Posted by Michael A. Kamperman on April 16, 2010
In a shocking move the SEC filed civil fraud charges against Goldman Sachs. They accused the firm of deliberately stuffing subprime CDO’s with bad mortgages, selling them to unsuspecting investors, and then arranging for bets that the mortgages would fail. If true and provable, then I imagine we will finally begin seeing someone go to jail for the massive subprime fraud. For the record Goldman Sachs denied the charges and plans to defend itself vigorously. However, the immediate and semi-permanent fallout for the economy is not good. For starters, these accusations probably just put the final nail in the coffin of the securitization market. The Federal Reserve was hoping to revive this market to bring more liquidity and leverage into the credit markets. Additionally, the enhanced risk this introduces into the market should lead to a new round of further deleveraging. All of this while the Greece sovereign debt debacle remains unresolved. The whole reason the Federal Reserve needed to print money is financial firms were delevering their balance sheets and didn’t have enough money to support the needed creation of credit. So the Fed stepped in and purchased over one trillion dollars worth of mortgages. The Fed just stopped its purchases gambling the markets could handle their exit without too big a hiccup. The SEC just pulled the rug out from under the Fed.
Make no mistake the SEC is doing the right thing. We know the subprime crisis was the result of massive fraud. Life savings have been wiped out. Millions have lost their jobs. We need to make sure those who stole from others are punished. The country will not be able to move past the subprime crisis without justice.
The SEC also just made financial regulatory reform a really hot issue. Despite the suspicions of some I do not believe the charges against Goldman Sachs are politically motivated. The SEC’s action has the very real possibility of throwing the markets into turmoil and ultimately throwing millions of more people out of work. That would not be good for the party in power come election day. Clearly the Federal Reserve wasn’t in the loop when this decision was made. Despite the constant rhetoric that the economy is much stronger than people believe and that we are in a V-Shaped recovery, the truth is consumers and small businesses are still having a very difficult time accessing credit on reasonable terms. It was reported today that the states of California, Florida, Nevada, and Georgia had record unemployment rates in the post World War II era for the month of March. That was just a couple of weeks ago. Foreclosures are continuing to go up, not down. The Obama Administration has been relying on smoke and mirrors to revive the economy. We all remember the stress tests. Well where are the loans to consumers and small businesses? Where are the jobs? This was the situation before the SEC pulled the rug out on the Fed by having the courage to call a spade a spade. It took Bernanke 18 months to start quantitative easing only after the Brits led the way and shamed him into it. Hopefully the Fed will not sleepwalk for so long this time.
Posted by Michael A. Kamperman on April 15, 2010
The news reported by the Daily Telegraph is “A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.” To achieve this lawmakers are directly calling on the Bank of Japan to monetize the debt to help steer the country out of persistent deflation. However, the Bank of Japan has cited the post World War II inflationary period as reason enough not to risk monetizing the debt. What the Bank of Japan is missing is the world today is awash with idle factories as almost everything except I-Pad’s and 3-D movies are over-supplied. After the war there were shortages of goods to meet massively pent up demand. There is simply no comparison between then and now. Yet the aged institutional memory of those who serve on the Bank of Japan is currently blocking the single best solution to Japan’s Two Lost Decades of debt-induced deflationary economic depression, namely massive quantitative easing known as printing money. The ruling coalition will win in time as they get the chance to replace the members of the Central Bank. This is the most important economic story in the world. The Democratic Party of Japan wants to encourage consumption. They do not believe a society that consumes less, saves more, produces more, and exports more is the key to prosperity. They have been traveling down that hard road for 20 years and now they want off.
Japan’s government debt is already over 200% of GDP, the highest in the developed world. There is really no way Japan can work hard and pay the debt back in a deflationary world. There is no other realistic way out but to print money. It will happen sooner or later. So why not let it happen sooner and save everyone several more years of unnecessary hardship?
In the U.S. we have only been in a debt induced deflationary depression for a little over two years, as opposed to 20 years in Japan. Hence our leaders have yet to move to the best solution to solve the economic crisis. Japan has moved and now looks poised to lead the way. In the U.S. our leaders are all excited about the false dawn of economic recovery. Japan’s ruling coalition has seen multiple false dawns and realizes they need to use drastic shock and awe to push the economy back into a long term growth mode. We will need to wait for an official government statistic double dip recession for our leaders to get their heads out of the sand. In Florida one in five mortgages are 90 days or more past due. One in five. The weekly jobless continue to signal no employment growth. And, the small business survey shows the most pessimism in 10 months as sales have simply not returned. Large companies have had access to the capital markets and have been able to take market share from smaller companies who have had a very difficult time accessing credit. In February consumer credit sank another $11 billion. We should not mistake an end to the Lehman Brothers financial panic and an Easter holiday a week sooner on the calendar as a sign of renewed economic prosperity. Unfortunately, no major political figure is calling for us to follow Japan’s lead. So like the Japanese we will sit and wait and wind up disappointed.
