Posted by
Andrews on Saturday, April 25, 2009 3:23:46 PM
Yesterday I wrote that there were some heartening signs that the Treasury may finally be taking the approach I considered the best of the likely solutions. (The best solutions, either doing nothing, or serious monetary reform, are not going to happen.) Today, talking to my mortgage lender, I have some clear evidence that the Federal Reserve is doing all it can to make the problem worse.
We have been talking about refinancing our mortgage, which we took out a bit over a year ago. And, it turns out that the current rates will not only allow us to lower our payments, but do so without any out of pocket costs. As we don't have much in the way of equity this early in the loan, and as we originally got the loan during the last days of the housing bubble, that is a clear sign the current rates are still far too low.
Of course this was expected. Not only is the government pushing home buying, forcing rates to ever more
absurdly low rates, offering
massive tax deductions for home purchases, but with the Obama budget being financed
largely through monetary inflation, it was inevitable that rates would drop, at least for a time*.
So, why should we care?
We need to worry for the same reason we needed to worry in the early years of this decade, the extension of credit through escalating mortgage lending is a means of expanding the money supply, especially if the increased lending leads to another housing bubble. If housing prices escalate on paper, the same supply of houses will allow the creation of ever increasing quantities of credit, creating more and more money. And this increase in the money supply could create the very same problems we are seeing today, misdirected investment, liquidity crises, worthless assets, and so on. Worse still, when added to the trillion dollars of bonds being bought up by the Federal Reserve, and the
massive monetary expansion those bonds will support, we are looking forward to some pretty severe inflation in the next few years.
Of course the solution is simple, if politically unappealing. The Fed needs to allow interest rates to rise, and the government needs to stop "encouraging" home buying. If the Fed and government cooperate in allowing interest rates to reflect something approaching the reality of the market, while it will upset many, it will at least stop the perpetuation of our current problems. Otherwise, if we continue along our current course, we can expect nothing but the same problems over and over.
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* Inflation inevitably leads to rates rising far faster than the rate of inflation, as banks, anticipating additional inflation start to add premiums beyond the rate of inflation. But early in the inflationary cycle, the excess money in the system leads to initially depressed rates. Even as inflation premiums are added, the excess money keeps rates below what the market would set. Coupled with a very low discount rate and government pressures to maintain low mortgage rates, it is likely mortgage rates will remain artificially depressed even while inflation causes other rates to skyrocket, at least for a while.