For the growing crowd who think The Fed will cut rates to appease desperate homeowners, sorry, the New Fed under Bernanke realize by now that the Old Fed made a horrific mistake in allowing the housing bubble (and housing ATM use) to grow to the point that it did, and they're going to knock it down.
From March 2006:
The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday.
In his remarks, Kohn attacked the popular 'Greenspan put' theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise.
"This argument strikes me as a misreading of history," Kohn said.
"Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk," he said.
"Whatever might have once been thought about the existence of a 'Greenspan put,' stock market, investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy," Kohn said.
"The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions," Kohn said.
September 24, 2006
A harsh reminder from The Fed's Donald Kohn: "homeowners should not expect to see all the gains of recent years preserved by monetary policy actions"
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20 comments:
Kieth I would hate to side with an idiot, but this idiot's accusations about you appear to have som merits.
THE WIZARD OF OZ
So, what is the consensus here. Is the fed going to raise or lower rates after the election or at the beginning of next year. I personally think they will keep raising rates as necessary, but I know many people think they will drop the rates to fight deflation. Do we really know? Are we 50/50 at this point?
Either way, housing prices will continue to drop. Raising rates will make them drop faster because of its psychological impact. I've heard from many people who believe home prices will shoot right back up as soon as rates are cut. Raising the Fed rate a few more times could be the final psychological blow to the bubble.
It appears that the jury is still out on just how the Benmar-Republic Fed will react to the ongoing housing bust.
They have ALREADY stopped raising short term rates in response to a falling GDP and housing "cooling" (I HATE that word!!! Just call it what it is: PRICES ARE FALLING YOU IDIOTS!!!), when in fact Benmar should be pulling a "Volcker" and slamming the brakes on all the runaway speculation in stocks, bonds, derivatives, houses--you name it.
Regarding Kohn's remarks about the Fed not necessarily not bailing out the sucker stockholders, in my opinion it was not for lack of trying on the Fed's part as they pounded down short term rates (and coerced our Asian debt-enablers to buy treasuries and agencies, thereby pounding down long term rates) to try to reflate the economy.
Predictibly, the massive hot-beef liquidity injection into the U.S. economy only further fed the speculative frenzy.
Throw in the entire securitization (MBS/ABS industry), completely insane lending "standards" (if you can call it that!), tens of millions of suckers willing to sign any piece of paper put in front of them to either get into a McMansion, reap a supposed windfall profit (or both) and you have a recipe for disaster.
And YES, the Fed (and federal government) WILL pull every trick in the book to keep the economy from falling into the deflationary abyss.
A perfect example is this weekend's Financial Times front page, lead article regarding the U.S. treasury stating that they will not fight Fannie and Freddie expanding their portfolios of loans held directly (currently at about $1.5 trillion collectively) to keep housing propped up.
Don't be fooled. We are looking at yet another round of panic liquidity by the Fed and feds.
Why does Mr Green refer to Keith as "Shoe Shine Boy"?
dave in jax: Do we really know? Are we 50/50 at this point?
The fed funds futures market is now pricing in a slight chance that interest rates will be cut as early as October, when the Federal Reserve meets on the 24th and 25th. November fed funds futures were last up 0.01 at 94.76, which implies a 4% chance that the Fed would lower its target for overnight rates to 5% from 5.25%. Late Thursday, the futures were pricing in no chance of a rate hike or cut. December fed funds, which starting pricing in a chance of a cut for the first time on Thursday after a surprise negative reading on manufacturing activity in the Philadelphia region, was last unchanged at 94.76. That suggests about a 7% chance of a rate cut.
check out this link: http://www.cbot.com/cbot/pub/page/0,3181,1563,00.html
Anon 1:52:38
Take a look at his profile (The Wizard of Oz). Not exactly the sharpest knife in the drawer.
Anon 3:50:38
Thanks for the good info. I have no formal training in economics and am not old enough to have lived through this before. I'm trying to learn as much as possible. It's very exciting.
Remember, the FED traditionally does NOT raise rates going into an election. Expect them to play catch up (.5% or 1.0% instead of .25% ???) after November. The Fed's job is to fight inflation first, not prop up any particular segment (REIC) of the economy.
Side note:
1.The local paper added two complete extra sections this week to list the sheriff’s sales for bank foreclosures. I have never seen this many listed in my lifetime, usually just a couple pages are added to the classified section. And this in a non-bubble area!
2.A major electronics retailer is offering "employee pricing" to their internet subscribers. (Yours truly)
Their online ad has some very, VERY, impressive price reductions, more than normal.
Will this be a prelude of things to come for the retail industry as they head into a Christmas season that does not look promising? I didn't buy anything this round taking the bubble sitter approach that "If you dropped this much already, how low will you go!"
Mortgage interest rates have been coming down for two months, so all this is just hot air. The Fed is talking tough but they know if they try to give us the "strong medicine", it will kill the patient.
If the Dems take Congress in November, look for a complete bailout package with exclusions for the "filthy rich" who shouldn't profit from the "misery of others". The U.S. dollar is toast.
Greenspan's legacy will be the creation of the worst asset bubble in history and Bernake has no chance of fixing it. Bernake can either protect the currency by raising interest rates (forcing a recession and action by congress on the deficit spending) or by keeping interest rates artificially low (inflation really 2.8%, please!) and watching the dollar fall off the cliff. Either way we all lose. Our politicians are all pieces of shit for getting us into this situation with the deficit at a time when unemployment is less than 5%. Truly disgraceful pieces of shit up there in Washington - not one patriot among them.
