Does anyone want to borrow?
February 11th, 2009By David Goldman
The Federal Reserve has bought $93 billion worth of mortgages this year. Nonetheless the mortgage bankers’ association Home Purchase Index for mortgage issuance fell from 344 on Jan. 2 to 235 this morning, while the refinancing index fell from 5904 to 2702 (due to the backup of long-term yields). No-one actually seems to want to take out mortgages to buy houses at the moment, no matter how much credit the Fed makes available.
That problem is cited in a strategy report from Credit Suisse by my old colleague Dominic Konstam, who argues that the best the Fed can do is to purchase Treasuries in order to avoid crowding out the limited amount of private lending that is desired.
What makes it impossible for Geithner to square his circle is that he has confused fixing the banking crisis with fixing the real economy. These are related but very different tasks. The banks can’t be forced to lend if consumers and businesses don’t want to borrow.
February 11th, 2009 at 9:56 am
As people across America and the world shake their heads and restore their household economic sensibilities, they’re figuring out en masse they can’t afford to borrow, so they save and/or pay down debt (the ones that have jobs, anyhow).
At least if they’re now saving (somewhere besides the mattress or the jar buried in the back yard) won’t that help prop up banks capitalization a teensy bit?
February 11th, 2009 at 12:41 pm
Maybe the Fed is buying Treasuries. Have you seen what the prices did in the last two days (including today)? And that’s on top of record auctions (today 10-year, tomorrow 30-year). Of course the “flight to safety” might account for much of it but I can’t believe how rapidly the prices have increased.
It’s a tough couple of days to be short treasuries
February 11th, 2009 at 1:35 pm
It’s only rational that mortgage applications are down. Home buyers were promised a 4.5% mortgage rate and are waiting to see if there will be a $15K tax credit. Who wouldn’t wait?
February 11th, 2009 at 4:39 pm
David,
I agree that nobody wants to borrow money to buy a house but what about the small business that is able to adequately service debt but unable to roll his financing over? The net effect is this business gets liquidated and jobs are lost. Additionally, if you take a good piece of commercial RE with LTV of 70% and again is adequately servicing the debt but cannot roll over, one has to ask, should this property be foreclosed upon? I think these are areas the government should intervene because the negative feedback loop will spiral out of control if left unmitigated. For small business, the Govt. should enable the SBA (via stimulus funds) to lend aggressively to GOOD businesses. If left to the free markets, the above situations would result in more unemployment and foreclosure. In the eyes of Keynes, the Govt. is filling the gap the private sector is unable to fill.
February 11th, 2009 at 4:39 pm
The thing is if ‘we’, as in mortal humans had access to near zero-percent financing, there’s all kind of projects we might take up. At 0.25% interest rate, let me see that means I could pick up a mil’ and then only pay back $208/month. Is that math right? That’s pretty cheap. There would be some opportunities out there for that kind of low rate — except we can’t get at it.
February 11th, 2009 at 10:26 pm
Flight to safety? A liitle goosing of the stock market downward works every time. There were rumors on the floor of the Exchange, even before Geithner opened his mouth, about axing the FED. The market started tanking before his speech., and somebody made a lot of dough.