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Thread: Current Fed Policy - For how long ?

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by Melonie View Post
    ^^^ and besides zero interest rate policy being an ongoing 'stealth' bailout for the big banks, the resulting 'devaluation' of the US dollar helps rich investors / speculators in other ways ... such as increasing the price of gold, oil, and other commodity investments. To some degree the resulting US dollar 'devaluation' also directly translates into rising US stock prices. And the resulting US dollar 'devaluation' also helps the overindebted 'poor', by decreasing the true value of the debts they owe. However, it is arguably not helpful at all for those Americans who have been financially 'responsible' ... i.e. savers and 'value' investors, those who have avoided going heavily into debt, etc.
    Low interest rates are helping everyone. Anyone who takes out a loan or buys anything on credit benefits. Anyone who refinances their house benefits. Any business that sells products to people who use credit to make a purchase benefits. The whole basis for your opposition to low interest rates is that it goes against your ideology.

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    Default Re: Current Fed Policy - For how long ?

    You're ignoring the unavoidable side effect of US dollar devaluation that must go along with zero interest rate policy. This results in a situation where 'grandma' sees the interest rate earned on her retirement savings decline to near zero, while the cost of buying groceries and heating her home in the winter increase significantly.

    You're ignoring the fact that the US dollar devaluation raises 'input costs' for those businesses making and selling products ... 'input costs' that, in many cases, cannot be successfully passed on to consumers without losing significant sales volumes. This in turn 'squeezes' profit margins for manufacturers and retailers ... which in turn forces them to postpone investments and shed jobs ( or at least avoid hiring ).

    You're ignoring the fact that FED funds interest rates have little to do with consumer interest rates ... or, put another way, show me a credit card with an interest rate below 8% on a permanent basis.

    In fact, the 'guaranteed' earnings handed to member banks who can borrow from the FED at near zero percent interest to buy US Treasury bonds paying 3% interest thanks to zero interest rate policy is in fact making new loans for businesses and individuals even harder to obtain !!! With the exception of home mortgages and auto loans that are ( de-facto ) backed by the full faith and credit of the US taxpayer, consumer credit interest rates for both 'prime' and 'subprime' borrowers haven't been reduced at all. What HAS increased is the 'spread' ( = potential lender earnings ) between the lender's 'cost' of money and the amount charged to the borrowers.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by eagle2 View Post
    The main problem with our economy is consumers aren't spending enough. You don't seem to be able to understand this. Increasing interest rates will reduce consumer spending more.

    After raising interest rates to record highs in the early 80's to fight inflation, the Fed dramatically reduced them after prices stabilized, and the economy grew and unemployment fell without inflation. Thus we don't even have to go back 30 years to disprove your "thousands of years of monetary history". Anyone with even the most basic knowledge of economics knows that if you want to increase economic growth and lower unemployment, you want low interest rates. This is simple, common sense. George H. W. Bush knows this, which is why he criticized the Fed for not lowering interest rates when he was running for re-election. The Republicans in Congress know this, which is why they criticized the Fed for keeping interest rates low and increasing the money supply. They don't want strong economic growth and falling unemployment when Obama is running for re-election. Even the moron Rick Perry knows this, which is why he made threats against the Fed for printing more money, when he decided to run for President. He doesn't want to run against an incumbent with a strong economy.

    What you are proposing doesn't make any sense. Before we continue with this conversation, let's see if you have an understanding of even the most simple economic concepts. Please answer these questions:

    If you want more people to buy houses, do you:

    A. Increase the cost of buying a house
    B. Decrease the cost of buying a house

    If you want more people to buy automobiles, do you:

    A. Increase the cost of buying an automobile
    B. Decrease the cost of buying an automobile
    Now WHO is making things up ? While successful, Volcker's high interest rates caused a LOT of pain by creating a severe recession. He could have and arguably should have accomplished the same thing by controlling the growth of the money supply. When he did lower rates, they were still a LOT higher than they are now. We also had a strong dollar under Reagan and Volcker. Likewise, the Fed was NOT printing money then at the rate that it is now.

    As to your questions, I want people to buy those houses and cars that THEY CAN AFFORD ! With proper down payments and credit histories ; with a serious likelihood that they will be able to pay off the concomitant loans. You are not seriously arguing for the ephemeral "prosperity" that we had under Bush The Dumber, are you ?

