Let ‘s face it folks, your faithful servant is a person of limited intellectual resources, who is easily baffled by the insights of his betters. Case in point: The Fed’s announcement that it is going to rescue us from the ongoing economic bad times by buying “billions of dollars of mortgage-backed securities — essentially bonds that are made up of a bunch of home loans, packaged and then sold to investors.” So says the Los Angeles Times. Don Lee and Jim Puzzanghera, Fed Aims Stimulus to Boost Housing Market, L.A. Times, September 14, 2012, at p. A1. That, goes the theory, will somehow get folks to rush out and buy homes, creating more jobs for assorted wood choppers, tin bashers and other horny-handed sons of toil, who will build lots of new houses, earn money for doing so, and promptly rush out to spend it by maxing out their credit cards, thus bringing back prosperity.
We rise above the temptation of dwelling on the fact that it was a surfeit of easy mortgage money and the construction of lots and lots of homes for people who couldn’t afford them that got us into trouble in the first place. It seems to us that the high and the mighty might have learned a lesson from all that. But what do we know?
What is missing from the Fed’s optimistic picture is that though mortgage interest rates are way down, that’s not the whole story when it comes to home buying. It seems to us that this is not the problem. For one thing, banks aren’t eager to lend. So says Donald Trump, and while we are not exactly a fan of The Donald, given how he makes a living, he ought to know what he is talking about when he speaks of real estate financing. In fact, interest rates are way down, and are not the problem at all. The good old days of buying homes with no money down, and without demonstrable, solid evidence of ability to pay off the mortgage, are gone, and it is not clear who is going to buy all those new homes. Second, lenders are not exactly eager to lend, and when they do they require good credit ratings. Which reminds us, what about down payments? Will those be borrowed too, like it was done at the height of the bubble?
Moreover, lots of people have had had a rude awakening in the last few years, and it seems likely that few of them will blithely go in hock up to their eyeballs again, in order to buy a house which — if they stop and think about it — they cannot really afford.
Bottom line: What lies at the heart of the Fed’s latest proposal is the notion that this new “stimulus” will cause people to borrow more, spend more on housing, and thus create jobs. In turn, those jobs will produce more money in wages, and wage earners will buy more homes which will require more financing which will be provided by. . . Wait a minute! Isn’t this a bit circular? Sounds that way to us. We fail to see how creating another mountain of bundled mortgage-based securities is going to restore prosperity. Sounds like the fed is putting the cart before the horse. It is job creation and higher wages that are likely to produce prosperity and higher levels of home ownership. Manageable debt is a byproduct of prosperity, that comes about when prosperous people, confident of their economic future, buy homes, cars, etc.. Asking insecure people who are threatened by prospects of job losses and an uncertain economic future to go in hock sounds to us like beating a dead horse in the hope that it will make him go giddy-up.
Maybe Mr. Bernanke, being a lot smarter than your humble servant can pull that economic rabbit out of the bankers’ top hat. But we doubt it.
Afterthought. You don’t suppose that Mr. Bernanke’s real motivation is to keep interest rates way down, near zero to banks, in order to give bankers a break, to pump up the stock market, and perhaps more important, to facilitate Uncle Sam’s enormous and growing multi-trillion dollar debt that would lead to even larger deficits if Uncle had to pay real interest on his indebtedness, like you do when you borrow money, do you?