Posted by Michael A. Kamperman on March 24, 2010
The economy tanked when home prices collapsed. All of a sudden banks, pension plans, and endowments were sitting on significant mortgage losses. Consumers were sitting on homes that were worth less than their mortgages. Everyone is still sitting and waiting for housing prices to stabilize and turn higher. It looks like we will be waiting for a long period of time. Worse, it looks like housing is poised to take another leg down. Home sales in January and February have been anemic. This despite the extension of the first time home buyers tax credit and the new trade tax credit to encourage those that sold a home to buy another one. Theoe tax credits expire on April 30, which is the date contracts must be signed to qualify. Additionally, the Fed will stop purchasing mortgages at the end of March. The Fed’s models suggest interest rates will rise by less than 1/2% when the Fed exits the market. If we have learned anything it is don’t put too much faith in mathematical models of the economy and the markets. The money simply doesn’t exist to replace the Bank of England and the Federal Reserves nearly $2 trillion in bond purchases over the last year. Interest rates are going up for someone somewhere and available credit is going to dry up for someone somewhere. My thoughts are mortgages rates could rise to well over 6% soon after the Fed exits. If we can’t sell homes with tax credits and low mortgage rates, then we won’t see the housing market turn up when we lose the tax credits and mortgage rates rise. For the record in February new home sales plunged to lowest level since they started keeping records back in the early 1960′s.These
Greece is an early precursor to what will happen when the Fed exits its quantitative easing program. Its been no secret Greece’s economy has been suffering from the global deflationary depression and that Greece had high levels of debt relative to its GDP. So why did the markets all of sudden slam Greek debt and nearly double its interest rates? It looks like the bond market is looking forward to March 31 when the Fed “normalizes” things a little more. Shrewd bond traders are not wanting to get stuck with the hot potato come April. It won’t take long for the Fed to admit it misread the strength of the economic recovery and the health of the bond markets and resume its quantitative easing program.
Now that Healthcare Reform is done, what will the Obama Administration do to aid the housing market, create and save jobs, and place the economy on firm economic ground? My fear is not much will happen. The clues come from how Healthcare Reform was handled. There was a significant emphasis placed on not increasing the deficit. And, part of the costs for increased Medicaid benefits were pushed off on the States that are known to be already broke. Plus, not much thought was given to the inability of some people to be able to afford to pay health insurance premiums. When one in seven mortgages are delinquent it is highly likely there is no available access to cash for many of those who are delinquent. Not to mention how are the 15 million people officially unemployed, and the 15 million not officially unemployed, going to be able to pay these premiums? To fix the housing market its going to take money. To create jobs its going to take money. An administration that is unwilling to ignore the deficit for its signature issue doesn’t look like an Administration that will ignore it for issues it clearly is not as interested in. Without much more help from Washington the outlook for home prices, jobs, and economic growth is not good.
Posted by Michael A. Kamperman on March 13, 2010
President Obama and his economic team have finally stumbled upon the absolutely best economic decision they could make by nominating Janet Yellen, President of the San Francisco Federal Reserve Bank, to the position of Vice-Chair of the Fed. Ms. Yellen would go from currently being a non-voting member of the Fed to a permanent voting member of the Fed’s Open Market Committee that sets interest rate and other Fed policies, like quantitative easing. Ms. Yellen is considered a Dove on monetary policy because she believes the Fed has a dual and equally compelling mandate to target both inflation and unemployment, as in current law. Many though would probably prefer a Hawk who would represent someone who tilts toward inflation as being the ever more pressing concern of the Fed, and therefore considers unemployment conditions as secondary to Fed policy. While unemployment is currently our nation’s number one problem, the best reason to nominate Ms. Yellen is not because she is a Dove. It is because she is not an anachronistic ideologue trapped in a 19th century understanding of the role of money in our society. She is the antithesis to Ron Paul and his “get back on gold and get rid of the Fed” religion.
