QE2′S FAILURE AND THE HOUSING MARKET
Wednesday’s MBA mortgage applications data highlights another glaring error in the efficacy of QE2. While the Fed loves to point to rising equity prices (while denying blame for commodities) they appear to conveniently ignore the consumer’s largest asset – housing. In the now infamous Washington Post op-ed Chairman Bernanke discussed the role that QE2 would play in helping to boost the housing market:
“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.”
Since then we have heard nary a peep about the housing market. And that’s because mortgage rates have spiked and housing conditions have become anything but “easier”. And as we all know, the housing market remains a disaster with housing prices continuing to decline, record low sales, climbing inventories and rising interest rates. The key here is interest rates and it highlights the failure of QE2. While many academics like to point to real rates the truth is that the consumer has not noticed the benefit of this rate effect at all. This is clear in the MBA application data where you can see the perfect inverse correlation in applications and interest rates:
Mortgage applications have fallen off a cliff since QE2 began last August
As I’ve stated over and over again, this program was destined to fail from its onset because it targeted size and not price. The housing market is perhaps, the most glaring example of QE2′s failure.
I’m sorry I can’t see the connection between this chart and QE2. Please explain.
interest rates and mortgage applications….ideally, the Fed would have kept rates low and helped refinancings and new home purchases….They failed miserably in this regard.
look at what happened to both from oct(QE2 start) on dennis
Housing has gotten slightly more affordable over the QE2 period. http://www.realtor.org/wps/wcm/connect/17310c8046537f16b296bbce195c5fb4/REL1102A.pdf?MOD=AJPERES&CACHEID=17310c8046537f16b296bbce195c5fb4
However, if you have no money (e.g. negative net worth), getting a bank to accept your loan application has become nearly imposible.
What is up with Bernanke? Any witless person can see that destruction of the dollar will cause oil to go even higher and wreak havoc on the global economy and crush his beloved 3rd mandate. Can someone tell Goldman Sachs to stop rigging the market in the wee hours with the counterfeit POMO
What does Goldman Sachs have to do with POMO? Please take the populist moronic nonsense over to ZeroHedge where it belongs
Bernanke is just a tool or a complete buffoon.
The biggest problem is that, interest rates are already near zero. There is nothing more the FED can do. What the buffoon is risking is long term collateral damage. Lower interest rates did not jump start investment into plant and equipment. QE has not led to investment although equity prices are higher.
It is indeed the transmission mechanism as Cullen points out. Small business are not getting the cash needed. With interest rates at zero, cash rich large business benefit very little. Lending to small business’s is usually collateral based (i.e. real estate). With Real Estate dropping and forecasted to drop further it is obvious lending is not happening. Now that mortgage rates are moving higher…….
Maybe Bill Gross is brilliant. Maybe, Bill and PIMCO are calling the bond bubble correctly and maybe that is the 3rd bubble to pop in this series. Heaven help us.
Come on, all this stuff about QE2 failing is completely off base.
You know lower rates were never ever a goal of QE2. Nor were higher housing prices. Nor was higher employment, at least directly.
Let’s be honest here – you and I both know the only goal of QE2 was higher equity prices – the ONLY goal.
So, I’n not disagreeing the policy has been a disaster. However, I do believe it to be somewhat disingenuous to judge the policy based on things we know it was directed at.
As you’ve said, if Bernanke cared about any of the things you evaluate in determining QE2′s efficacy, he’d have targeted them directly. Namely, he’d just name a rate on the 10 yr and “poof”, he’d have it.
I’m not trying to be a jerk here, but let’s just admit the obvious. Despite all the obvious deleterious impacts QE2 has had, you can’t deny that relative to Bernanke’s goal of higher asset prices, the psychological impact it’s delivered has been quite successful.
No one has gulped down the kool-aid quite like you have over the last few months. You’re really convinced that nominal price increases are the equivalent of real economic improvement. Do you know how many people in this country actually own the stock market? Better yet, do you realize that nominal price increases have no correlation to consumer spending? So, a small portion of the country feels wealthier. You really think that’s a viable strategy for economic growth? I know QE2 has forced us to throw common sense out the window in terms of trading, but when it comes to real economic growth, nominal wealth creation is not real wealth creation. This is why we have booms and busts….How anyone cannot see that is beyond me….QE2 did nothing. It made everyone feel better. But it didn’t actually make anything better….
Less than 20% of Americans own stocks outside of their retirement plans. Let that number sink in for a few minutes. And most of those people are the uber rich. So, Ben’s plan is classic trickle down. He’s hoping that by showering the wealthy with money (the exact people who don’t need it) that he can create some sort of economic rebound. Meanwhile, the other 80% of the country flounders. How do you not see the problem here? I know most of the people reading this website are in this illusion of grandeur called the upper crust, but let’s be real. Without that 80% doing well the rest of us are totally screwed in the long run.
Cullen:
The people reading this website are the upper crust? In income?
I thought the upper crust hired people to do their reading!
If I were to guess, I would say that your readers are in the upper crust of education, and have some interest in actively preserving their wealth, but it’s hard to say what the average size of that wealth is.
