Low Rates, Big Problems

[Crewleader]

by Peter Schiff, Euro Pacific Capital | December 5, 2008


Government and mainstream economists have erroneously concluded that the key to reversing the financial free fall can be found in stopping the plunge in home prices. (I would offer the corollary that the key to reducing injuries in auto accidents is to suspend the laws of inertia). But to accomplish the improbable task of re-inflating the housing bubble, the government appears ready to announce a coordinated plan to push down mortgage rates to just 4.5%. Of course, this is precisely the wrong solution to the housing crisis, but when it comes to bad ideas our government has been remarkably consistent.

The plan would require the newly created Federal agencies of Fannie Mae and Freddie Mac to lower rates to 4.5%, and then require the Fed to directly buy the loans after they were made. The idea is that by lowering mortgage rates, current homeowners will be able to afford to make their payments, and new buyers will be more likely to qualify for larger loans, provided of course they do not have to come up with a burdensome down payment. If 4.5% is not enough to convince reluctant borrowers then look for the mandated rate to drop further. Perhaps there may come a time where the interest flows to the borrower instead of the lender. Anything to get Americans borrowing again.

But artificially suppressing mortgage rates will encourage risk taking and debt assumption at a time when consumers and lenders should be acting prudently. By setting rates below market levels, and buying mortgages that no private funder would want to touch, the government is creating a mortgage entitlement. Given the size of the home mortgage market, the program could eventually become one of the largest entitlement program on the federal books.

http://www.financialsense.com/fsu/editorials/schiff/2008/1205.html

[NOW tense]

1. This could work

If they were very restrictive on the loans, but I doubt that will happen. I think we as a country will find that we just need to take the big poison pill and not look for and spend money on the quick fix. I will say this though It is in my best interest for people to start building again. My job depends on it.

[Mojorabbit]

2. I think 4.5 is a reasonable

mortgage rate. It is what mine is. If it will keep people in their homes I am all for it. The supply of houses is enormous. Until people can afford to move into them they will sit empty.

[Citizen Number 9]

3. Mr. Schiff is full of it

This is exactly what we need. His argument is one of the poorer ones I've seen as well. I suspect he is worried that his financial stocks won't recover as fast under this plan as they might if we let the interest rates continue to hover just out of reach. I think he's wrong about that one, too.

Not the least of his problems is his assumption that unsubsidized mortgage rates are 10%

Inflation is not a problem at all right now.

Risk is much reduced in this market due to the lower housing prices.

SOMETHING has to get credit markets and consumer purchasing moving again. Housing acquisition has always been a strong factor in that.

[CoffeeCat]

4. The problem is...that Americans are tapped out...

For years, American's made $5 a year, but spent $9.

You can only do that for so long, before the bills come due--and the maximum amount of debt spending
reaches a ceiling.

We've peaked. People have no only spent their incomes. They've spent money that they do not have.

Now it's time to pay the fiddler.

Your comment about getting the credit markets and consumer purchasing moving again--is a valid point. We
eventually will have to do that. However, right now--we're in a frickin crisis of epic proportions because
Americans played the role of good-little-consumer for too long.

There's just nothing left. Most Americans have no savings. They've dipped into their home-equity and
a great deal of their income is being siphoned off to pay massive credit-card debts, exorbitant
car loans and other debts.

We've got to face the fact that not only is our country bankrupt--but most households are as well.

It wouldn't matter if the "credit markets get moving." It doesn't matter if loans are made available
for mortgages or cars. People have no money, and many people that do have money are scared shitless.

Our entire economy is contracting. We propped up our aggregate demand with artificial spending. Now,
it's time for a re-set. It's going to be quite painful and we'll see lots of suffering. However, we're
getting back to normal--where people save, don't spend what they don't have and don't prop up the economy
with borrowed dollars.

Lots of businesses started and boomed--because people used credit cards to pay for everything. That
day is gone. So, many businesses will fail and sales will plummet in many sectors.

It hurts...but our entire way of life was completely unsustainable. Somehow, every family of four in this
country making $50,000 - $100,000 became convinced that they could afford a $300,000 house, two $50,000
cars, and $20,000 in credit-card balances. It wasn't true, and now we're experiencing the fallout.

[Warpy]

5. I don't think the risk is as great as the author does

simply because recession psychology has taken firm hold. People are not going to assume any new debt until and unless they think their jobs are safe and their income will be on the way up at some point.

The party is over and the hangover is just starting, in other words, and it will be quite some time before most people are able to look at prospective debt without tossing their cookies.

Any suppression of mortgage interest needs a sunset clause or we'll get to the point that mortgages are so unprofitable that no one will be able to get one.

[whatchamacallit]

6. We'll see if this is enough to keep people paying a mortgage on a house with negative equity

Unless it's primarily intended to lead new lambs to the slaughter...

[unlawflcombatnt]

8. Schiff is right on the money

We don't need to encourage still more irresponsible borrowing.

We need to be creating jobs by putting tariffs on foreign imports, making them prohibitively more expensive than American goods, thus increasing demand for American goods to replace the now more expensive foreign imports. More demand for American goods means more demand for American workers and increased wages for American workers.

[Crewleader]

10. thought you would enjoy reading this

The Man Who Predicted The Economic Meltdown

by David Folkenflik

http://www.npr.org/templates/story/story.php?storyId=97801606&ft=1&f=1006&

[Citizen Number 9]

11. I think the 4.5% rate is meant to

encourage responsible borrowing.

Presumably, having been badly hurt by irresponsible borrowing, lenders will be employing increased vigilance with respect to the mortgage originators.

[Waiting For Everyman]

7. Why should the market level on rates not fall, to match everything else?

This is a deflation. What makes interest exempt? Just how much sense does it make to keep rates above what people can pay? And risk already happened. We're past risk - too late for that consideration. Now we're at what will work.

Keeping rates high is closing the barn door after the horse is gone.

[Odin2005]

9. Financial Sense is a Libertarian loony site, not a source of good economic info.

I am sick of DUers using it as a source. I swear, ever since W drove the Libertarians away from the GOP they have been coming over here infecting us with their "Gold is Good, the Fed is Evil" nonsense.

[westerebus]

12. Where else are they going to go?

A little progressive economic education and who knows? Centrist Democrats?