Monday, August 27, 2012

Ben Bernanke's Jackson Hole speech could be a letdown - Aug. 22, 2012

The Fed can do a lot to help the economy, but they can only do so much. With the uncertainty in Washington the Fed is rather limited. More than anything we need Congress to pass policies that last more than 1-year. We have the Bush tax cuts and payroll tax cuts expiring at the end of the year.  There is further uncertainty over changes in the tax system. 

Investors and economists agree: No QE3 - Aug. 26, 2012

Will the Fed announce QE3. My guess, they will do it in November.

Thursday, August 9, 2012

Political economics: The Fed on the ballot | The Economist

Interesting arguments for why QE3 will be launched this September. Regardless of the election cycle, I suspect QE3 will come in September following big fed meetings in Jackson Hole and the next FOMC meeting.

Wednesday, August 1, 2012

FOMC Policy Statement

The Federal Reserve's policy statement has been released. Here is the interesting stuff that carried over from June:
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Read over this statement and compare it with the last statement. You will notice paragraphs two and three have remained unchanged.

From June: Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year.

From August: Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year.

Overall, not a whole lot was done. They left the door open for more policy down the road. It will be interesting to see if the Fed does anything prior to the election. They have a big conference in Jackson Hole, Wyoming in the end of August. Last year they announced operation twist in September following this meeting. Here is a list of what can be done.

Monetary Policy Today

I think this is a very good proposal. Here's why:

Right now interest rates on a 30-year mortgage are around 3.25%. Now, I purchased a home in April of 2009 and our interest rate was 4.625. Last October, we refinanced and took out a 20-year mortgage at 3.75%. We refinanced after the announcement of QE1 and operation twist. I follow the markets fairly closely and both times felt confident that interest rates would not, could not go lower. Fast forward less than a year and interest rates have dropped again. I could take out a 20-year (or 30-year) mortgage today at 3.25%. Again, I find myself asking, are rates going to be lower. Is it worth the hassle of doing another refinance. What if rates go down again?  What if my appraisal comes in much lower than previously?

Now if I know interest rates are going to stay at 2.5% for the next year the uncertainty is removed and further it will help spur home sales. I can take my time with my refinance, get my paper work together, and not worry about a low appraisal.

Now, does it make a difference?  Suppose you were looking at financing a home and needed to borrow $300,000 under a 30-year note here are your payments:

4.625% .....$1542.42

As you can see, the payments drop significantly, anyone else think that would be a huge boost to the economy? One, side note. A number of people are unable to refinance because they are underwater or have lost a considerable amount of equity. If you do not have 20% equity you must pay mortgage insurance. That could add an additional $100-150 per month to your mortgage. The government needs to change this. If someone has been a good borrower and not missed a payment over a significant period (3+ years), they should not be required to have mortgage insurance. The government should accept this risk, its the least they can do to homeowners.

Audit the Fed

As always, Ron Paul wants to audit the Fed. Here is an overview of his bill. This article sums up my views nicely. Ron Paul wants the Federal Reserve to disclose all of their loans to banks through the discount window. Given our recent discussion on adverse selection what would happen if the Fed had to publicly announce who was borrowing from the Fed and selling securities through the open market operations?

Break Up the Big Banks

One of the men responsible for the creation of banks too big to fail, now wants to break them up.
To me, the issue is not about breaking up the larger banks. These banks are going to all be technologically advanced and very difficult to breakup, let alone regulate. The issue is about the 6,200 banks that cannot compete electronically and the subsection of these banks that are still facing issues of solvency.