Brandon, do you remember what the stated goals of QE2 were? As far as acheiving the stated goals, QE2 has been a miserable failure. Yes, there were likely unstated goals, and subsequently altered goals (kind of like the invasion of Iraq), but it’s best to judge the merits of a program transparently.
As far as home afforabilty, it is still very good. Most of the lending action is happening in the purchase area. I have examples of people making half the median income buying very nice homes in our area, with as little as 3.5% down. You can find a little less desirable homes for only $100 down (HUD/FHA owned).
There are not many homeowners left that CAN profitably refinance, even if rates were back to the level of last fall. Lack of equity, lack of documentable income, and job gaps would be my estimate for the top reasons that those who could benefit from a refi, but haven’t.
The gov has tried pretty hard to deal with the lack of equity, by offering the HARP program, letting qualified borrowers refi up to 125% of value, but it has some significant limitations:
1. Only works on Fannie Fredie loans, leaving out Alt A (80/20s, stated incomes), subprime, FHA, VA and Option Arms.
2. Won’t touch 2nd loans, won’t allow them to be folded in to a new 1st.
3. Requires full documentation of income and assets. Most self-employed people, who can and will pay the mortgage, cannot document adequte income (even though they may have it).
As far as job gaps…well, that should be the entire government’s focus (not just the Fed). Get people back to working, at something. Americans like to work, will work, and can create some amazing things when they are working.
Let me rephrase – if you’re spending your time thinking about the stock market and the monetary system you have far fewer worries than most of people out there in America. I’ve seen the demographics of the website. They’re a little ridiculous….
True.
By definition, if we have time to read and comment, for no apparent profit, we belong to the Leisure Class, and have relatively few worries.
What is worrisome to me is the enormous amount of idle human capital I see. Many people in my circles are working far less than they would like to be. They are generally skilled, educated, a bit older, and have had a history of consistent employment (they want to work, and seem very employable). It harms our country and society to not have them engaged in making it better, in some way.
I have drank the Kool-Aid, I must admit.
All I was saying is that if you want to criticize the goals of QE2 as being misdirected relative to what we should really be focused on, then I think that’s fair game.
What I don’t think is fair game is saying QE2 has been a failure because housing prices are lower or rates are higher – we both know that despite Ben’s superficial claims to the contrary, that these were not goals of QE2. There was one goal – driving asset prices higher. In that context, QE2 has in fact been wildly successful.
Do higher asset prices mean anything in the context of the broader economy? No, you are absolutely correct – they benefit but one group of the economy.
What I’m trying to do is get us (your writing and reader opinion) away from purely putting Bernanke and the Fed on the chopping block because it diverts us from the broader issue here – the FED HAS to act and at the zero bound, this is ALL it can do.
So, a more complete analysis of the Fed’s actions should always be in the context of 1) Congress’ dual mandate to the organization and 2) Congress’ lack of macro knowledge regarding the need for deficit spending here and monetary policy futility.
This is all I’m saying. I know you heavily criticize Congress here and I obviously don’t agree with what the Fed is doing. However, because this blog is so useful at directing its readership to the REALLY pertinent issues nearly 99% of the time, I think you’re doing the blog a disservice by SOLELY cricizing the Fed without providing this broader perspective.
Bernanke is not evil, nor is the Fed. They are merely doing the only rational thing they can do in the context of their Congressionally supplied duties.
Sure, if his goal was to help the banks then he’s probably achieved that to some extent. I theorized at the beginning of QE2 that this was the true goal, but he very much framed it as though it would help Main St. Go back and read that Washington post op-ed. It spews all sorts of nonsense about being able to help the economy, homeowners and the average american. He sold it to the public in that op-ed and they chewed it up and swallowed it down.
I have never rejected the notion that it helped the stock market. But I don’t really care about that. I am sick and tired of seeing policy in this country that helps 1% of the population and leaves the rest in the dust. In the meantime, these policies only help to create all sorts of other problems. QE2 may have been a huge success in terms of what BB really wanted to do, but it was a massive failure in helping the general economy and the average American.
As for the Fed being evil – I totally agree. They are not. They are ill-eqiuipped to deal with the problems in front of them. And that’s why they need to simply step away from the operating table. You don’t send in a proctologist to perform a brain surgery just because you don’t have any brain surgeons around….
And dont take my kool-aid comment the wrong way. I don’t mean it as an insult. You’ve done what a smart market practitioner should be able to do and you’re seeing the market for what it is.
When I am discussing QE, however, I am more referring to the real economy and not so much the market.
I didn’t take the comment as an insult at all. Because as you’ve pointed out, as a rational market participant, the only thing to do is drink the Kool-Aid.
And I understand the disgust at the misguided policies that only help a select few. That said, I’m still going to go back to my original point – Ben has to act because it is his job and he is using the only tools he has available to him.
If it were your job, what would you do? Would you handle the process that much differently? While he clearly has institutional biases in favor of “doing something” and over-promising on what mon. policy can do in this environment, he at least deserves some credit for telling Congress not to cut spending now but to focus on that objective over the long-term instead.
He has to sell his actions and tool kit to main street as if they will help them. He’s a politician just like all the others.