I actually think that there's a much greater chance that the dollar falls off the cliff than most on this blog are counting on. If it does and we have runaway inflation, I'd rather own a house than cash.
dave in jax: thanks for the kind words with regards to the fed funds futures market info I provided. although remember the market isn't always perfect nor is the wisdom of crowds, nevertheless I put much more stock in what people say who have skin in the game, ie the traders than what all the pundits have to say, ie talking head economists who have no skin in the game
kilgore: "I actually think that there's a much greater chance that the dollar falls off the cliff than most on this blog are counting on. If it does and we have runaway inflation, I'd rather own a house than cash."
you have a point but inflation works both ways so the cost of maintaining, insuring and servicing any household debt also goes up. so while real estate does offer somewhat of a hedge against inflation it does have it's limitations - furthermore, if inflation has you scared there are much better, cheaper and less riskier ways to protect oneself.
btw, the more I think about the future the more confused and scared I get - my only advice is to make sure there is ample liquidity on the other end of any trade you make - soon people will pay up for assets that allow people to exit quickly and cheaply
Kohn: '"Conventional policy" as practiced by the Federal reserve.'
Wow! For a central banker, that's basically calling Alan Greenspan a terrorist-sympathizing socialist-adoring lily-livered syphilitic uber-wuss, and a craven political hack.
BTW I think that the Fed is going to hold on rates and stand still for significantly longer than expected, even through the start of the general recession slash Housing Panic just to make sure it kills inflation dead.
It's clearly the most conservative CYA call at the time. Neither raising rates into a clear recession, nor bailing out the f@cked borrowers.
I've heard from many people who believe home prices will shoot right back up as soon as rates are cut.
In that case, the best medicine is not a rate raise, but a continued collapse in home values even after the rates are cut.
The next Fed move will probably be a cut but by then we will be hearing much wailing and lamentation. I'm guessing no earlier than summer '07.
I don't think Ben Bernanke deserves the blame that he will assuredly be slandered with.
I don't see house prices falling as far as the doomsayers on HP. If the Fed can continue pumping in the money (along with bond market help from the BoJ and others), then mortgage rates will continue to trend downward. Keep the lending standards lax, and at some point the demand for homes will return. There is no way the Fed or the federal government is going to allow this thing to snowball into a rout.
David in JAX,
Being a dul knife, much gets past me. Please explain how it is the man that in 2005 correctly predicted the inability of the FEDs to raise real borrowing cost, and refer to the FEDs as nothing more than the Wizard of OZ, and man with no real power is the dumb one.
Yet when Shoe Shine Boy warns the GREAT ALMIGHTY Wizard of OZ will be back at work he is the smart one.
Does he understand what is ment by refering the FED to the Wizard of OZ? Or is he just a bumbling idiot that plagerized?
Please explain...
Good post, an article from 6 months ago.
ZZzzz, Keith's Boring Paranoid Blog, what a great read.
"and at some point the demand for homes will return. There is no way the Fed or the federal government is going to allow this thing to snowball into a rout.
"
HAHAHAH Keep smoking that crack chump, all you have left is HOPE HOPE more HOPE. The FED WONT bail the stupid sheep (debtors) out (did they bail out the suckers that bought into the Nasdaq at 5000? Nooooooo) and you can take that to the bank!
Remember, the smart money is ALREADY out of RE NOW. All there is left now in RE are bagholders, dumb money, and stupid sheep with HOPE. Now its time for the hammer to drop!
Let me explain for you Dogcrap.
The Upcoming Housing Boom
Enough Said.
I'm not sure if your just a tool of the REIC or if your just clueless. Your profile makes you look like a high school aged misfit.
Being a dul knife, much gets past me. Please explain how it is the man that in 2005 correctly predicted the inability of the FEDs to raise real borrowing cost, and refer to the FEDs as nothing more than the Wizard of OZ, and man with no real power is the dumb one.
More like stating the obvious. I believe that you are one of the hundreds of blogs that has pointed this out, including HP.
Yet when Shoe Shine Boy warns the GREAT ALMIGHTY Wizard of OZ will be back at work he is the smart one.
Keith isn't claiming to be a genious for stating the obvious. He's also hardly a shoeshine boy. I have a lot of respect for him and his excellent blog.
Does he understand what is ment by refering the FED to the Wizard of OZ? Or is he just a bumbling idiot that plagerized?
Please don't take credit for a term that has been used to describe The Fed and The Fed Chirman for over twenty years. I remember reading this exact same thing when I was a kid in the 80's. Who knows when the comparison was first made.
Go ahead and call me a Nazi or a Fascist Dogcrap. I know that's what's coming next.
Burst this freaking bubble already so we can begin the cleanup and eventually be restored to sanity.
Just keep the FDIC in place so there aren't any bank runs.
To hell with the rest of it.
It's true, the smart money left RE a while back.
It would be a really stupid move for the Fed to cream the smarties just to support the dummy losers.
Get a grip people. The FED will lower rates back to 1%. Do any of you really think the FED cares about savers? The owners of this country want debtors, not savers. The average citizen is too dumb to know better.
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