Importantly, Ms Yellen doesn’t believe that monetary policy should be limited to the zero barrier of interest rate policy. Not many people are willing to loan someone some of their money and then pay them to boot. But Ms Yellen understands that in a deflationary environment the Fed needs to seek ways to use monetary policy to stimulate demand even when interest rates are already set at the barrier of zero. Hence, under the right conditions Ms. Yellen is an advocate of quantitative easing. Well, anyone who doesn’t understand that we are in the midst of the right conditions is either dumb, blind, or lying. If not now, when? The Kansas City School District is on the verge of shuttering almost half of their schools due to a severe lack of funds. Washington can simply send the school districts more money and pay for it by having the Fed buy the Treasuries issued to finance the policy. I don’t know anyone who doesn’t want America’s kids to have the best education in the world. So why is Washington twiddling its thumbs while thousand of Teachers continue to get pink slipped?
While President Obama has made a wise choice, I will with-hold rendering judgement on whether the Whitehouse finally gets it, or whether the Whitehous is simply playing politics and throwing a bone to the Progressive wing of the Democratic Party. You see there are two other vacancies on the Federal Reserve’s Open Market Committee that President Obama and his economic advisers have irresponsibly ignored for the last 14 months. If this is stumbling economic luck for us because of politics, then we will know it when President Obama fails to fill the other two Fed seats soon with people who hold similar views to Ms. Yellen. But if the Whitehouse isn’t buying their own snow job on jobs, then they know they need to find Fed Governor’s that will continue quantitative easing rather than those that prefer to end it like the current voting members of the FOMC. After March the Fed will no longer be in the bond market buying up mortgages primarily backed by U.S. agencies. Someone will step in and buy those mortgages. But will someone else be available to step in and buy whatever those people were buying, like junk bonds or Greek Sovereign debt? The Fed and the Bank of England purchased almost $2 trillion worth of U.S. and U.K. debt in the last year. Where does that money come from when they step aside? They have purchased almost as much as China has in foreign reserves. They have purchased more than twice as much as exists in the world’s largest sovereign wealth funds. The only way to replace all of the money is to use leverage, or to resume quantitative easing. Otherwise the world will spend the next year robbing Peter to pay Paul. Please President Obama, show us you get it and put two more Yellen’s on the Fed.
Posted by Michael A. Kamperman on March 1, 2010
This man is now my hero. He is the first highly respected financial commentator to recognize the seriousness of the current debt-induced deflationary depression. At risk to his reputation he has manned-up and called on Ben Bernanke to resume quantitative easing. When it comes to quantitative easing ignorance reigns. Many people have left comments on his column that the way to get out of debt is not to take on more debt. They are confusing borrowing and spending with printing. In the U.S. quantitative easing involves the Federal Reserve creating money out of thin air (printing) and purchasing assets. When the Fed purchases U.S. Treasury bonds with printed money the U.S. debt is reduced, not increased. This gives the federal government the leeway to maintain or increase spending without raising taxes or increasing the national debt. The economy desperately needs support. Increasing federal spending is the only way to stabilize the economy. As Evans-Pritchard points out the state of Illinois is running a $13 billion budget deficit on a total budget of $28 billion. Basically, Illinois needs to double state tax revenues or cut state spending in half. Many other states are in similar dire predicaments. The states cannot print, the Fed can. It must fulfill its duel mandate of price stability and full employment. Likewise, the federal government must fulfill its moral obligation to support the states.
Evans-Pritchard points out “the Fed’s Monetary Multiplier dropped to an all-time low of 0.809 last week.” Money is not circulating as it should. He also points out that “the M3 money supply has fallen at a 5.6pc rate since September.” Additionally, he highlights that ”the contraction of eurozone bank credit to firms accelerated to 2.7pc in January, while eurozone M3 fell by a further €55bn. Japan’s GDP deflator has dropped to a record low of -3pc. He claims “these are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity.” He is so right!
Evans-Pritchard quotes the Bank of England’s Head Governor Mervyn King as saying “”I was struck by the mood at the G7, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth. That can’t be true of everybody,” he said. We already know Larry Summers is advising President Obama to pursue just such a strategy. He believes we can spend less in America and save more, all the while growing our economy by selling more to others just like China does. As King states we can’t all run an import/export surplus. Meanwhile the British Pound is getting pounded by currency markets limiting the ability of the Bank of England to aggressively print money and revive its economy. It is up to Ben Bernanke and the Federal Reserve to aggressively print more money thereby providing cover to Britain, Japan, and the European Central Bank to pursue their own quantitative easing programs. Fed Vice Chair Donald Kohn retired today. This means President Obama now has three openings on the Fed. His appointments will decide the course the Fed ultimately takes. Hopefully someone in the Whitehouse is pointing out Evans-Pritchard’s comments to him.
