Joy, joy, the Fed has cut rates again.
Gary
by Llewellyn H. Rockwell, Jr.
Joy, joy, the Fed has cut rates again.
Picture the Joker from the movie Batman throwing money from his float
on the parade and you can see where this is going. Or imagine the
alchemist of medieval lore, attempting to conjure up wealth from
chemical mixtures.
The sea of inflationary credit is the core problem behind the falling
dollar, the subprime crisis, the housing meltdown, not to mention the
rise in the national debt and a thousand other problems.
And how do they deal with it? More credit and more calls for controls.
No one in Washington seems to understand the reason for the crisis,
much less how to fix it. The markets go for this stuff for a while
until it looks like Washington is in panic mode. Even Wall Street is
starting to sense that something is very wrong.
A good indication is President Bush’s freeze on subprime mortgage
rates. It is a classic case that provides serious lessons for all of
us. It shows the political penchant for intervening in the market, the
market response, and the further interventions that are called forth
when the first round doesn’t bring the utopia they imagine.
Here is the great mortal threat that intervention poses to the
economy: not the first round, not even the second round, but the
relentless dynamic of political rescues that drive us further into the
pit of state planning. Under Bush's solution, rate freezes kick in
next year and subsidize only part of those affected. His plan is under
fire, not for being an intervention but for not bailing out every
living soul.
Why do subprime mortgages exist in the first place? They are a market
response to a regime of easy money that was brought about through the
Federal Reserve in cooperation with government-backed mortgage
underwritings, which have undergone an explosive expansion in recent
years.
Since the period after World War II, the American dream has been
identified with owning one's own home. And when the government makes a
dream come true, it is going to do it good and hard. So there were no
limits. The housing market has boomed and ballooned beyond belief. No
amount of money has been too much.
Houses require loans, so the mechanism of choice here is the interest
rate. A high rate both discourages borrowing and tends to separate
good lenders from bad ones. This is what the politicians, who love
nothing more than giving people something for nothing, do not like. So
from the perspective of the state, the interest rate can't be low
enough.
The political establishment loves this method of subsidizing the
public as much as it loves the welfare state or any other transfer
program. In fact, it loves it even more. The transfers associated with
easy money are harder to detect than taxes and spending, but they are
no less a redistribution. They redistribute money from dollar holders
to dollar spenders.
The 30-year mortgage has been on a 15-year downtrend at the very time
when savings rate has been falling. People were screaming when rates
peaked in 1984 at 14.6%. They bottomed out in the salad days of 2005
at 5.77%.
Then there was the subprime market that has accounted for 20% of these
loans. These are for people who, in a real market, would never get a
mortgage because their credit score is too low. These loans come with
adjustable rates, which sank millions of borrowers once rates began to
rise.
The incredible fact is that these loans are an expected result of 15
years of government propaganda about mortgage loan "discrimination."
Some genius noticed that the loan markets tend to favor people with
good credit histories and some savings built up over time. And then
some other genius noticed the demographic fact that these credit
histories, in general, parallel racial demographics. Hot button! And
so the pressure was on to lend as if the prospect for repayment didn't
matter.
The loans in this category were only viable if we presume that housing
equity would rise forever. Then it works like magic. It's like an
economic perpetual motion machine. You borrow and borrow and the loan
pays itself off. Crazy? Yes, it is, but such is the craziness of any
inflationary environment. It leads people who should know better to
believe that the impossible is happening.
It was not just the subprime market but the entire housing market that
has been wildly distorted through intervention. The money lent has had
no economic justification, and the low interest rates are
unsustainable. And by the way, it is myth that the market has bottomed
out. The data still show that housing prices are rising nationally,
albeit at a much slower rate than in the past. What the market needs
to be thoroughly re-balanced is a massive downward correction, one
that is permitted to take place without any intervention.
But will the political establishment settle for it? No way. The
relative minor problems that have cropped up with subprime have
elicited some of the most ridiculous regulation in memory. Both
parties agree that rates should be frozen low, so that existing
borrowers don't have to pay market rates. This strategy only forces
banks to hold low-quality loans and passes the risk up the chain of
borrowers, penalizing people with good credit and rewarding people
with bad credit -- which is essentially the opposite of what credit
markets are supposed to do.
But it gets worse. Interest rates are dropping, not rising, both long
term and short term. This is precisely the opposite of what is best at
this stage in the market. The drunk is taking another snort just as he
was sobering up a bit.
Where is the end of all of this? We can't know the specifics, but
long-term disaster looms. One can't create prosperity out of a
printing press. Michael Heilperin, one of the prophets of the current
money mania, once described the attempt as the pathology of money. It
is a pathology because it amounts to an amazing denial of reality.
Here is the plan in Bernanke's own words: "The U.S. government has a
technology, called a printing press (or, today, its electronic
equivalent), that allows it to produce as many U.S. dollars as it
wishes at essentially no cost. By increasing the number of U.S.
dollars in circulation, or even by credibly threatening to do so, the
U.S. government can also reduce the value of a dollar in terms of
goods and services, which is equivalent to raising the prices in
dollars of those goods and services. We conclude that, under a
paper-money system, a determined government can always generate higher
spending and hence positive inflation."
The question is: no cost to whom? Inflation, in case we've forgotten,
is robbery by another name.
http://www.lewrockwell.com/rockwell/mortgage-fix-mirage.html
JC
"Gary" <no...@not.com> wrote in message
news:2ngvl31fgu7e12us1...@4ax.com...
Wall Street appeared poised for a recovery Wednesday
rick++
system - not too little or too much. from the complaints of people
trying
to get home or business loans, it sound like there may be too little
in the
system. Banks have become rather cautious.