If it were my job I would stand up and tell the Congress the truth. My policies are not likely to help very much. I am not equipped to deal with what we’re dealing with. I would explain that it’s crazy to bicker about the USA going bankrupt. I would explain that it’s crazy how we have debt ceilings. I would explain how it’s crazy that our elected officials are wasting time posturing over things that don’t serve the people. I would explain that Americans need jobs, balance sheet repair and that bankers don’t really need help. I would explain how important it is that their spending be targeted, productive and not wasteful.
I think a little honesty would be a great fuel under the politician’s behinds. Unfortunately, Bernanke is part of the problem because he continues to work under a false paradigm….
Precisely. This is exactly what I’ve been trying to direct the discussion to. Excellent!
You’ve implicitly stated you don’t think Bernanke is a fool. You’ve suggested he knows his policies are highly imperfect for dealing with our situation, etc. I agree with all of what you just suggested you’d do if you were him; they’re all great suggestions. Imagine the economic progress we’d make as a country if he did all those things?!
The problem is, though he is aware of all the things you suggested, he lacks the leadership skills and willpower to stand up and do something about it. And I also think that like most academics, his ego is huge and he strongly believes in his and the Fed’s invincibility.
So I think we can agree that
1) Bernanke is not a fool nor evil
2) Bernanke is a poor leader and thus, unfit for the role as Fed chair
3) Congress has no idea about macro economic or monetary policy
I think this is the fairest way to be critical of the Fed and probably the most constructive to effect change.
In the end, the things you’re asking for would require a Volcker like leader who voluntarily sends us back into recession to fix prior policy mistakes.
Great exchange guys…can somebody pass me the Kool-Aid?
I suspect Bernanke would say the following in a candid moment:
- He is playing an “inside game”, not airing his differences publicly.
- He is concerned with getting Fed slots filled with his ppl and antagonizing politicians is NOT helpful
- Fed itself is divided with Kocherlakota, Plosser, Lacker, and Fischer difficult to keep in line. He does not want to engage in heated rhetoric at a. time when his own house is divided. Don’t forget BB is only one vote.
- It is far from clear what exactly the peril is. Japan thought they were doing the right thing and look how they turned out.
- Inflation can be easily fixed. Take a look at Bullard’s Seven Faces of Peril paper for a very cogent look at the deflationary dilemma the Fed is confronting.
Let’s be honest here – QE2 has added to the wealth of the wealthy and only worsened conditions for the struggling through the weak dollar -> increased food & energy policies.
BFerro may feel it’s been a success due to your market stance, but for the average person and the majority of American’s it’s been a complete and total failure
The the 1966 model is the proper policy to resurect the housing market. The FED caps REG Q CEILINGS for the COMMERCIAL BANKS (but not the thrifts). This increases the supply of loan-funds for the thrifts (principal mortgage holders). I.e., money flows thru the non-banks (but it actually never leaves the CBs), becuase the non-banks are the customer’s of the CBs.
Lower long-term interest rates benefit new homeowners & refinancing would benefit existing owners. In the process, the commercial banks end up even more profitable. The oldsters retirement earnings (interest on savings), end up being the short-term casualty.
People should put the past 60 years into perspective. This country has been run by financial predators. If the bankers can’t be regulated, the banks & credit card companies should be nationalized. As it now stands, the CUs are the only holdout.
“You don’t send in a proctologist to perform a brain surgery just because you don’t have any brain surgeons around….”
Depends if someone’s head is up their ass………..
Ha!
Double ha!
Depends if someone’s head is up their ass………..
Some people can tout their IQ, others are relegated to DENSA. Fullwiler doesn’t know the difference between the supply of money & the supply of loan funds — yet he leads the charge for MMT. MMT is a career killer.
blah blah blah
I think you and Ferro have hit the nail on the head. But as per TCP: “If [Ben's] were my job I would stand up and tell the Congress the truth.” What a mistake! In the same breath you have said that the public has no idea how the world’s monetary system actually works, and they vote for “leaders” who’s election funds come from the folks that want to keep the status quo at any cost. In this horrible situation we have Ben. WE HAVE BEN. I thought his answers to questions were fantastic this week. (Since I’m retired these days I could turn on the TV and see something fun rather than the big O, or actually do something productive.)
It may have been his best day ever, in my opinion. Yes you can lay a lot of blame on him and Paulson for why we are in this mess, but that is in the past. The past is over. We cannot go back at this point in time. The world’s economy is being held together by boot straps, gum, and misinformation. There are lots of people that are afraid the world’s economy could end at any time. Our debt currency system is seriously flawed and likely doomed. However, for this week “we have Ben”, and that’s all.
Reductions in member bank deposit interest rate ceilings reduce the ratio of time deposits, reduce member bank costs & increase member bank profits, stimulate the flow of funds to the non-bank mortgage suppliers, and obviate the need for Governmental infusions to reduce the cost of mortgage funds in order to make housing more affordability. That should have been the objective of the BOG’s quantitative easing in the first place (to prop up the decimated housing sector).
& FULLWILER doesn’t understand reserve requirements either.
You’re good for comic relief, if nothing else (and, yes, NOTHING ELSE).