Monetary policy

2009

2009-03-19-NYT-Fed-creates-one-trillion

Fed Plans to Inject Another $1 Trillion to Aid the Economy
By EDMUND L. ANDREWS
New York Times, 2009-03-19

[Emphasis is added.]

WASHINGTON —

[1]
The Federal Reserve sharply stepped up its efforts to bolster the economy
on Wednesday, announcing that
it would pump an extra $1 trillion into the financial system
by purchasing Treasury bonds and mortgage securities.

[2]
Having already reduced the key interest rate it controls nearly to zero,
the central bank has increasingly turned to alternatives like buying securities
as a way of getting more dollars into the economy,
a tactic that amounts to
creating vast new sums of money out of thin air.
[aka “printing money”]
But the moves on Wednesday were its biggest yet,
almost doubling all of the Fed’s measures in the last year.

[3]
The action makes the Fed a buyer of long-term government bonds
rather than the short-term debt that it typically buys and sells
to help control the money supply.

[4]
The idea was to encourage more economic activity
by lowering interest rates, including those on home loans,
and to help the financial system
as it struggles under the crushing weight of bad loans and poor investments.

[5]
Investors responded with surprise and enthusiasm.
The Dow Jones industrial average,
which had been down about 50 points just before the announcement,
jumped immediately and ended the day up almost 91 points at 7,486.58.
Yields on long-term Treasury bonds dropped markedly,
and analysts predicted that
interest rates on fixed-rate mortgages would soon drop below 5 percent.

[6]
But there were also clear indications that
the Fed was taking risks that could
dilute the value of the dollar and
set the stage for future inflation.
Gold prices rose $26.60 an ounce, hitting $942,
a sign of declining confidence in the dollar.
The dollar,
which had been losing value in recent weeks to the euro and the yen,
dropped sharply again on Wednesday.

[Goodbye, price stability. Hello, inflation.]

[7]
In its announcement,
the central bank said that the United States remained in a severe recession
and listed its continuing woes,
from job losses and lost housing wealth
to falling exports as a result of the worldwide economic slowdown.

[8]
“In these circumstances,
the Federal Reserve will employ all available tools
to promote economic recovery and to preserve price stability,”
the central bank said.

[9]
As expected, policy makers decided to keep the Fed’s benchmark interest rate on overnight loans in a range between zero and 0.25 percent.

[10]
But to the surprise of investors and analysts, the committee said
it had decided to purchase an additional $750 billion worth
of government-guaranteed mortgage-backed securities
on top of the $500 billion that the Fed is already in the process of buying.

[11]
In addition, the Fed said
it would buy up to $300 billion worth of longer-term Treasury securities
over the next six months.
That would tend to push down longer-term interest rates on all types of loans.

[12]
All these measures would come in addition to
what has already been an unprecedented expansion of lending by the Fed.
The central bank also said it would probably
expand the scope of a new program to finance consumer and business lending,
which gets under way this week.

[13]
In effect,
the central bank has been lending money to
a wider and wider array of borrowers,
and
it has financed that lending by
using its authority to create new money at will.

[14]
Since last September,
the Fed’s lending programs have roughly doubled the size of its balance sheet,
to about $1.8 trillion, from $900 billion.
The actions announced on Wednesday are likely to
expand that to well over $3 trillion
over the next year.

[15]
Despite a trickle of encouraging data in the last few weeks,
Fed officials were clearly still worried
and in no mood to cut back on their emergency efforts.

[16]
Fed policy makers sharply reduced their economic forecasts in January,
predicting that
the economy would continue to experience steep contractions
for the first half of 2009,
that unemployment could approach 9 percent by the end of the year and
that there was at least a small risk of a drop in consumer prices
like those that Japan experienced for nearly a decade.

[17]
The Fed rarely buys long-term government bonds.
The last occasion was nearly 50 years ago
under different economic circumstances
when it tried to reduce long-term interest rates
while allowing short term rates to rise.

[18]
Ben S. Bernanke, the Fed chairman,
has been extremely cautious in recent weeks
about predicting an end to the recession,
saying that he hoped to see the start of a recovery later this year
but warning that unemployment, a lagging indicator,
would probably keep climbing until some time in 2010.

