Why the Economy Refuses to Recover
Up to a point, Helicopter Ben is correct (not to mention the Oracle of Omaha): the housing market is a big drag on the economy. Sadly, setting interest rates at 0% has not helped. Plus, there are other reasons.
Both TMF and Bloomberg, among others, have covered this. See, MegaBanks are being forced to buy back all the junk home mortgages they wrote during the Go-Go years, and this is costing them $10s billions. In order to prevent from having to do this ever again, they are now writing mortgages only for those with platinum credit scores and sure things. The rest of you, let them eat cake.
Pushing down % to record lows (say 3%) will encourage the housing market, but only if people are feeling good about the future and banks are issuing mortgage paper. Neither is true right now, so the % is largely irrelevant, no matter how low Helicopter Ben brings down the %.
The full title of this pernicious law is: “Dodd-Frank Wall Street Reform and Consumer Protection Act”. The PDF I downloaded had 848 pages, and the relevant portion is on p. 761-837: TITLE XIV - MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT.
The minutiae here is rather astonishing:
--if the borrower defaults, the bank might be liable for not doing do-diligence
--bank cannot charge more than specified: fees, escrow, assesments, etc.
--limits on forclosures
--other specific limits on bank behavoir
$1 TRILLION ON ICE
Many of us Fools are pretty sure that QE1-3 is sure to ignite inflation, so recommendations for GLD and so forth are legion. However, this is not on the horizon because all of dollars being printed 24 x 7 by Helicopter Ben is simply being put on ice on deposit at the Fed, so the MegaBanks can use it to satisfy Tier 1 capital reserve requirements. A similar situation exists in the EU. Until this cash moves, neither will our economies.
Consumers are reducing debt, and increasing savings, at least up to a point. They have learned their lesson, and are doing the proverbial preparations for a rainy day. However, since 2/3 of the economy is consumer spending, this also suppresses GDP growth.
In the end, I get the feeling that if we go over this thing, the effects will not be nearly so pernicious as is commonly thought. However, it is the uncertainty about an eventual resolution or not that is causing business and consumers to be gun-shy. Confidence needs to exist before the spending starts.
My apologies: I do not have one. All I have to offer is my gut feeling: despite reports that housing and manufacturing outlooks are improving, I do not get the feeling that prosperity is just around the corner.