File this one under the heading “That’s The Ticket”, because it will be very hard for me to believe that the Federal Reserve will just dump nearly 1.5 trillion dollars in housing debt.
Yet that is the word coming out of meetings at the Fed. They are setting a long term goal of getting out of the mortgage finance business they fell into when they bought up the loans at Freddie Mac and Fannie Mae.
But they are foolish to think that that much debt will be absorbed by the marketplace unless they take a huge hit. And although they can print the money to take the hit (more madness) they will not find happy buyers of bad paper.
This is the problem with the long term failure of easy money. We have too many homes owned by too many people who can not afford them in an economy that is too fragile. Instead of taking our lumps quickly and painfully and resetting the marketplace, we are slowly unwinding it.
- We have too many empty homes right now.
- We have too many people living in homes not paying a mortgage waiting for the foreclosure notice.
- We have too many foreclosures that are pending because bankers are overwhelmed or want to manage their losses and prolong the agony.
We have no firm footing in real estate folks.
There is no reason for the Federal Reserve to be in the mortgage business. However, that train has left the station. They made the decision to slow down the pain, save the banks, and protect the economy. Understandable.
But, there is still the mess after the storm. We have too many people not knowing when the foreclosure notice is coming, too many people uncertain of what tomorrow will bring, and too many people just plain scared.
The Federal Reserve is stuck with the housing debt until we have answers and people are moving forward. Until then the Federal Reserve will just have to be the biggest housing lender in the country.
Central bankers are planning to eventually remove $1.43 trillion of housing debt from the balance sheet after critics such as Stanford University economist John Taylor accused them of straying beyond monetary policy. Philadelphia Fed President Charles Plosser said yesterday that the Fed’s purchases of housing debt expose it to demands from politicians to support other industries.
Some of the Fed’s emergency actions “blurred the line between monetary policy and fiscal policy, thereby increasing the risk to the Fed’s independence,” Plosser said in a speech. “These policies have veered toward deciding how public money should be allocated across firms and sectors of the economy.”
Policy makers agreed that it “will eventually be appropriate” to “return to holding only securities issued by the U.S. Treasury,” according to minutes of their January 26-27 meeting released yesterday.
Update:
Greg Swann takes a slightly different look on the topic but comes to the same basic conclusion. We are all on welfare now: “The government’s assistance in the housing market now is less about giving us a soft landing than it is about having us furiously flap our arms to stay aloft.”
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