so I can only surmise that you are psychic? ..and I thought that was all woo?
__________________
"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous
kevsta is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 29th October 2012, 02:26 AM   #35
ebastogne
Guest
 
Join Date: Oct 2012
Posts: 20
Originally Posted by Beerina View Post
It's been pointed out that under Bernanke the Fed has assumed a dual mission. It has always, since Volker, and then Greenspan, been about keeping inflation low so as to preserve the currency as a stable source of value.

Now it is also being used to try to manhandle the economy, something that is arguably at cross purposes, and is much more political.

Expect hard lessons to be learned.
Could not agree more. This will hurt.
ebastogne is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 21st November 2012, 07:52 AM   #36
Puppycow
Penultimate Amazing
 
Puppycow's Avatar
 
Join Date: Jan 2003
Posts: 18,340
I remain optimistic about this policy.

A couple housing reports were released on Monday and Tuesday, and both were good.

Existing-Home Sales Climb

Quote:
WASHINGTON (AP) — Sales of existing homes rose solidly in October, helped by improvement in the job market and record low mortgage rates.

The increase, along with a surge in home builder confidence this month, suggests that the housing market is continuing to show signs of recovery.

The National Association of Realtors said on Monday that existing-home sales rose 2.1 percent to a seasonally adjusted annual rate of 4.79 million. That is up from 4.69 million in September, which was revised lower.

The sales pace is roughly 11 percent higher than a year earlier.
. . .
A separate report on Monday showed that confidence among home builders rose this month to its highest level in six and a half years. The increase was driven by strong demand for new homes and growing optimism about conditions next year.
Housing Starts Soar To 4 Year High

Quote:
The news out of the housing sector continues to impress.

Housing starts for October soared to a 4 year high, jumping 3.6% to 894,000. That beat even the high end of the forecasters range and was the fastest increase since July 2008.

Permits fell 2.7% to 866,000 but that was coming off of a big September number. The mix is also changing. Multi-family housing units had been hot the past year but there were fewer multi-family permits in October. The single family home permits, however, rose to the highest since July 2008.
The most recent inflation report was nothing to be alarmed about either:
Consumer Prices in U.S. Rose at a Slower Pace in October

Quote:
The cost of living rose in October at the slowest pace in three months, a sign U.S. inflation is in check.

The 0.1 percent increase in the consumer-price index followed a 0.6 percent gain the prior month, the Labor Department reported today in Washington. The median estimate of 83 economists surveyed by Bloomberg called for a 0.1 percent rise. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.2 percent, more than projected, reflected rising rents and clothing costs.

Macy’s Inc. (M) is among retailers planning holiday discounts, while Amazon.com Inc. (AMZN) and Wal-Mart Stores Inc. (WMT) are battling to offer the best online prices on toys, indicating companies have little leeway to charge more. The inflation outlook is in sync with the Federal Reserve’s view and gives policy makers room to concentrate on boosting growth.

“Inflation in the U.S. is very subdued,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, who correctly forecast the gain in prices. “This is allowing the Fed to strive toward supporting job growth and reducing unemployment.”

Bloomberg survey estimates for the consumer-price index ranged from a drop of 0.1 percent to an increase of 0.3 percent.

In the 12 months ended in October, consumer prices rose 2.2 percent, the report showed.
So far the policy appears to be working quite well IMHO.
One more indicator:
Unemployment falls in 37 states in October

Quote:
4:19PM EST November 20. 2012 - Unemployment rates fell in 37 states and the District of Columbia last month despite the slight rise in the national jobless rate, the government reported Tuesday.

Unemployment increased slightly in seven states and was unchanged in six.
__________________
“Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them. With Major Major it had been all three.”
― Joseph Heller, Catch-22
Puppycow is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 21st November 2012, 09:06 AM   #37
Free Thinkr
Muse
 
Join Date: Nov 2006
Posts: 738
I'll just take this opportunity to point out how clearly this case shows why land ought not be treated like other property. We should be thrilled at the prospect of affordable housing, but because our entire financial system is hopelessly tied to capitalized land rents, the government intentionally seeks to make 'housing' (land) less affordable instead.
__________________
I put the "nan" in "nano-nano thermite."
Free Thinkr is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 21st November 2012, 09:16 AM   #38
Meadmaker
Penultimate Amazing
 
Join Date: Apr 2004
Posts: 11,791
Originally Posted by Free Thinkr View Post
I'll just take this opportunity to point out how clearly this case shows why land ought not be treated like other property. We should be thrilled at the prospect of affordable housing, but because our entire financial system is hopelessly tied to capitalized land rents, the government intentionally seeks to make 'housing' (land) less affordable instead.
Exactly.

We now have the prospect of the government trying to drive up housing costs. How bizarre is that?
__________________
Dave

"Mead is proof that God loves us and wants us to be happy." -very similar to something said by Ben Franklin
Meadmaker is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 21st November 2012, 10:36 AM   #39
balrog666
Eigenmode: Cynic
 
balrog666's Avatar
 
Join Date: May 2004
Posts: 2,974
Originally Posted by Meadmaker View Post
Exactly.

We now have the prospect of the government trying to drive up housing costs. How bizarre is that?

It is not bizarre; it is rather typical of government meddling.
__________________
A person who won't think has no advantage over one who can't think. - (paraphrased) Mark Twain

Political language… is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. – George Orwell
balrog666 is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Old 21st November 2012, 04:11 PM   #40
Puppycow
Penultimate Amazing
 
Puppycow's Avatar
 
Join Date: Jan 2003
Posts: 18,340
Originally Posted by Free Thinkr View Post
I'll just take this opportunity to point out how clearly this case shows why land ought not be treated like other property. We should be thrilled at the prospect of affordable housing, but because our entire financial system is hopelessly tied to capitalized land rents, the government intentionally seeks to make 'housing' (land) less affordable instead.
Originally Posted by Meadmaker View Post
Exactly.

We now have the prospect of the government trying to drive up housing costs. How bizarre is that?
Actually the government is driving down the cost of mortgages, which makes it more affordable, not less. There are two factors that make up the total cost of buying a house. There's the price of the house itself and there's the price of the money you borrow to buy the house. The latter is typically what costs more. Mortgage interest rates are now at all time lows, making a great time to buy if you want a great deal.
__________________
“Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them. With Major Major it had been all three.”
― Joseph Heller, Catch-22
Puppycow is offline   Quote this post in a PM   Nominate this post for this month's language award Copy a direct link to this post Reply With Quote Back to Top
Reply

International Skeptics Forum » General Topics » Economics, Business and Finance

Bookmarks

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Forum Jump


All times are GMT -7. The time now is 05:03 PM.
Powered by vBulletin. Copyright ©2000 - 2014, Jelsoft Enterprises Ltd.
© 2014, TribeTech AB. All Rights Reserved.
This forum began as part of the James Randi Education Foundation (JREF). However, the forum now exists as
an independent entity with no affiliation with or endorsement by the JREF, including the section in reference to "JREF" topics.

Disclaimer: Messages posted in the Forum are solely the opinion of their authors.