It will be dropping money, lots of money. How much money? Well that all depends on how much it costs to force down interest rates. There have been a lot of articles over the past couple of days regarding this, personally I think this paragraph from the economist sums it up nicely:
In theory, purchases of longer-term securities could have more impact by pulling down longer-term interest rates. The 10-year Treasury yield, for example, is 2.3%, and the 30-year conventional mortgage-rate is around 5.5%. But whereas the Fed knows more or less just what it has to do to move short-term interest rates up or down, it is in uncharted territory on longer-term interest rates. Indeed, theory suggests that the purchases would have to be spectacularly large to affect such large, globally integrated markets.
In theory… right. In theory we are screwed. Even if this whole plan works, and it probably will, how the heck are we supposed to unwind this disaster? This about this for a moment, GDP is a factor of Money Supply and Velocity. Since velocity has dropped, we are pumping money supply and trying to force credit down peoples throats. Once this mess actually gets cleaned up, how on earth are we going to pull this back? When velocity beings to pick up, well hello inflation, lots of it.
Okay, getting side tracked here. The fed is trying to push down rates, and they will likely be successful. My question is to what end? Lets pretend for just a few moments that mortgage rates do fall to 4.5%. What will happen at that point? Well, qualified, capitalized, worthy credit risk, non-defaulting consumers will refinance and save more money every month. All of those people who are defaulting will not be able to refinance. Why you ask? Well that’s a great question. Basically they won’t refinance because they can’t and shouldn’t be able to. In most cases these folks shouldn’t have received a loan to start with, they are not credit worthy.
I get why the fed is doing what it is doing, the cost of actually fixing the virus is politically unpopular and very high. The problem is we can only steal from our children’s, children’s, children for so long.
On a similar note, I read recently that there is talk of legislating a no appraisal refinance. This may help a bit as it will allow those folks who have ticking time-bomb loans, but are still good credit risks to refinance an upside down property and ride it out. However, this concept seems to be littered with second and third order problems…
Lets just say I’m a little more than worried about the future of our economic system and our country as it stands today. We may come out of this stronger, however the path to that exit is going to hurt – a lot.