    I'm not going to take the bait on the rest of your political coments. Naughty ! Go sit in the corner lol.
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    Default Re: Current Fed Policy - For how long ?

    Paul Krugman's column in today's N.Y. Times was hilarious. If he didn't exist, he'd have to be invented. The main focus of his column was that January's employment numbers were good but that it was no reason to sit back. His usual prescriptions : continued easy money from the Fed and increased government spending were funny enough. That's what he ALWAYS says but one thing he wrote was breathtakingly bizarre. Even for "Krugie": " Furthermore, it is not hard to see how this recovery could become self-sustaining. In particular,at this point America is seriously UNDER-HOUSED by historical standards, because we've built very few houses in the six years since the housing bubble popped." What planet does this man live on ????? We only have about 18 million vacant houses in this country with about 300,000 of those being "new construction". In some cities like Cleveland and Detroit, they are tearing down vacant houses by the dozen. He notes that one factor is the glacial pace of household formation which he attributes SOLELY to young adults staying with or moving back in with their parents. True BUT ( in keeping with his usual intellectual dishonesty ) just one piece of a VERY large puzzle. He ignores the explosion of single parent households ( almost all of whom cannot afford a down payment let alone a mortgage ) ; the decline in the marriage rate; the explosion of student debt ( well if you already owe $100,000 in student loans what's another quarter million ? ) and of course the stagnation in middle class earnings and wealth formation which he used to decry on a regular basis.

    Nobody is arguing for radical increases in the Fed Funds Rate or Discount Rate. According to the Taylor Rule it should be about 2 % which is still below the rate of inflation. That is part of the problem and what is too reminiscent of Japan in the 90's: The effectively negative interest rates being charged by the Fed.
    Last edited by Eric Stoner; 02-07-2012 at 09:23 AM.
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    Default Re: Current Fed Policy - For how long ?

    Eric, we agree, Krugie seems to be a necessity for comic relief on the NYT editorial pages. The latest employment numbers mask a lower participation rate than we have seen since the 1980s and that is not a good thing. Of course, this jobless recovery is brought about by Obama's set of policy decisions that find their genesis in Tim Geithner and Larry Summers' belief that government cannot stimulate demand and thus the only role for government to play is propping up the bankers. Geithner, Summers and Obama have played that role, to the hilt. I fear, as I think you do, that the US is entering a "lost decade" akin to the 1990s for Japan.

    Z

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by Eric Stoner View Post
    Now WHO is making things up ? While successful, Volcker's high interest rates caused a LOT of pain by creating a severe recession. He could have and arguably should have accomplished the same thing by controlling the growth of the money supply. When he did lower rates, they were still a LOT higher than they are now. We also had a strong dollar under Reagan and Volcker. Likewise, the Fed was NOT printing money then at the rate that it is now.
    It wasn't necessary to dramatically increase the money supply or lower interest rates to the levels they are now in the 1980's, because they were much higher to begin with. Interest rates were around 18% at their peak, so there was a lot of room to lower them. When this current economic crisis started, interest rates were much lower, which is why the Fed had to lower them as much as they did.

    Quote Originally Posted by Eric Stoner View Post
    As to your questions, I want people to buy those houses and cars that THEY CAN AFFORD ! With proper down payments and credit histories ; with a serious likelihood that they will be able to pay off the concomitant loans. You are not seriously arguing for the ephemeral "prosperity" that we had under Bush The Dumber, are you ?

    I'm not going to take the bait on the rest of your political coments. Naughty ! Go sit in the corner lol.
    I agree that people shouldn't buy homes they can't afford. Lower interest rates makes it possible for more people to afford homes, which is what we want right now. I'm against giving people mortgages for homes they obviously can't afford, but that doesn't mean we shouldn't make it easier for responsible people to be able to buy homes. I'm also against unconventional mortgages, such as "interest only" or A.R.M.s, but for traditional 15, 20, or 30 year mortgages with down-payments, it would be beneficial for the economy right now to keep interest rates as low as possible for these types of loans to increase home sales.

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    Default Re: Current Fed Policy - For how long ?