Posted by Michael A. Kamperman on February 22, 2010
The Core CPI index was reported as minus .1%. This is the first time since 1982 the core rate has been negative. It won’t be the last. We are in store for many more negative Core CPI readings over the next couple of years. Housing costs in the form of rent and owner’s equivalent rent make up over 40% of the Core CPI rate. While the government should be using an estimate of actual home prices to calculate the cost of home ownership, it remains wedded to the concept of using owner’s equivalent rent which was introduced in 1983. While housing prices were falling dramatically for over 2 years, the CPI calculated the cost of home ownership as rising because rents were rising. Now the lag effect of the deep contraction in the housing market has spilled over to rents and rents are declining. Vacancy rates for apartments are now over 8%, and these units are having to compete with recent foreclosures and short sales purchased by investors and turned into rental units. Hence, the pressure on rents will remain relentless over the next couple of years unless there is a dramatic uptick in employment. Too many young men and women are graduating from college without the prospect of a full-time job that can cover their living expenses and they are being forced to move back home with Mom and Dad. Additionally, many pe0ple who are financially strapped are moving in with friends or relatives. The glut in housing will take a lot longer to work off than most experts expect.
The Core CPI is actually reflecting where we have been. But troubling to my mind is the more the government reports the country is experiencing deflation, then the more it will become a reinforcing self fulfilling prophecy. First of all many wage negotiations are tied to the CPI rate, as is Social Security. This will lower incomes. Additionally, as people see and perceive that prices are actually falling they will do the rational economic thing which is to delay purchases. Fewer purchases will lead to fewer jobs and fewer people capable of buying or renting a house. It is ironic that the Fed wanted to signal to the markets a return to normalcy by raising the discount rate last week only to have a negative print in the Core CPI rate bring in to question any attempt to tighten. It is only a matter of time before the Fed reverses and resumes its program of quantitative easing, just as it has been only a matter of time before the housing price declines would turn the Core CPI rate negative. Our country has too much debt, and now it has falling incomes to service that debt.
We are not alone. In fact we are legion. Most of Europe shares our fate. We now share Japan’s deflationary fate of the last 20 years. Japan sent a clear signal that when economic calamity hits the worst thing to do is to be too timid and then compound the error by propping up too-big-to-fail-too-broke-to-lend Zombie Banks. The history book on the shelf is always repeating itself….Waterloo. The Greek led euro crisis indicates deflation is inevitable in Europe as well. It also has sparked a significant rally in the dollar which is killing any hopes of an export led recovery. Message to Lawrence Summers, the whole world cannot adopt the Chinese model of selling four times as much as it buys from everyone else. There is an upside to the negative Core CPI rate. It will highlight the dramatic decline in the velocity of money and focus attention on the need for the Fed to print more money.
Posted by Michael A. Kamperman on February 8, 2010
The Dow Jones closed below 10,000 as investors are becoming increasingly nervous about the ability of governments to step forward and solve the economic crisis. Global economies cannot revive unless significant amounts of additional government spending continue to take the place of private sector spending. However, governments cannot cut deficits and support the global economy with higher spending at the same time. The crisis surrounding the debts and deficits of Greece, Spain, and Portugal expose Europe as leaderless and rudderless. Now is not the time to ask Greece, Spain, and Portugal to accept fiscal austerity and more economic pain. Yet that is exactly what Europe’s leaders are doing. The U.S. remains equally leaderless and rudderless as the states are asked to swallow the same type of bitter fiscal austerity pill by the Whitehouse and the Congress. Global governments appear frozen and incapable of stepping up and meeting the challenges that face us. Confidence is always fragile. No one in a leadership position is capable of putting Humpty Dumpty back together again. Money is heading back under the mattress. Let’s be clear, nothing has been fixed. The credit markets remain broken. Sleight of hand statistics like those used in the unemployment report are not working any more. People are waking up and realizing that the unemployment rate went down to 9.7% because we have thrown more workers out of the want to work bad enough category, not because we actually created jobs. The Labor Department reported we have the same number of Jobs in January as we did in November, yet the unemployment rate dropped from 10% to 9.7% despite population growth. Weekly unemployment claims started rising again before the loss of confidence even swept the markets. Now there is a very good chance the momentum to fire more workers will gather steam.