[19]
In contrast to several recent Fed decisions,
with the presidents of some regional Fed banks dissenting,
the decision at Wednesday’s meeting
of the 10 members of the Federal Open Market Committee,
the central bank’s policy making group,
was unanimous.

[20]
Jan Hatzius, chief economist at Goldman Sachs, said
the Fed had adopted a “kitchen sink” strategy of throwing everything it had
to jolt the economy out of its downward spiral.

[21]
But while Mr. Hatzius applauded the decision,
he cautioned that the central bank could not solve the economy’s problems
by expanding cheap money.

[22]
“Even if the Fed could make interest rates negative,
that wouldn’t necessarily help,” Mr. Hatzius said.

“We’re in a deep recession mainly because
the private sector, for a variety of reasons,
has decided to save a lot more.
You can have a zero interest rate,
but if you just offer more money
on top of the money that is already available,
it doesn’t do that much.”

[The key point here is that
the private sector simply doesn’t see many good investment opportunities.]

[23]
Fed officials have been wrestling for months with the fact that
lenders remain unwilling to lend and
borrowers are unwilling or unable to borrow.
Even though the Fed has been creating money at the fastest rate in its history,
much of that money has remained dormant.

[24]
The Fed’s action is an expansion of its effort to
bypass the private banking system and
act as a lender in its own right.

[25]
The Fed and the Treasury are starting a joint venture this week called
the Consumer and Business Lending Initiative
in their latest effort to thaw the still-frozen credit markets.
The program will start out with $200 billion in financing for
consumer loans, small-business loans and some corporate purposes.

[26]
Fed officials have said they hope to expand the program next month,
possibly to include the huge market for commercial mortgages,
and both the Fed and Treasury hope the program will eventually provide
up to $1 trillion in total financing.

2009-05-04-NYT-Meltzer

Inflation Nation
By ALLAN H. MELTZER
New York Times Op-Ed, 2009-05-04

2009-05-26-WP-Shin-Fed-reeling-in-lifelines

Fed's Next Task: Reeling In Lifelines
As Recession Eases, Expanded Lending Could Stoke Inflation
By Annys Shin
Washington Post, 2009-05-26

[1]
As if the worst recession since World War II, the near collapse of the financial system, and the prospect of double-digit unemployment weren’t enough to deal with, the Federal Reserve now has something else to worry about: success.

[2]
Lately, a steady stream of economic data has suggested that while the economy is still shrinking, the pace of the decline is slowing. That, in turn, has stoked fears that the Fed’s efforts to steer the economy away from a 1930s-era depression would push the country toward ‘70s-style inflation.

[3]
Those fears center on the Fed’s unprecedented efforts to revive the economy by creating more than $1 trillion in new money. Determining the best time to withdraw that money is a classic quandary for central bankers. The challenge of timing is even more daunting than usual this time because the Fed has become so integral to shoring up the financial system. As Fed leaders ponder their next move, analysts say they may have to choose between propping up credit markets today and fighting inflation tomorrow.

...

Fed officials say the risk of inflation is low because much of the money the Fed has created is not circulating but sitting in bank reserves. But because those reserves are so large, other economists see potential for danger. If the Fed moves too slowly once the economy recovers, that money could get out quickly. As a result, some view signs that the recession is starting to ease as meaning that it is time to step back by ending some of the Fed’s emergency lending programs.

…

The harder task is
disposing of the up to $1.75 trillion in
mortgage-related securities and long-term Treasury bills
the Fed has pledged to buy
in an effort to drive down borrowing costs for consumers.
The Fed can sell them outright or through reverse repurchase transactions --
complex deals that let the Fed sell those securities temporarily.

The Fed can also adjust
the amount of interest it pays banks on money held in reserve.
Tinkering with that rate sets a floor for rates charged on overnight loans
and thus the overall availability of credit requiring a sell-off of mortgage-backed securities or other long-term debt.
The Fed could also sell its own bonds --
or “Fed bills” as Fed insiders call them --
that investors would be more likely to buy,
or have the Treasury issue debt on its behalf.

Many of these ideas have been tried by other central banks but not the Fed.
“I don’t think we should have a huge amount of confidence
about how all this is going to work,”
said William Poole, former head of the Federal Reserve Bank of St. Louis.