    I'm against giving people mortgages for homes they obviously can't afford, but that doesn't mean we shouldn't make it easier for responsible people to be able to buy homes
    To the extent that it is possible to 'make it easier' for home buyers without negatively impacting other Americans I would agree with you. But, for better or worse, the FED's zero interest rate policy is NOT neutral. For every mortgage lender or would-be home buyer it helps, an American saver or retiree is hurt. As such, FED interest rate policy is in fact picking winners ( banksters, 'rich' investors / speculators, and 'subprime' borrowers ) and losers ( financially responsible Americans ).

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    Default Re: Current Fed Policy - For how long ?

    The Fed says it is now targeting inflation at a 2% rate..... Keeping in mind the official rate as calculated is too low..... This is good way to devalue the currency and to pay back the debt with cheaper dollars...... Now if tax receipts would just pick up...... The plan would be working.
    The country has been looted.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by mikef View Post
    The Fed says it is now targeting inflation at a 2% rate..... Keeping in mind the official rate as calculated is too low..... This is good way to devalue the currency and to pay back the debt with cheaper dollars...... Now if tax receipts would just pick up...... The plan would be working.
    This is exactly what Mel and I have been saying for quite some time.
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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by Melonie View Post
    To the extent that it is possible to 'make it easier' for home buyers without negatively impacting other Americans I would agree with you. But, for better or worse, the FED's zero interest rate policy is NOT neutral.
    It is neutral. Everyone pays lower interest rates on loans than they would be paying if the Fed increased interest rates.

    Quote Originally Posted by Melonie View Post
    For every mortgage lender or would-be home buyer it helps, an American saver or retiree is hurt. As such, FED interest rate policy is in fact picking winners ( banksters, 'rich' investors / speculators, and 'subprime' borrowers ) and losers ( financially responsible Americans ).
    You're making stuff up again. You don't know how many people rely solely on savings accounts for income. There are alternatives to low-interest savings accounts that don't require you to be rich. There are plenty of stocks that pay 4-5% in dividends that anyone can purchase. Practically everyone benefits from low interest rates. Anyone with a mortgage can benefit by refinancing. Any business, or employee of that business, that sells products on credit, benefits. Anyone who buys anything on credit, benefits. The whole entire basis of your opposition to the Fed's policies is that it goes against your ideology.
    Last edited by eagle2; 02-08-2012 at 04:11 PM.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by Melonie View Post
    You're ignoring the unavoidable side effect of US dollar devaluation that must go along with zero interest rate policy. This results in a situation where 'grandma' sees the interest rate earned on her retirement savings decline to near zero, while the cost of buying groceries and heating her home in the winter increase significantly.
    You're making stuff up again. As I have stated earlier, the price of natural gas has fallen significantly. We've already gone through this, yet you continue to make up the same stuff. Anyone whose home is heated by natural gas, or electricity from a natural gas plant is paying less for heating.

    Quote Originally Posted by Melonie View Post
    You're ignoring the fact that the US dollar devaluation raises 'input costs' for those businesses making and selling products ... 'input costs' that, in many cases, cannot be successfully passed on to consumers without losing significant sales volumes. This in turn 'squeezes' profit margins for manufacturers and retailers ... which in turn forces them to postpone investments and shed jobs ( or at least avoid hiring ).
    No it doesn't. It reduces labor costs relative to 'input costs'. The facts completely contradict your statement. Domestic auto makers' profits have significantly increased and they have been increasing hiring, not shedding jobs.

    Quote Originally Posted by Melonie View Post
    You're ignoring the fact that FED funds interest rates have little to do with consumer interest rates ... or, put another way, show me a credit card with an interest rate below 8% on a permanent basis.
    I regularly get offers for credits cards with 0% interest for over a year.


    Quote Originally Posted by Melonie View Post
    In fact, the 'guaranteed' earnings handed to member banks who can borrow from the FED at near zero percent interest to buy US Treasury bonds paying 3% interest thanks to zero interest rate policy is in fact making new loans for businesses and individuals even harder to obtain !!! With the exception of home mortgages and auto loans that are ( de-facto ) backed by the full faith and credit of the US taxpayer, consumer credit interest rates for both 'prime' and 'subprime' borrowers haven't been reduced at all. What HAS increased is the 'spread' ( = potential lender earnings ) between the lender's 'cost' of money and the amount charged to the borrowers.
    Anyone with home equity and decent credit can refinance at a lower rate, which benefits a significant number of Americans.

