Sooner or later they're going to have to jack up the interest rates or risk rampant inflation. Right now, I think the Fed is still far more worried about unemployment than inflation, but it's bound to happen eventually. I'm kind of surprised he's still buying assets at such a rapid rate, personally.
If they let the housing market fall to fundamental levels many more people will lose their homes. But with the world's stock markets rolling over they will have to make some tough choices soon.
Fall? The housing market is already picking up quite a bit. But yes, you're right that a lot of that may very well be due to the dirt cheap interest rates. 3.5% is almost unheard of, even 5% would be relatively cheap historically.
But I don't think the Feds really care that much about the housing market. Maybe it's just me, but there are several things that could have been done to improve the housing market that aren't that complicated. But yeah, it'd involve things like marking people's mortgages down to the actual property value and the bank would be forced to take a loss on it. That's really what it comes down to, the banks have more clout than the millions of underwater homeowners. I saw a post in our weekly newspaper where they were talking about an eminent domain idea where the city would come in, seize the property, sell it back and market value to the original owner so that they wouldn't be paying grossly inflated prices. Sadly, it never got off the ground. It'd really be a win win for everyone - except, of course, the banks which sold this whole song and dance to begin with.
If the housing market is picking up, why is the Fed spending $85 billion a month on mortgage backed securities while millions of homes sit empty and are being held off the market.... just waiting for a recovery so the banks don't have to book the losses.
Probably because the housing market, and the economy, hasn't picked up as much as the Fed wants it to pick up. I feel like the low interest rates are more about helping the economy than helping the housing market personally, although it does help both, ultimately.
Either that or they've just ran out of traditional tools because the effective interest rates are 0% now and this is the only thing they can do to affect the economy.
I didn't realize it was mostly mortgage backed securities, though. I thought it was bonds in general they were buying.
http://en.wikipedia.org/wiki/Quantitative_easing#QE1.2C_QE2.2C_and_QE3
Quote
A third round of quantitative easing, QE3 was announced on 13 September 2012. In an 11-to-1 vote, the Federal Reserve decided to launch a new $40 billion a month, open-ended, bond purchasing program of agency mortgage-backed securities. Additionally, the Federal Open Market Committee (FOMC) announced that it would likely maintain the federal funds rate near zero "at least through 2015."[48][49] According to NASDAQ.com, this is effectively a stimulus program which allows the Federal Reserve to relieve $40 billion dollars per month of commercial housing market debt risk.[50] Because of its open-ended nature, QE3 has earned the popular nickname of "QE-Infinity."[51] On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.
So yea, good luck with your "housing market is picking up quite a bit" theory. I would really love it if I were wrong.
