Can the Fed save housing?

[powayseller]

I’ve read some great points that the Fed might step in to save the economy after falling housing prices lead to a recession. The Fed could stimulate the economy with lower interest rates, tax incentives, more government spending, social program, or some new idea. How likely is it?

First, if you look over our economic history, you find that recessions are a normal part of our economy. What is unusual is that we haven’t had a real recession since the 1980’s, as the 2000-01 recession was mild and cut short by the Fed lowering the interest rate to 1%, well below inflation. Thus, recessions are not bad, because they are part of history.

Second, the only recession I know of that was cut short was the 2000-01 recession, and the shortness of it was due to the biggest stimulus this country ever had. If Bush wants to avoid another recession, he will have to do even better than the 1% rate that subverted the last recession. Our excesses are so much greater, that the remedy must be extraordinary. I think the only way to provide sufficient stimulus is to lower rates again to 1%? To .25%?

But this low interest rate will raise inflation as the economy overheats. Remember that the Fed has been raising rates to cool inflation. How can they lower it now?

So for those who think the Fed will provide stimulus to prevent a recession, I have these questions:
1. Why didn’t they prevent any of the other recessions we had, if it was possible to just prevent a recession?
2. What tools would the Fed use to prevent a recession?
3. What makes anyone think that we can have repeated asset bubbles that never are allowed to burst, that this is even sustainable?

[PerryChase]

I doubt that the Federal Reserve or the Federal government can do much to save housing for a confluence of reasons. The Fed can’t lower interest rates because were are so indebted to the world that we need higher rates to keep foreigners from pulling their money out of America.

We can’t do much more deficit spending to boost the economy because we are already, under a Republican administration, spending much more than we can afford. How much more deficit spending can we do?

The money pits that are Iraq and Afghanistan will continue to be there 5 to 10 years into the future.

American consumers are already so far in debt that they can’t borrow much more.

China, as a rising economy will compete with America as an investment destination. We will need to keep interest rates high to keep money coming here.

We need a strong dollar (i.e. high interest rates) to import ever more expensive oil.

We did not invest much in education in the last 20 years so future productivity improvements won’t be so technology driven. Remember the Internet comes from research that began in the 1950’s and 1960’s. I’m afraid that Chinese and Indian engineers will be able to match our own engineers so we won’t own future technologies and therefore won’t have competitive advantages.

As much as I hate to think about it, I’m afraid that Thomas Friedman is right. Unless we start investing in intellectual knowledge now, we stand to loose our technological and economic supremacy. If we are complacent, it’ll happen slowly and it’ll be too late to reverse course.

I would not be suprised to see mortgage rates go to 10% or the low teens within the next 10 years.

[hipmatt]

I agree, the fed is between a rock and a hard place. We aren’t in that great of shape…we don’t have money, we have debt, the country and the people are in debt…the answer to recessions isn’t more debt, especially at this point. Home values are so high, that nothing can save them, even low rates again. We are in for a huge reality check.

[LA_Renter]

I found this hedge fund report on one the hb yahoo chat boards. This is one of the top hedge funds in North America. Basically they are saying that at this time housing is beyond saving. They also use words like “collapse” to describe its current state, and they admit to using housing bubble blogs for anecdotal evidence. All in all it is a great read for our current state of affairs that I have come across. I would like to mention they are heavy in commodities so their is a little bias in that direction. Enjoy the read

http://www.sprott.com/pdf/marketsataglance/05-2006.pdf

[powayseller]

I read the Sprott report. It was good, but they make the same flawed conclusion that I eluciated in my Zeal thread from last week.

[qcomer]

I liked an analysts comment that the Fed need to kill RE and Commodities bubbles to contain inflation (and from recent Fed talk, they look serious about inflation). The Fed has to increase rates to kill both these bubbles as higher rates will slow economy (reducing demand for commodities), strengthen dollar and bust Real Estate. Any attempt for a way out through more money printing, will be disastrous.

I now believe that Fed is going to raise rates that will create a mini recession causing a bust in demand for real estate starters, as well as commodities (including oil) and will hence contain inflation. We will need to build our economy from there onwards but it seems to be the only way forward.

[powayseller]

Since when is the Fed targeting asset bubbles? They ignored housing for years! They could easily have instituted lending standards. They let the stock market bubble go on also in 2000. They are not talking down gold, as they would if they wanted to pop it. I am not convinced.

Analysts don’t know so much after all. I subscribed to Bill Fleckenstein, and he said the Fed will pause in June, because they really want to be done. I totally disagree with him. I think they will raise, because the inflation is still there, and they want to appear tough. Bill is highly regarded, but not always right.

Both Zeal and Sprott believe that China’s burgeoning economy will make commodities prices rise so much, that we can all get rich dabbling in copper and lead. I disagree with that also, because their premise is weak.

Time will tell who is right. The point is: analysts are often wrong, or they would all be billionaires by now. Zeal’s owner, Adam Hamilton, is not a billioanire to my knowledge, neither is Fleck or the Sprott group. Neither am I. But I realize they don’t know any more than I do!

[qcomer]

Fed is not targetting bubbles, they are targetting inflation. The point was that main contributing factors to inflation now are the high commodity prices (including oil) and the high living costs (another measure used in CPI). If Fed is really as serious about containing inflation as they talk to be, they need to kill these 2 speculative bubbles to contain inflation. It will hurt economy as well but this is the only way out. Basically, there is too much easy money out there (thanks to greenspan) and it keeps showing its face as one bubble or the other as hedge funds follow the hottest thing around.

And I said, I “liked” comments by an analyst because it made sense to me. It will be presumtuous of you to assume that I agree or believe in anything analysts have to say. But thanks for your concern and references to different analysts.

[davelj]

In answer to your questions:

(1) Why didn’t they prevent any of the other recessions we had, if it was possible to just prevent a recession?

In the past, the Fed has TRIED to prevent recessions, but obviously hasn’t always succeeded. Volcker was the last great Fed chairman. He understood the cleansing aspects of recessions and let the ’81-’82 recession crush both inflation and a lot of balance sheets. At the time he was unpopular and didn’t care. But ultimately his actions were vindicated. Fast forward to Greenspan. After the first recession of his tenure (’90-’91) he decided he didn’t like not being liked. Consequently, he decided that lowering interest rates at the mere hint of any bad news was how he would run the Fed, giving rise to the “Greenspan Put,” the stock market bubble, the real estate bubble, etc. All Greenspan cared about was the applause from Wall Street. Based on his comments, I’d say Bernanke is in the Greenspan mold, but only time will tell.

(2) What tools would the Fed use to prevent a recession?

Lower and lower and lower interest rates (again).

(3) What makes anyone think that we can have repeated asset bubbles that never are allowed to burst, that this is even sustainable?

No one with a functioning brain believes this. The only issue is TIMING, which is critical. There were lots of stock market bears as far back as 1995… most of them are now out of the asset management business, despite being fundamentally “correct.” They had to wait SIX YEARS for some measure of vindication. That’s a career down the drain in asset management unless you’ve been around a LONG time and can withstand the criticism. If you haven’t already noticed, bubbles can last A LOT longer than anyone would think. They all burst in the long run, but that long run can be an awfully long time.

[powayseller]

qcomer and davelj – my hat’s off to you guys for knowing how to carry a debate and explain your point of view without any personal slants. Thank you.

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