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    Default Re: Current Fed Policy - For how long ?

    Forcing people into the stock market...... Sure the're are safe dividend paying stocks (Nothing ever goes wrong with that ) is an added benefit...... I'm with you on Nat Gas..... But the rest is wrong..... Every monthly bill (Cable.... Insurance..... Water & Sewer..... Etc) is going up.
    The country has been looted.

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    Default Re: Current Fed Policy - For how long ?

    Many seniors already own dividend stocks to begin with. It's not the job of the Fed to ensure people can get a high rate of return on savings accounts. I haven't seen any noticeable increase in my cable or insurance bills. As I've said many times before, the biggest problems facing our economy are slow economic growth and high unemployment, not the cost of cable, or the interest rates on savings accounts. Increasing interest rates would make both of those problems worse.

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    Default Re: Current Fed Policy - For how long ?

    yes, extraordinary circumstances have led to falling prices for natural gas in the eastern USA ( which is not true elsewhere in the world ), nor for 'transportable' fuels i.e. heating oil and propane. Yes 'prime' borrowers with excellent credit histories and high incomes may receive offers for temporary 0% credit cards ( which transition to 18% after the time limit expires ). Both represent isolated, and conditional exceptions.

    And no, zero interest rate policy is NOT neutral because higher earnings based on interest rate spreads, and lower consumer borrowing interest rates, apply to a select few - while higher prices apply to all !

    As to the 'differences' of opinion on FED interest rate policy, try this 'professional' commentary ... from http://www.zerohedge.com/news/guest-...ican-conundrum

    (snip)"Under more normal circumstances Joe would absolutely be correct. Rising consumer credit means more consumption which leads to stronger economic growth. Let me explain. Individuals go to work to produce a good or service for which they are paid a finite amount of money for. With that income they pay taxes which leaves them with discretionary income from which to live on. Pay the rent, utilities, insurance and healthcare, food, clothes and put gas in the car and that pretty much consumes the majority of the paycheck.

    Therefore, in the past, if they wanted to expand their consumption beyond the constraint of incomes they turned to credit in order to leverage their consumptive purchasing power. Steadily declining interest rates and lax lending standards put excess credit in the hands of every American. (Seriously, my dog Jake got a Visa in 1999 with a $5000 credit limit) This is why during the 80's and 90's, as the ease of credit permeated its way through the system, the standard of living rose in America even while economic growth rate slowed in America along with incomes.

    Therefore, as the gap between the "desired" living standard and disposable income expanded it led to a decrease in the personal savings rates and increase in leverage. It is a simple function of math.

    Today, the situation is quite different and a harbinger of potentially bigger problems ahead. The consumer is no longer turning to credit to leverage UP consumption - they are turning to credit to maintain their current living needs.





    Take a look at the chart of personal consumption expenditures (PCE) versus total consumer credit. Notice in the past year as consumer credit rose you saw an increase in PCE. In the last two months consumer credit has exploded higher but there has been virtually NO increase in PCE levels on a month over month basis. Retail sales during the Christmas shopping season we disappointing and this was even with a large decrease in gasoline prices.

    This situation becomes even more apparent when we begin to look at the longer term trends of real disposable incomes, consumer credit and personal saving rates.

    Most of the deleveraging process that has been occurring up to this point has NOT been voluntary. Banks have been cutting off excess credit lines, consumers have been defaulting on debt, mortgage foreclosures, and personal bankruptcies. Consumers, on the other hand, are struggling just to make ends meet and are in reality doing very little in terms of voluntary debt reduction. As incomes have decreased over the past two years - the inflationary pressures in food, energy, medical and utilities have consumed more of that declining wage base. This is why today we have 1 out of every 2 Americans on some form of governmental assistance, more than 47 million people on food stamps and transfer receipts making up more than 35% of personal incomes. It is hard to make the claim that the economy is on a fast track to recovery with statistics like that. That is why the recent increases in consumer debt are disturbing. The rise in NOT about increasing consumption by buying more "stuff" it is about just about being able to purchase the same amount of "stuff" to maintain the current standard of living."(snip)