Our country has over 6 million people that have been out of work for over 6 months. Where is the plan to put all of them, that’s right all of them, back to work? Cutting taxes isn’t going to do it. A feeble $100 billion jobs bill isn’t going to do it. Faith in the markets isn’t going to do it. We need to see a real plan. So far no leader in Washington has put forward a comprehensive plan to put America back to work.
In 1931 there was false optimism the economy stabilized and the worst was over, then the next big leg down in the economy hit and eventually drove the unemployment rate to 25% in 1933. It appears the next leg down in our economy has begun. The global economy cannot be sustained without significant increases in global government spending. Spending cannot continue without large deficits. The solution is to print money to reduce government debts and increase government spending at the same time. No leader is currently advocating this. Both the Bank of England and the Federal Reserve have naively backed away from quantitative easing. What our leaders fail to see is first they came for the Gypsies, then they came for the Jews, then they came for us. First the deficit hawks are coming for Southern Europe, then…
Posted by Michael A. Kamperman on February 4, 2010
Today the Bank of England announced they are ending their quantitative easing program for the time being. They will no longer print money and buy their own government bonds. The Federal Reserve has already announced they will stop printing money and purchasing mortgages. The Japanese Central Bank remains lost in translation. The ECB remains clueless. This week the Australian Central Bank back-pedaled and backed off raising interest rates, which shocked the markets since all 20 analysts predicted they would continue raising interest rates. The Australians came to their senses and stopped the madness. It is only a matter of time before the Federal Reserve, the Bank of England, the Japanese Central Bank, and yes even the European Central Bank begin to aggressively print money to stop the debt-induced deflationary depression in its tracks. How long it takes and how much more global unemployment pain will be endured before they come to their senses is anybody’s guess. There is no doubt this will happen, for there is no other way out. The unemployment crisis, which will be highlighted by the U.S. unemployment report tomorrow, is a global crisis. Unemployment rates in Spain are officially 19%, which are Great Depression levels. Yet the ECB and the bond vigilantes are demanding that Spain join Greece and initiate significant cutbacks in government spending including firing more government workers and cutting wages. Even Herbert Hoover increased federal government spending in the 1930’s, though not by much. Cutting government spending will lead to a decline in aggregate demand which will further depress the global economy leading to more firings of private sector workers. The time for euphemisms like “layoffs” is over. Workers are being told to hit the streets. The global economy is suffering from a lack of demand due to ridiculously tight credit conditions for consumers and small businesses. Tight credit conditions have once again spread to corporate borrowers and now they are being inflicted on sovereign nations. The world is still in the midst of global deleveraging because there is simply not enough money in the world to support all of the debts.
The nations in the euro will either share their debts or they will be forced to break the euro up and return to their own currencies. My advice to the Europeans is to have all 15 nations in the euro guarantee the debts of all other 15 nations, true monetary integration. While this was not part of their original treaty it either gets added now or they can kiss the euro goodbye. Then, the ECB should embark on an aggressive quantitative easing program to make sure the debts do not require cutbacks in government services and do not fall on the backs of the taxpayers. The only risk would be the euro might depreciate against other currencies. If this happened it would only make European exports much more competitive improving their balance of trade.
What is needed now is global leadership, sadly it is lacking. A money printing solution to the economic crisis exists and yet politicians are cowered by false prophets preaching the limits of money creation and the anachronistic worship of gold. Those concerned about high unemployment rates need to understand those rates will trend higher and higher unless and until the world central banks come to their senses and re-inflate the money supply. Helicopter Ben needs to rev up the engines or forever sacrifice his reputation as having avoided another Great Depression. In order to solve a crisis you have to understand it first.
Posted by Michael A. Kamperman on January 16, 2010
The Wall Street Journal is reporting the Federal Reserve plans to let most of their emergency measures expire as scheduled during the next two months. The Federal Reserve will remove guarantees for money market funds on February 1. They will also no longer make emergency loans to businesses that are having trouble accessing the commercial paper market. Most significantly, they will stop purchasing federal agency paper and mortgages at the end of March as scheduled. They will leave interest rates near zero until the economy demonstrates it has improved, and that the improvement is sustainable. Basically, the Fed plans to hide and watch for the remainder of 2010. Surprisingly, the Fed acknowledges that unemployment will probably remain stubbornly high for the foreseeable future. Yet there is a belief by the majority of Fed Governors that they have done enough and there is not much more they can do for the economy.