[Gee, sounds just great.
Just the time for economic experimenting.
Where’s Phil Gramm?
He said he wanted innovation.]

There could be unforeseen glitches,
said Williams College economist Kenneth Kuttner.
The market for mortgage-backed securities, for example, froze up last fall.
“What happens if they need to start removing liquidity from the system
before the markets for some of those securities spring back to life?”
Kuttner said.

The Fed could face increasing pressure not to raise interest rates if the Obama administration doesn’t cut spending or raise taxes to bring down the deficit, which is estimated to hit $1.8 trillion this year. A rate hike would increase the government’s borrowing costs and could sabotage a housing market recovery.

Fed leaders “may be faced with a lot of unpalatable trade-offs,” said Franklin Allen, a finance professor at the University of Pennsylvania’s business school.

2009-06-04-WP-Irwin-Bernanke-monetizing-the-debt

Bernanke Presses For Fiscal Restraint
Prolonged Deficits Threaten Economy, Fed Chief Warns
By Neil Irwin
Washington Post, 2009-06-04

[An excerpt; emphasis is added.]

Some analysts worry that

the Fed will succumb to political pressure in the future to
effectively print money
to fund government borrowing --
a process known as monetizing the debt.

Two congressmen raised that possibility explicitly in yesterday’s hearing.

“This can be a dangerous policy mix.
The Treasury is issuing debt.
And the central bank is buying it,”
said Rep. Paul D. Ryan (R-Wis.).

“It gives the alarming impression that
the U.S. one day
might begin to meet its financial obligations
by simply printing money.
And we all know what happens to
a country that chooses to monetize its debt.
It gets runaway inflation,
a gradual erosion of workers’ paychecks and family savings.”

Bernanke said that the Fed takes its political independence seriously,
and while it is now focused on using all the tools at its disposal
to ease the pain of the recession,
it will respond aggressively if inflation becomes a problem.

The Fed has given no strong indication of
whether it will expand its purchases of Treasury bonds.
Without doing so, though,
the Fed would have less flexibility to stimulate the economy.
It has already cut a key interest rate it controls to nearly zero.

“They definitely have less leeway” to buy more Treasury bonds,
said Michael Feroli, an economist at J.P. Morgan Chase.
“The Fed hasn’t done a stellar job of communicating its strategy”
with the bond purchases, which, he argued,
has allowed the discussion to be dominated by people who argue that
the Fed’s actions are effectively monetizing the debt.
Doing so would increase the money supply,
thereby weakening the dollar and leading to high inflation.

One thing that would help assuage those fears
would be for government leaders to signal that
they will manage the nation’s finances well in the long run.
That would tend to keep long-term interest rates low,
which in turn would help encourage an economic recovery.

[Sadly, the American electorate will punish
any realistic steps politicians take
to fix America’s fiscal problems.
Between the GOP’s desire to keep taxes from rising
and the Dems love for exorbitant and irresponsible social spending
there are insufficient responsible centrists to
a) raise taxes and b) slash radically those “entitlements.”]

2010

2010-01-03-Bernanke-address-to-American-Economic-Association

Monetary Policy and the Housing Bubble
Chairman Ben S. Bernanke
At the Annual Meeting of the American Economic Association, Atlanta, Georgia
www.federalreserve.gov, 2010-01-03

[An excerpt; emphasis is added.]

With respect to the magnitude of house-price increases:
Economists who have investigated the issue have generally found that,
based on historical relationships,
only a small portion of the increase in house prices earlier this decade
can be attributed to the stance of U.S. monetary policy. [12]
This conclusion has been reached using both econometric models
and purely statistical analyses that make no use of economic theory.

[While Bernanke presents sophisticated and technical arguments
to justify that statement,
it seems really hard to believe in practical terms.
The cause-and-effect relation which he is denying runs like this:
1. The Fed’s monetary policies affect interest rates in general,
and mortgage interest rates in particular.
2. In turn, lower mortgage interest rates make home-buying more attractive and affordable to prospective home buyers,
pulling them into the market.
Lower mortgage interest rates mean that
more of the monthly payment goes to principle, less to interest,
meaning that for the same monthly payment the home buyer can get a bigger loan,
or for the same size loan, he will have lower monthly payments.
In the first case, he can bid more for a house;
in the second case, more Americans can afford to bid for housing.
Either factor will lead to rising home prices.