    Stating the author's point plainly, lower monthly payments on the purchase of higher priced goods primarily benefits those who are not likely to ever actually pay off the debt in full !!! While not addressed by the author, it also benefits rich speculative investors who are able to profit from rising ( commodity ) prices and rising interest rate 'spreads'. But it clearly penalizes those who primarily consume commodities i.e. gasoline, food etc. ( exception - food stamp / social welfare beneficiaries who don't actually pay for food and energy out of their own pockets ). And it clearly penalizes non-speculative investors who are seeking 'safe' stable ( retirement ) income from CD's or US gov't bonds.

    Thus, to repeat my earlier post, current FED policy benefits the 'rich', the 'poor', and the financially IRresponsible - while harming the financially responsible working / middle class.
    Last edited by Melonie; 02-09-2012 at 04:11 AM.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by eagle2 View Post
    It is neutral. Everyone pays lower interest rates on loans than they would be paying if the Fed increased interest rates.



    You're making stuff up again. You don't know how many people rely solely on savings accounts for income. There are alternatives to low-interest savings accounts that don't require you to be rich. There are plenty of stocks that pay 4-5% in dividends that anyone can purchase. Practically everyone benefits from low interest rates. Anyone with a mortgage can benefit by refinancing. Any business, or employee of that business, that sells products on credit, benefits. Anyone who buys anything on credit, benefits. The whole entire basis of your opposition to the Fed's policies is that it goes against your ideology.
    You are making the enormous assumption that every borrower pays low rates on their borrowings. The better risks do but not those without higher incomes and sterling credit histories. Exhibit A is the enormous number of homes currently underwater ; B is the high number of delinquent car loans and C are the huge number of student loans that are delinquent or behind.

    More importantly, you are deliberately misunderstanding what Mel, I and others are saying about Fed policy in general and low rates in particular. It is not that rates are low. It is that they are TOO LOW ! With nominal inflation running about 2.8 % and REAL inflation well over 3 % , current rates make no sense. We have been arguing for a Fed Funds Rate of 2 % which in and of itself is both historically low and still BELOW current inflation.

    Even more importantly, how much borrowing do we really want ? By whom? For what ? For a car or house they can afford ? - O.K. but is it healthy for there to be borrowing to maintain a lifestyle that is beyond the borrower's means ?
    Last edited by Eric Stoner; 02-09-2012 at 08:19 AM.
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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by eagle2 View Post
    You're making stuff up again. As I have stated earlier, the price of natural gas has fallen significantly. We've already gone through this, yet you continue to make up the same stuff. Anyone whose home is heated by natural gas, or electricity from a natural gas plant is paying less for heating.


    No it doesn't. It reduces labor costs relative to 'input costs'. The facts completely contradict your statement. Domestic auto makers' profits have significantly increased and they have been increasing hiring, not shedding jobs.


    I regularly get offers for credits cards with 0% interest for over a year.




    Anyone with home equity and decent credit can refinance at a lower rate, which benefits a significant number of Americans.
    Here we go again. Except for the paradise known as "Eagleland" , heating costs have gone up, Up , UP ! Especially for those who use home heating oil which is retailing for well over $3 a gallon. And as I have pointed out, despite a decline in the wholesale price, many gas consumers are paying MORE despite using fewer therms. Many utilities have NOT gotten the memo about lower gas prices. And of course, the other kind of gas that we put into our cars is creeping up to $4 a gallon.

    Yes, GM is showing a profit. On lower earnings and with a much smaller labor force than before the Bailout. While still owing billions that haven't been paid back yet.

    You do read the fine print on those credit card offers don't you ? What is the APR AFTER the 1st year ? 12 % ? ; 15 % ?; 18 % ?
    Last edited by Eric Stoner; 02-09-2012 at 10:17 AM.
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    Default Re: Current Fed Policy - For how long ?

    ^^^ risking a brush with the SW 'politics ban', I will also throw out another point for you to ponder.