Balderdash! The Federal Reserve is charged with both price stability and full employment. By tacitly acknowledging we have an employment problem, but not using more of the tools at their disposal, the Fed is throwing in the Keynesian towel and adopting the creative destruction concepts of the Austrian School of Economics. If Ben Bernanke cannot move the Federal Reserve Board to fulfill its mandate, then he should not be confirmed to a second term. In a war, if you’re not winning, you fire the generals and bring in leaders who are willing to be more aggressive. Just because the Fed has done more than they ever have before doesn’t mean they have done enough, nor all that they can. Haiti is an example of an overwhelming crisis that requires a much bigger effort than what has been put forward so far. It doesn’t matter that what we are sending is more than we have ever sent to an island nation. It only matters that we do the job required of us to save those people, especially since we have the resources to do it sitting on U.S. bases. Like Haiti, the scale of our economic collapse is beyond the experience and the ability of our current economic rescue team to handle.
The Federal Reserve is now looking to the Whitehouse and the Congress to solve the economic Rubik’s Cube of finding a way out of the economic mess we find ourselves in. Unfortunately, massive quantitative easing is a big part of the way out and the Fed controls that. Doubly unfortunate is the fact that the Whitehouse and the Congress appear to be like deer in the economic headlights. Whatever came of the President’s job summit? Should Brown win in Massachusetts on Tuesday, then we could have gridlock right up until the mid-term elections in November. Even if the Democrat Coakley pulls it out, a near miss will call for recalibration. The situation in Haiti has clarified for me the problem with finding a solution. CNN reported that U.N. doctors left 25 patients in a field hospital unattended at night because of security fears. Yet CNN’s correspondent Dr. Sanjay Gupta, a hero, was able and willing to stay with the patients through the night to give them the best chance at survival. Because of his heroics all of the patients lived through the night. The command and control structure for the Haitian rescue mission is disjointed and broken. No one is really in charge and chaos reigns. The same problem has happened with the federal government’s response to the economic crisis. No one is in charge and no one is willing to be a hero. Everyone wants to stay with protocol and not stray to far from the orthodoxy. Therefore, they can always claim they did all they could and it wasn’t their fault. We need to throw caution to the wind and place a U.S. General in charge of the entire Haitian rescue operation, protocol be damned, and give that person full authority with unlimited resources to get the job done. Likewise, we need the President to use his existing authority to take ownership for providing a solution to the economic crisis. Instead, all we have now is bickering and debate and minimal efforts that are too meager to be effective.
Posted by Michael A. Kamperman on January 11, 2010
The consumer is getting the shaft in the Fed’s zero percent interest environment. Consumer credit fell by over $17 billion in November, which is part of the all-important Christmas shopping season. But what’s even more disturbing is the federal government is allowing the tax payer bailed out too-big-to-fail banks to get away with highway robbery. Big banks have raised the interest rates on credit card customers who are current on their bills up to 30% in some cases. We already have a huge problem in that many consumers cannot access credit. But many who can access credit are getting gouged. There is simply no acceptable reason for banks to be allowed to charge usurious interest rates when the Fed is letting them have money almost for free. The Fed’s policy of low interest rates is working to give the banks a chance to earn some income to cover their swept under the rug losses. However, the Fed’s low interest rate policy is failing to jump start the economy because the consumer is not seeing the low interest rates passed on to them, except for home mortgages. But most people cannot buy a new house because they can’t sell the house they live in and they cannot refinance because their current mortgage is underwater. Hence, this is having a limited impact on reviving the economy. The consumer’s inability to access affordable credit is paramount to a contraction in the money supply. Since the money supply is already contracting without factoring in the interest rate differential, the risk of persistent deflation rises daily.
The Federal Reserve needs to quit talking nonsense about an exit strategy and needs to get serious about printing a lot more money. There is no way the housing market will survive if mortgage interest rates rise further. That is all but certain to happen if the Fed ends its purchases of mortgages under its current quantitative easing program at the end of March. Nero fiddled while Rome burned. Right now the Obama Administration is fiddling while the consumer is being burned alive. It is up to Ben Bernanke to stand up and be counted. History calls.
It is also up to Congress to stand up and be counted. The recent “consumer protection” bill left a multi-month window for banks to abuse the little guy. And boys have they. Do they not realize that 70% of the U.S. economy is based on consumer spending? Do they not realize the consumer votes? Senator Dodd pushed this legislation through and now he has been pushed out. President Obama needs to call for change. He needs to call for change we can believe in. This economy is going no where if the consumer is not given a life-line, pronto.
