Give a Worker a Raise
How to Fight Deflation
By MIKE WHITNEY
The slight rebound in housing looks a lot different when one considers how much the Fed is meddling in the market. Fed chair Ben Bernanke has purchased $240 billion in US Treasuries to keep long-term interest rates artificially low while--at the same time--buying $740 billion in Fannie Mae and Freddie Mac mortgage-backed securities (MBS) to provide the financing for new home buyers. It's the double-whammy; and that's not all. Bernanke plans to continue buying agency MBS (monetization) until he reaches $1.45 trillion, which will make Uncle Sam the biggest player in the housing market by far. How's that for central planning?
The fact is, all the recent gains in home sales are all the result of direct government intervention. If interest rates were allowed to rise (as the would naturally) or if Congress withdrew its $8,000 first-time home-buyer subsidy, or if FHA tightened its loosey-goosey financing (which requires just 3.5% down payment and low FICO scores, the same as subprime!) home prices and sales would continue to drop at a 10 to 15 percent year-over-year rate. Housing has stopped plummeting for one reason alone; the Fed bought the market.
The same rule applies to the stock market, where the Fed's quantitative easing (QE) and liquidity injections have sparked a 6-month bear market rally sending equities to the moon. It's all Fed intervention. A recent report by Egan-Jones Ratings And Analytics traces the Fed's lavish liquidity handouts pointing out the precise sectors of the market that have been most effected:
"Massive monetary stimulus is good for asset prices (stocks, bonds, houses, commodities) in a weak pricing environment and soft economy. The Federal Reserve has doubled its balance sheet from $1 Trillion to $2 Trillion effectively adding $1 Trillion to our economy. In addition, the Fed has through an alphabet soup of facilities i.e. Term Auction credit, Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Term Asset Backed Securities Loan Facility, Primary Dealer and other Broker Dealer Credit, Other Credit Extensions, Term Facility, Maiden Lane LLC one, two and three, Money Market Investor Facility, added approximately $3 Trillion in loans and over $5.5 Trillion in guarantees of private investments. While these latter funds are technically loans, they get renewed regularly.
So where has all the money gone? The chart below shows the rise in the stock market causing the valuation to be somewhat extended in our view - some liquidity found a home here. Large rises in just the last month in small cap stocks, plus 17%; most shorted stocks, plus 17%; stocks with the lowest analyst rating out performing those with the highest rating by 380 basis points, all suggest some speculation......
Commodities have had a nice rebound from their lows with copper hitting new highs. High yield bonds have out performed investment rated bonds as investors are willing to bet on a faster recovery and start to reach for yield.
These are indications of excess liquidity finding outlets."
("Fundamentally...Disconnected" Egan-Jones Ratings And Analytics, hat tip zero hedge.com)
Let's summarize: The Fed is goosing the stock market and the housing market. Bernanke has slashed interest rates to zero percent, underwritten the entire financial system with $12.8 trillion in loans and guarantees, and flooded the financial system with liquidity. The Fed has also doubled its balance sheet to $2.08 trillion which is the equivalent of dropping the Fed Funds rate to -1 percent. As Mark Gongloff of the Wall Street Journal opines, "The Fed is essentially paying people to borrow money."
Indeed, the Fed has done its level-best to keep the market from correcting, but isn't it a bit of a stretch to call it a "recovery"?