    Neither the 'rich' bankers writing mortgage loans, nor the 'rich' investors holding mortgage backed securities, nor the low income / subprime homebuyers, actually care if the homebuyer is actually able to repay the loan or not. Why ? Fannie / Freddie have the 'rich' bankers covered, the FED's Maiden Lane has the 'rich' investors covered, and the subprime homebuyer A. can't be quickly or easily foreclosed upon ( meaning mortgage payment free living for months or years ) plus B. can always go bankrupt without repaying. The 'losers' in the deal are of course Americans who actually pay income taxes ... which are in turn used to bail out Fannie / Freddie as they absorb the mortgage loan losses.

    Same situation applies to 'subprime' auto lenders and car loans made to 'subprime' buyers. The only major 'subprime' auto lender these days is Ally Bank ( former GMAC ). The 'subprime' loans they are making are funded with TARP money ( which has not been repaid ). Again the 'losers' in the deal are Americans who actually pay income taxes ... which were used to bail out Ally Bank and offset losses from 'subprime' auto loan defaults. And yes other automakers have been 'forced' to underwrite low interest loans to compete with GM / Ally Bank ... as Toyota, Honda etc. can show you via reduced profitability.

    Ultimately, when 'risk' of actual loan default is mispriced, i.e. when 'subprime' borrowers are approved for low interest loans with low / no positive collateral as is the case above, sooner or later someone must pick up the tab for the inevitable losses. Lately that 'someone' has been the US taxpayer, instead of the bankers or investors ! This provides an alternate confirmation that FED policy helps the 'rich' and the 'poor', while hurting the working / middle class who actually pay income taxes.
    Last edited by Melonie; 02-09-2012 at 10:04 AM.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by Eric Stoner View Post
    You are making the enormous assumption that every borrower pays low rates on their borrowings. The better risks do but not those without higher incomes and sterling credit histories. Exhibit A is the enormous number of homes currently underwater ; B is the high number of delinquent car loans and C are the huge number of student loans that are delinquent or behind.

    More importantly, you are deliberately misunderstanding what Mel, I and others are saying about Fed policy in general and low rates in particular. It is not that rates are low. It is that they are TOO LOW ! With nominal inflation running about 2.8 % and REAL inflation well over 3 % , current rates make no sense. We have been arguing for a Fed Funds Rate of 2 % which in and of itself is both historically low and still BELOW current inflation.

    Even more importantly, how much borrowing do we really want ? By whom? For what ? For a car or house they can afford ? - O.K. but is it healthy for there to be borrowing to maintain a lifestyle that is beyond the borrower's means ?
    The CPI is up 2.4%, which is approximately what the Fed's goal is. Housing is still down over 20% from before the crisis. Raising the interest rate to 2% would hurt the recovery and possibly send us back into recession. I don't think that either you or Melonie have enough understanding of basic economic concepts to understand why your position is wrong. Again, can you please answer my questions:

    If you want more people to buy houses, do you:

    A. Increase the cost of buying a house
    B. Decrease the cost of buying a house

    If you want more people to buy automobiles, do you:

    A. Increase the cost of buying an automobile
    B. Decrease the cost of buying an automobile
    Last edited by eagle2; 02-12-2012 at 01:23 PM.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by eagle2 View Post
    The CPI is up 2.4%, which is approximately what the Fed's goal is. Housing is still down over 20% from before the crisis. Raising the interest rate to 2% would hurt the recovery and possibly send us back into recession. I don't think that either you or Melonie have enough understanding of basic economic concepts to understand why your position is wrong. Again, can you please answer my questions:

    If you want more people to buy houses, do you:

    A. Increase the cost of buying a house
    B. Decrease the cost of buying a house

    If you want more people to buy automobiles, do you:

    A. Increase the cost of buying an automobile
    B. Decrease the cost of buying an automobile

    Lol..... You don't really believe that..... The problem today is TOO much interference.... Market should dictate rates..... And 2.4% is a joke.
    The country has been looted.

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    Banned Melonie's Avatar
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    Default Re: Current Fed Policy - For how long ?

    If you want more people to buy houses, do you:

    A. Increase the cost of buying a house
    B. Decrease the cost of buying a house

    If you want more people to buy automobiles, do you:

    A. Increase the cost of buying an automobile
    B. Decrease the cost of buying an automobile

    The answer to your questions, under today's circumstances, doesn't involve prices per-se or interest rates per-se.