How Bernanke avoids seeing this, all his technical arguments notwithstanding,
is beyond me.]

2010-01-06-Leonhardt-Bernanke-punchbowl

Fed Missed This Bubble. Will It See a New One?
By DAVID LEONHARDT
New York Times, 2010-01-06

[An excerpt:]

...

When Mr. Bernanke is challenged about the Fed’s performance,
he often points out that recognizing a bubble is hard.
“It is extraordinarily difficult,”
he said during his Senate confirmation hearing last month,
“to know in real time if an asset price is appropriate or not.”

Most of the time, that’s true.
Do you know if stocks will keep going up?
Is gold now in the midst of a bubble?
What will happen to your house’s value?
Questions like these are usually an invitation to hubris.

But the recent housing bubble was an exception.
By any serious measure,
houses in much of this country had become overvalued.
From the late 1960s to 2000,
the ratio of the median national house price to median income
hovered from 2.9 to 3.2.
By 2005, it had shot up to 4.5.
In some places,
buyers were spending twice as much on their monthly mortgage payment
as they would have spent renting a similar house,
without even considering the down payment.

More than a few people —
economists, journalists, even some Fed officials —
noticed this phenomenon.
It wasn’t that hard, if you were willing to look at economic fundamentals.
You couldn’t know exactly when or how far prices would fall,
but it seemed clear they were out of control.
Indeed, making that call was similar to
what the Fed does when it sets interest rates:
using concrete data
to decide whether some part of the economy is too hot (or too cold).

And Fed officials could have had a real impact
if they had decided to attack the bubble.
Imagine if Mr. Greenspan, then considered an oracle,
announced he was cracking down on wishful-thinking mortgages,
as he had the authority to do.

So why did Mr. Greenspan and Mr. Bernanke get it wrong?

The answer seems to be more psychological than economic.
They got trapped in an echo chamber of conventional wisdom.
Real estate agents, home builders, Wall Street executives, many economists
and millions of homeowners
were all saying that home prices would not drop,
and the typically sober-minded officials at the Fed persuaded themselves
that it was true.
“We’ve never had a decline in house prices on a nationwide basis,”
Mr. Bernanke said on CNBC in 2005.

He and his colleagues fell victim to
the same weakness that bedeviled
the engineers of the Challenger space shuttle,
the planners of the Vietnam and Iraq Wars,
and the airline pilots who have made tragic cockpit errors.
They didn’t adequately question their own assumptions.
It’s an entirely human mistake.

Which is why it is likely to happen again.

[With regard to that issue of how does one recognize a bubble,
I want to recall a familiar media story from the past.
During the 1970s and 1980s,
when economic activity got too warm (not quite the same thing, I know),
the Fed chairman would inevitable take some action to cool it off,
and he, or media pundits, would always justify this
by recalling the statement of
1950s and 60s Fed Chairman William McChesney Martin, Jr.
that the job of the Federal Reserve is
“to take away the punch bowl just as the party gets going.”]

...

“The Federal Reserve has unparalleled expertise,”
Mr. Bernanke told Congress last month.
“We have a great group of economists, financial market experts and others
who are unique in Washington in their ability to address these issues.”

Fair enough. At some point, though,
it sure would be nice to hear those experts
explain how they missed the biggest bubble of our time.

2010-03-22-Samuelson-Greenspan

Alan Greenspan's flawed analysis of the financial crisis
By Robert J. Samuelson
Washington Post, 2010-03-22

2010-11-12-Norris-Fed

Fed Efforts to Revive Economy Find Critics
By FLOYD NORRIS
New York Times Opinion, 2010-11-12

The Fed did not deserve the praise it used to get.
It presided over bubbles and huge debt creation.
When things were good,
it forgot the injunction of a former Fed chairman,
William McChesney Martin, that
the Fed’s job was to “take away the punch bowl”
when everyone was having a good time.

