Quantitative Easing and the Electronic Money Printing Machine – Saying Goodbye to Historically Low Mortgage Interest Rates. Federal Reserve 95 Percent Complete on Buying $1.25 Trillion in Mortgage Backed Securities.
People forget that quantitative easing is a form of creating something out of nothing. This extreme form of monetary policy is called upon in certain situations when central banks reach the zero bound with their funds rate like the Federal Reserve in this current crisis. What is quantitative easing? The Federal Reserve trying to solve the economic recession via monetary policy dropped the Fed funds rate to zero to stimulate demand. Back when Alan Greenspan was chairman, he dropped rates to 1 percent to mitigate the damage of the technology bubble and set off and even bigger housing bubble. Current Fed chairman Ben Bernanke dropped rates to zero and the economy did not respond. In comes quantitative easing.
If you are wondering why mortgage rates are at historically low levels yet the economy is still in the doldrums look at the following chart:
Source: Federal Reserve, St. Louis
Over 40 years of data and the 30 year fixed rate mortgage averaged 9 percent. Today that rate is slightly below 5 percent, a level unseen in nearly a century. Now this isn’t where the quantitative easing stepped in to bolster the market. If you look at the chart above since Alan Greenspan dropped rates early in the 2000s the 30 year fixed mortgage has been historically low. The Federal Reserve added maximum fuel to the housing bubble. Banks borrowed at extremely low rates and speculated in mortgages and other forms of debt. Seeing how much demand was stimulated early in the decade with lowering the Fed funds rate, Ben Bernanke decided to pursue a similar policy this time as well. Yet it didn’t work and he reached the zero bound level. The market was saturated with debt and demand was nonexistent for mortgage backed securities. In steps the Fed:
Source: Federal Reserve, Atlanta
It is interesting that the Federal Reserve Banks of smaller more fiscally prudent districts offers the best kind of data. The New York Fed with the most assets held offers very little transparency. Above, we see the major source of quantitative easing. With no market, the Fed starting early in this crisis has been buying up mortgage backed securities to keep the housing market going.
“The Fed purchased a net total of $11 billion of agency-backed MBS through the week of February 10. This purchase brings its total up to $1.188 trillion, and by the end of the first quarter of 2010, the Fed will have purchased $1.25 trillion (thus it is 95% complete).”
So the Fed has roughly six weeks to go and $50 billion left in this component of the quantitative easing phase. If you think about this, this is electronically creating money out of thin air. The Fed in the past was only able to take on triple AAA rated securities on their balance sheet from banks. In this crisis, the Fed in order to free up the toxic waste on the balance sheet of banks decided to take over many forms of toxic assets including buying up mortgage backed securities. They nationalized the banking system without talking to Congress, the public, or anyone else for that matter. This is really the only reason the housing market did not correct further and the stock market is now up over 60 percent without any real change in the employment level. The Federal Reserve has monetized toxic waste since there is no other sensible buyer in the market that would buy this junk up. Banks have been lending government backed mortgage debt in barrels because this is off their hands once they finalize the loan. With the bailout funds costing banks near zero to borrow, they have gone back to making additional funds gambling in the stock market casino. In other words quantitative easing is financing the Wall Street circus with money we don’t have, literally.
Most Americans would probably be outraged to find out that their central bank is irresponsibly printing money out of thin air. Knowing this, the Federal Reserve obfuscates their real actions by calling it quantitative easing. But this is exactly what is happening. Banks have balance sheets full of junk and toxic waste. Without the bailouts many banks would be insolvent and fail. So the Fed steps in and removes this junk off their books to give them breathing room. But now after 26 months of financial crisis the average American is seeing no benefit from the actual bailouts. This is because the money was funneled into the banking sector elite, not the average public. They sold the public a bill of goods to keep their con game up.
And if you look at the Fed’s balance sheet since the crisis started they have trillions of dollars in junk on it most of it picked up since the crisis started:
The Fed’s balance sheet has ballooned to nearly $2.5 trillion. Back in August of 2008 it was under $1 trillion. Most of that growth came in the form of quantitative easing as we have seen above from buying those mortgages that no one else in their right mind would buy. That is why mortgage rates remain artificially low. That is why over 95 percent of all mortgages made today have some form of government guarantee. But that gig is ending soon unless the Fed decides to go further with this charade. Expect mortgage rates to go up. Expect the housing market to enter a second adjustment because the artificial housing steroids will be removed. Quantitative easing failed in Japan and it didn’t do much in this market except allow the banking sector to drain the wealth from the middle class of this country.