    In essence, any financially responsible American that NEEDS to buy a house or a car has already done so. While I'm not going to trouble myself to search it out, have a look at historical percentage of home ownership in America. During the late 90's and early 2000's 'bubble' years, it rose 5% above historical norms due to 'subprime' homeowners being allowed to qualify for loans they could not have qualified for in prior decades. Surprise, surprise, since the 'bubble' burst, the percentage of home ownership in America is gradually returning to historical norms.

    So if the FED's / gov'ts goal is to expand house and auto sales beyond current levels, it needs to make approved buyers out of financially IRresponsible people - i.e. people who don't have the ability to pony up a substantial down payment, whose credit history is less than sterling, who thus pose a greatly increased risk that the lender will incur a loss !

    Lenders will only 'buy into' this plan if they can off-load the greatly increased loss risk onto taxpayers. The mortgage lenders have already done this via FED purchases into Maiden Lane plus 130+ ( maybe a huge plus ) billion in Fannie / Freddie mortgage guarantees that have already gone belly-up, and would need to do even more of it to start another wave of 'subprime' home sales. Ally Bank a.k.a. GMAC has already done this via TARP funded 'subprime' auto loans.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by Melonie View Post
    During the late 90's and early 2000's 'bubble' years, it rose 5% above historical norms due to 'subprime' homeowners being allowed to qualify for loans they could not have qualified for in prior decades. Surprise, surprise, since the 'bubble' burst, the percentage of home ownership in America is gradually returning to historical norms.
    You're making stuff up again. Home ownership is falling to near 50-year lows, not "gradually returning to historical norms".

    http://realestate.aol.com/blog/2010/...-50-year-lows/

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    Default Re: Current Fed Policy - For how long ?

    Since you brought it up ... from http://blog.american.com/2011/07/cha...ership-bubble/



    (snip)"The Census Bureau reported today that the U.S. homeownership rate fell to 65.9 percent in the second quarter of 2011. That’s the lowest homeownership rate in slightly more than 13 years, since the 66.4 percent rate in the fourth quarter of 1997. Compared to the all-time peak of 69.2 percent in 2004, America’s homeownership rate has now fallen by more than 3 percentage points.

    The chart above displays quarterly homeownership rates back to 1975 compared to inflation-adjusted house prices, using the Federal Housing Finance Agency (FHFA) house price index. After several decades of relative stability in real home prices (at about 280) and homeownership rates (at 64-65 percent) between 1975 and 1995, both series rose over the next decade to unprecedented record-high levels. By 2004, the homeownership rate had risen to 69.2 percent from 64 percent in 1994, and real home prices appreciated by more than 50 percent between 1996 and 2006. That huge run-up in home prices created an unsustainable real estate bubble that started crashing in 2007, leading to a 22 percent drop in home prices through the first half of this year and bringing real home prices back to their 2001 levels. Likewise, the unsustainable “homeownership bubble” started crashing in 2007 and homeownership rates are below 66 percent for the first time since the late 1990s.

    Conclusion: Starting in the mid-1990s, there was a politically driven effort to promote affordable housing, and those efforts resulted in significantly higher homeownership rates and housing prices, but those levels were artificially high and clearly not sustainable in the long run. And what was the driving force behind the unsustainable bubbles in homeownership and home prices?

    As AEI fellow Ed Pinto concluded in a recent article, “Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing, compounded by moral hazard spread by Fannie and Freddie.” In the process of abandoning traditional, conservative underwriting standards to increase homeownership, government policies ended up turning millions of good renters into unqualified homeowners, which then created a housing price bubble that finally crashed, bringing on waves of foreclosures and a financial crisis. (snip)


    Thus even after recent declines, in order to return to HISTORICAL norms ... with norm being defined as the percentage of home ownership resulting from 'free market' housing price forces and unsubsidized, non-risk shifted mortgage borrowing costs ... we still have 1.5% of downdraft. This also implies that 'bubble'-ized housing prices still have another 10% downdraft as well to return to historical norms.