We would be much better off if the Fed had noticed
there was a bubble inflating in housing,
rather than take the doctrinaire [?????!!!!!] position that
there were no bubbles,
or, if there were,
no one could figure out if they were too big.

[By the way, I recalled the punch bowl quote in
2010-01-06-Leonhardt-Bernanke-punchbowl.

So far as I can tell, between 1980 and 2010
the only article in the Times by Mr. Norris which mentions
the punch bowl quotation from William McChesney Martin is
the 1999-10-22 article “Fed Learns Bartenders Are More Popular Than Bouncers”.

But more broadly,
it was not just that the Fed that failed to act on Martin’s dictum.
There are plenty of media outlets that cover the business and financial world,
including the NYT and WSJ,
as well as the magazines and television programs,
that also ignored those crucial words of wisdom.
The blame truly is spread across our “elite.”]

2011

2011-08-10-Kudlow-On-Bernanke

We've Seen This Bernanke Movie Before
by Lawrence Kudlow
Creators Syndicate, 2011-08-10 (Wednesday)

U.S. Federal Reserve Chairman Ben Bernanke’s
shocking Federal Open Market Committee announcement Tuesday (08-09) —
that its zero-interest-rate target
would be extended for two more years, through the middle of 2013 —
drove Dow stocks up more than 400 points.
But this new policy had no stock market carry-over on Wednesday,
when the Dow plunged more than 500 points.

But we have not heard the last from Bernanke — not by a long shot.

Buried in the last paragraph of this week’s surprise FOMC announcement
was this huge statement:
“The Committee discussed the range of policy tools available
to promote a stronger economic recovery
in a context of price stability.”

This is a brand-new statement.
And in all likelihood, it was purposefully open-ended.
A Fed source suggests that this sort of stuff is usually left out of sight
and buried in Fed committee minutes, released well after the FOMC meeting,
and not put boldly in the actual policy statement.
So clearly, it’s very important.

What might it mean?

When Bernanke speaks at the Fed’s Jackson Hole, Wyo., meeting Aug. 26,
he could conceivably launch a real shock-and-awe stimulus program.
If you go back a year, when Bernanke first announced QE2 at Jackson Hole,
sources tell me that the original debate over the quantity of bond purchases
had a $2 trillion balance-sheet expansion on the table.
Inflation hawks beat that number back to $600 billion.
But now the rest of that $2 trillion — or $1.4 trillion —
could conceivably be on the table for a new QE3 announcement by the Fed.

A new round of Fed bond purchases likely would be aimed at
pinning long-term interest rates down as much as possible.
In other words,
the Fed will be buying 10-year paper and maybe even 30-year paper
to get those yields down even more.
(Ten-years are currently about 2 percent.)
The idea would be to reduce the attractiveness of government bonds
and get investors into riskier assets, such as stocks,
or perhaps even new-business and venture-capital startups,
where potential yields look even more attractive.

There even might be some job creation in all this.
Plus, the Fed’s potential Jackson Hole shock-and-awe program could include
the removal of the 25-basis-point Fed payment on
the $1.6 trillion excess bank reserve now on deposit at the central bank.
If the banks no longer earn a safe 25 basis points,
they might conceivably lend more.

And if long-term rates come down as per Bernanke’s target bond purchases,
mortgage rates might come down even more,
to the benefit of future and current homeowners.

Politically, inside the Fed, three regional bank presidents dissented from
the unprecedented Fed decision
to keep its target rate down for two more years.
But the inner circle of Fed power —
Bernanke, Janet Yellen and William Dudley —
has enough votes from other Fed board governors and reserve bank presidents
to jam through almost any shock-and-awe it wants.
All this could be announced formally at the next Fed meeting, on Sept. 20,
but Bernanke himself is likely to let the cat out of the bag in Jackson Hole
toward the end of this month.

The trouble with all this is that it didn’t work with QE2,
and it would have no permanent effect on the slumping economy.
Targeting bond yields and printing more money
simply distorts asset prices
throughout the financial markets.

We’ve seen this movie before. And it didn’t play well.
The Fed’s shock-and-awe risks another round of dollar depreciation.
It’s part of the message of skyrocketing gold prices right now.