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If it isn’t enough that average Americans are contending with the rising cost of healthcare, education, and daily necessities like food now additional funds are going directly to the banking sector to keep them propped up like a money loving puppet. Since the Great Depression the rise of the middle class has been the envy of many people around the globe. The ability for hard working Americans to have access to an economy that supported them so long as they worked hard and followed an implicit guarantee with their nation. With this implicit guarantee it was assumed that the government would also protect people to a certain degree especially when it came to their financial well being. This did not assure a winning portfolio but it did mean we wouldn’t turn our stock market into a giant game of casino where the connected had a loaded deck. Much of the strong regulatory arm that came from the Great Depression was because of the speculative gambling during the Roaring 1920s. Yet as time went on slowly Wall Street took these structures away and now we are finding ourselves once again with the middle class largely at risk in the United States. It isn’t by accident we are in the situation we are in today.
The first important thing to understand is that yes, the income of middle class families has gone up since the 1950s but a large part of this was the rise of the two income households with women entering the workforce:
The above chart is disturbing in many ways because it bucks the nearly 50 year long-term trend of employment. Now, even with two income households many with rising job losses are finding they now have to make it with one income while inflation has eroded their buying power over the decades. In this recession 3 out of 4 job losses have been men. If you have any doubt regarding the insidious nature of inflation I put together a chart looking at various costs over the last few decades:
Part of this is due to the Federal Reserve and U.S. Treasury trashing the U.S. dollar over the decades. For example, in 1950 it took the median household income (which was largely a one income household) about 2 times the annual household income to purchase the median priced home. In 2008, it took the median household income (now largely a two income household) four times annual earnings to purchase the median priced home. In fact, the two income household has hidden a large part of how much the middle class has fallen behind in this country. Now with this recession, the deep cracks are now being exposed in the system.
Income inequality has also risen in this country and a large part of it is due to the financial sector. 1 percent of our population control 42 percent of all financial wealth. In fact, in the last decade the only segment of our population that has seen any sizeable gains in true wealth is the top 1 percent. Every other category has seen a loss of housing net worth, wage stagnation, and higher costs for daily items that consume a larger part of their budget. Just take a look at the chart below showing this change:
Source: CNN
The above is looking at a one income household in 1973 versus the two income household in the 2000s. It is interesting to note that in the 1970s Nixon took the dollar into a purely fiat system and since that time, the dollar has lost much of its actual value. This would be expected. The Federal Reserve with its banking lieutenants has been able to put our country so deep into debt that realistically we are in a position of never paying back all our outstanding obligations. The only way out is via inflation and with a fiat system that is the path we are heading down. This is important because when you look at the charts above prices rise for various reasons and inflation is a hidden tax. No need for higher taxes to bailout the banking sector when you can just destroy the purchasing power of middle class Americans by monetizing enormous amounts of debt as we have done.
That is why in the next decade, Americans are now working for someone else beyond their immediate household. A large chunk of their money is now going to the banking sector. This can be in absurd payments to credit card companies, loss of purchasing power because of the Fed, or other hidden methods of taxing the public. We are really at a crossroads for the middle class. If we dissect the data further we realize that even though things cost more, much of it has been financed through debt:
Ironically the family in the early 1970s had more discretionary income than the family in the early 2000s even with a dual income. Yet if you look around, it isn’t immediately apparent because of the massive debt bubble financed by the banking sector. Sure people bought bigger homes and newer cars but all this was under a phony veneer of success and was financed with debt. All of it was built around a mountain of debt. Yet here is where the big divide hits. Middle class families are now losing their homes through foreclosure. Many are having their cars repossessed because they can’t make their payments. Bankruptcy filings are soaring because people cannot service their debt. So middle class Americans are paying the price with the rules that are setup. Yet banks are not. They are sucking the American taxpayer for all their horrible bets and are not dealing with the ramifications of their actions. In other words, the bill is going to the middle class as the middle class is dealing with their own bad decisions. This is part of the system built around the corporatacracy model of government. Losses are socialized while gains are privatized.
And don’t kid yourself, this entire game was financed on debt:
And the small group of banks at the top now control a large portion of all FDIC backed assets in our country:
Source: FDIC, Bank Financial Statements
Forget about the Republican or Democrat parties, we are being governed by the financial sector of this economy. It is amazing how hard it is to get sensible legislation even after this great calamity. To prove this point, in California an insurance company announced they are hiking healthcare premiums by 30 percent in the midst of this recession even though they pulled in billions in profits. The government will sit back and let the middle class get fleeced because they are part of the problem. They speak a good game but are bought by the industry. Prove us wrong if this isn’t the case. Enough talk, time for action. From now on we need to focus on who is delivering results. If you can, take you money out of the big banks and put them in local regional banks. Let your local representatives know that their number one priority should be focusing on protecting our struggling middle class. Time to get some real reform or we really risk losing our middle class.