    I would also point out that your link story stated that home ownership rates COULD fall to 62%. While that is indeed a possibility, in fact it has NOT happened yet. I would also cast doubt on 'self-serving' statistics offered up in your link story by real estate industry funded RealtyTrak, which has a vested interest in promoting a gloomy real estate picture in hopes of receiving more gov't assistance which will produce new real estate commissions from more 'subprime' home-buyers .

    Circling back on topic, it can also be pointed out that present FED policies in regard to money printing / US dollar devaluation directly REDUCE the affordability of homes. The reason of course is that a devalued dollar makes global commodity input costs for employers more expensive, translating into zero pay increases for workers. Then from those 'stagnant' paychecks, would-be home buyers must shell out more US dollars for the same amount of food, gasoline etc. leaving less 'discretionary' income left over for mortgage payments. I would also add that other gov't policies have caused significant increases in property taxes, school taxes, insurance costs etc. which also raise the non-mortgage related costs of home ownership. Plus having a large tax deduction for mortgage interest payments does NOT offer any advantage to the 49.5% of income tax filers who aren't required to pay income taxes now !

    So yes, home ownership rates COULD fall to 62% for these reasons.
    Last edited by Melonie; 02-13-2012 at 05:22 AM.

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by eagle2 View Post
    You're making stuff up again. Home ownership is falling to near 50-year lows, not "gradually returning to historical norms".

    http://realestate.aol.com/blog/2010/...-50-year-lows/
    Rather than argue with you, I just ask that you LOOK at the chart Melonie posted. Up until 1995 there was relative stability in both homeownership and home prices. The fluctuations in both from 1975 to 1995 were relatively small. It radically changed in 1995. What happened ? Well a number of things : Greenspan at the Fed ; securitization of mortgage debt ; repeal of Glass Steagall in 1998 ; Cuomo at HUD and Janet Reno the A.G. making various threats to the banks to increase lending ; Fannie and Freddie relaxing their lending and underwriting standards. In a nutshell : Government, government and more government interference in the housing market and banking and mortgage industries. The latest settlement represents more of the same.

    Another illuminating thing to do is to compare our rate of homeownership to that of Canada during the same time period.
    A
    The credit belongs to the man who is actually in the arena... who, at the best, knows in the end the triumph of high achievement, and who, at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those timid souls who know neither.
    Teddy Roosevelt

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by eagle2 View Post
    The CPI is up 2.4%, which is approximately what the Fed's goal is. Housing is still down over 20% from before the crisis. Raising the interest rate to 2% would hurt the recovery and possibly send us back into recession. I don't think that either you or Melonie have enough understanding of basic economic concepts to understand why your position is wrong. Again, can you please answer my questions:

    If you want more people to buy houses, do you:

    A. Increase the cost of buying a house
    B. Decrease the cost of buying a house

    If you want more people to buy automobiles, do you:

    A. Increase the cost of buying an automobile
    B. Decrease the cost of buying an automobile
    Which is why I posted the "nominal" and the REAL inflation rates. We have rehashed how the government cooks the books on the CPI too many times to count. Please do a search in this forum. The main reason we have not YET experienced runaway inflation is that wages are so depressed.
    A
    The credit belongs to the man who is actually in the arena... who, at the best, knows in the end the triumph of high achievement, and who, at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those timid souls who know neither.
    Teddy Roosevelt

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    Default Re: Current Fed Policy - For how long ?

    Quote Originally Posted by Eric Stoner View Post
    Rather than argue with you, I just ask that you LOOK at the chart Melonie posted. Up until 1995 there was relative stability in both homeownership and home prices. The fluctuations in both from 1975 to 1995 were relatively small. It radically changed in 1995. What happened ? Well a number of things : Greenspan at the Fed ; securitization of mortgage debt ; repeal of Glass Steagall in 1998 ; Cuomo at HUD and Janet Reno the A.G. making various threats to the banks to increase lending ; Fannie and Freddie relaxing their lending and underwriting standards. In a nutshell : Government, government and more government interference in the housing market and banking and mortgage industries. The latest settlement represents more of the same.

    Another illuminating thing to do is to compare our rate of homeownership to that of Canada during the same time period.
    These were the real drivers...... We will never know if someone other than "The Maestro" would have blown a bigger bubble..... Or allowed and codified the looting as much...... I doubt it though.
    The country has been looted.

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