Unleashing dormant animal spirits in this economy
can only come from the fiscal side,
with low-tax and regulatory reforms
to provide new economic growth incentives
and lower the cost of doing business.

[I dissent from this last remark.
There are many reasons why the American worker is no longer competitive
with those in the East Asian countries, among others.
Those far-reaching policy decisions and their unintended economic consequences
need to be examined.]

A pro-growth package from Washington is what we really need.
It should be part of the next round of budget cuts,
included in the work of the super-committee during phase two of the debt deal.

Without those new incentives for growth,

the Fed can print all the new money in the world
and the federal government can spend itself into oblivion,
and none of it will resurrect the economy.

2011-08-17-Kudlow-On-Perry

Perry's Red-Hot Bernanke Slam
by Lawrence Kudlow
Creators Syndicate, 2011-08-17 (Wednesday)

...

The Texas governor, who by some polls is
the new Republican presidential front-runner, went on to say:
“We’ve already tried this.
All it’s going to be doing is
devaluing the dollar in your pocket.
And we cannot afford that.”

Well, to me that is exactly right.

Let’s take a quick look at Bernanke’s QE2 record of pump priming:
The dollar fell 12 percent on foreign exchange markets.
The consumer price index jumped more than 5 percent at an annual rate.
And the $600 billion cheapening of the greenback
led to skyrocketing commodity prices, including oil, gasoline and food.
That oil price shock is one of the principal factors behind
the 0.8 percent first-half economic stutter.
As a result of the jump in inflation linked to QE2,
real consumer incomes slumped badly
and consumer spending fell substantially.

Before QE2, the economy was growing about 2.5 percent,
even though it already was blunted by numerous tax and regulatory obstacles.

But the cheap-dollar oil shock came perilously close to pushing us into recession.
So it turns out that Perry — even with his overly strong language —
is a pretty sharp economic and monetary analyst.

In fact, Perry’s analysis actually channels recent Fed dissents
by reserve bank presidents Dick Fisher of Dallas,
Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis.
They object to a two-year extension of the Fed’s zero-interest-rate policy
and, in so doing, have set down an opposition marker to
a potential new shock-and-awe quantitative easing
that many fear will be announced Aug. 26
when Bernanke speaks to the Jackson Hole, Wyo., Fed conference.

What makes Perry’s position even more interesting is
his disagreement with former Massachusetts Gov. Mitt Romney.
When I interviewed Romney this past April,
he essentially defended Bernanke and dollar depreciation.
“Well, you know, I think Ben Bernanke is a student of monetary policy,”
Romney said.
“He’s doing as good a job as he thinks he can do in the Federal Reserve.”

...

2012-09-16-Samuelson-bernanke-on-the-brink

Bernanke on the brink
By Robert J. Samuelson
Washington Post, 2012-09-16

We are reaching — or may already have passed —
the practical limits of “economic stimulus.”
Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth.
But even before the announcement,
there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months.
The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year.

...

... the stimulus programs themselves. Intended to inspire optimism by demonstrating government’s commitment to recovery, they could do the opposite. If consumers and companies interpret them as signaling that the economy is in worse shape than they thought, they might retrench even more. Some stimulus benefits would be offset.

There is a desperate air to Bernanke’s latest move. At best, it will reinforce a long-awaited housing revival. At worst, it will founder on obvious problems. How much lower can the Fed drive long-term interest rates? How much money can the Fed shovel into the economy without rekindling inflationary expectations and behavior? The Fed is on the brink of moving beyond what it understands and can control.

2012-09-18-WP-qe3-may-have-little-impact-on-mortgage-borrowers

Fed’s latest stimulus may have little impact on mortgage borrowers
By Danielle Douglas and Brady Dennis
Washington Post, 2012-09-18

The Federal Reserve took aim at the nation’s wobbly housing market last week
with its biggest stimulus action in two years,
but that firepower is doing little to lower mortgage rates
or make home loans more available for Americans.

Instead,
banks are set to see a windfall
since the Fed’s actions will immediately lower the cost of issuing loans.
It may take months or longer for benefits to trickle down to consumers,
analysts say.

The emerging scenario highlights the limitations of the Fed’s ability
to jump-start the housing market on demand:
Rather than intervene directly with consumers,
the Fed must rely on banks, brokers and other industry actors
to offer borrowers better terms.

Banks say they are keeping rates high right now
because lowering them any further would overwhelm them with customers.
They say that over time, as volume thins out,
rates could come down to attract new borrowers.

“Bank of America, Wells, Chase, whomever, have fixed capacity.
You can’t take in more loans than you can handle,”
said Matt Vernon, a senior mortgage executive at Bank of America.

Critics argue that banks
are simply maximizing profits at the expense of consumers.
Mortgage bankers are recording higher gains from home loans
as the gap widens between the interest rate they charge consumers
and the rate they must pay investors who finance the loans by buying mortgage securities.

Another challenge for the Fed is that many people
eager to buy a home or refinance an existing mortgage
simply can’t qualify because of poor credit histories.
That may not change even if rates fall.

People “are seeing a dangling low fruit, but they just cannot reach it,”
said Lawrence Yun, chief economist for the National Association of Realtors.

At a news conference last Thursday following the announcement
that the Fed would begin buying $40 billion worth of mortgage bonds per month,
Fed Chairman Ben S. Bernanke faced several questions
about the significance of the central bank’s actions to the housing market.

Bernanke said that the initiative
should “provide further support for the housing sector
by encouraging home purchases and refinancing.”
The chairman said “housing is usually a big part of the recovery process”
but has been “one of the missing pistons in the engine.”

Yun said he believes the Fed was right
to focus its latest round of stimulus at the long-suffering housing market,
[What would you expect the chief economist for the National Association of Realtors
to say?
Talk about a biased source!]
but it remains far from certain that the action will have meaningful impact.

Rates are already at generational lows, he said.
Pushing them lower might spur some additional refinancing,
but Yun said it is unlikely to create a new wave of home buyers.

Mortgage Bankers Association chief executive David Stevens
expects even the refinancing boom to “burn out”
since everyone who could qualify for a lower mortgage will have refinanced already.

To move that process along, banks are ramping up.
Bank of America has added more than 800 people to its mortgage lending team
to keep pace with refinancing applications.
Vernon, the mortgage executive, said that
as banks continue to work through backlogs of loans more quickly,
they should begin offering consumers lower rates.

Once the refinancing activity dies out,
demand for new homes will climb as borrowers gain confidence in the market,
analysts say.
The Mortgage Bankers Association is forecasting that
loans used to purchase homes could increase by 20 to 25 percent.

Some regions of the country, which experienced only moderate price declines,
are seeing a dearth of desirable homes for sale.
Lower interest rates, therefore, may have little effect on boosting sales.

In Washington,
the number of active listings in June reached a historic low,
down 33 percent from a year ago.
The result has been a wave of eager but frustrated buyers
and a return of bidding wars, escalation clauses and offers to forgo requests for any repairs by sellers.

Wells Fargo senior economist Mark Vitner said he expects
the Fed’s actions will give home builders confidence to build new properties in anticipation of demand.

“When Bernanke talked about giving a boost to the housing market,
he was really talking about home building,” Vitner said.
“Inventories are so low today and sales are growing
that I think these actions are really meant to improve buying.”

Indeed, Bernanke said increasing home sales
would provide the much-needed boost to the overall economy.
“House prices are beginning to rise in some markets,
which will encourage people to look at homes,
will encourage lenders to make more mortgage loans,” Bernanke said.
“So I’m hopeful that we’ll see continued progress in the housing market.”

[I can only shake my head in amazement at how these guys running the show
have placed, and continue to place, such an emphasis on home building
rather than manufacturing.]

2012-10-13-WP-booming-banks-say-consumers-may-not-see-lower-mortgage-rates

Fed actions to reduce mortgage rates may be helping banks more than borrowers
By Danielle Douglas
Washington Post, 2012-10-13

JPMorgan Chase and Wells Fargo, the nation’s largest mortgage lenders,
said Friday
they won’t make home loans much cheaper for consumers,
even as they reported booming profits from that business.

Those bottom lines have been padded by
federal initiatives to stimulate the economy.
The Federal Reserve is spending $40 billion a month
to reduce mortgage rates to encourage Americans to buy homes.
Instead,
its policies may be generating more benefits for banks
than borrowers.

...