QE3 is already an abject failure as stocks tanked right after 'The Twist' was announced.
Fed’s Operation Twist Isn’t Much to shout about as the fed had to reach back in time to 1961 to come up with this plan.
Yet more bad news on the housing market below as prices are expected to stumble through 2015 Economists say which would weigh down the recovery.
Here are the top financial stories of the day:
1) “Very Unusual” Fed Action Fails To Boost Animal Spirits: Dow Drops 285-From the Daily Ticker
The Fed's latest moves to bring down long-term interest rates will be "marginally helpful," predicts former
Fed Governor Mark Olson, now co-chair of Treliant Risk Advisors, a compliance and strategic advisory firm specializing in the financial services industry. "There really isn't a lot of room" left for the Fed to bring down rates.
Specifically, the Fed announced plans to buy $400 billion of long-term Treasuries and sell an equivalent amount by the end of June 2012. The so-called Operation Twist will not change the size of the Fed's balance sheet but the duration of its Treasury holdings. "This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative," the FOMC statement declares.
In addition, the Fed announced plans to reinvest principal payments from its current holdings of agency debt and agency mortgage-backed securities into agency MBS. In other words, the Fed is going to be buying paper from Fannie Mae and Freddie Mac again "to help support conditions in mortgage markets."
Treasury prices did rally in response to the Fed announcement with the yield on the benchmark 10-year note falling to a record low 1.86%, while the yield on the 30-year bond slipped to 3.01%.
If the Fed was trying to lower long-term rates, the action was a success. If the goals was to boost the stock market, the action was a total failure, although perhaps traders focused on Moody's downgrade of Bank of America, Wells Fargo and Citigroup vs. the Fed, which did say "there are significant downside risks to the economic outlook, including strains in global financial markets."
Tumbling into the close, the Dow shed 285 points, or 2.5%, while the S&P lost nearly 3% and other so-called risk assets like gold and oil fell sharply as the dollar rose.
Very Unusual
While Operation Twist was widely expected, the MBS announcement was a bit of a surprise, as was the timing of the Fed's announcement, some 10 minutes after its normal 2:15 ET release.
The Fed's failure to meet its (self-imposed) deadline is "very unusual," Olson says, suggesting there was likely some last-minute wrangling over the wording of the release.
Although three Fed governors dissented from Wednesday's policy action — Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota, and Philadelphia Fed President Charles Plosser — Olson notes they were the same dissenters at the August meeting "so I don't think that in particular was much of a surprise."
For the record, Olson says he would have voted for Wednesday's action if he were still a voting member of the FOMC.
"I would have because I don't see any downside risk to it," he says. "Should inflationary pressures start to build, it's a circumstance where they can adjust that portfolio just a quickly and reduce the size in a way that won't have long-term negative implications."
But positive implications? That remains very much in doubt.
2) Fed’s Operation Twist Isn’t Much to Shout About-From Yahoo Finance
The Federal Reserve has announced its latest effort to jolt the economy back to life. In the widely anticipated move, dubbed Operation Twist, it is pledging, over the next nine months, to sell some $400 billion in short-term government bonds it owns and use the proceeds to buy government bonds that mature in 6-30 years.
The theory: This market intervention will help further lower long-term interest rates. The Fed also said that when mortgage-backed securities it owns pay off, it will roll the money back into similar securities. That could help push mortgage rates down.
There are some reasons why we shouldn't have great expectations for this move.
First, the Federal Reserve moves with all the surprise and guile of a lumbering elephant. It talks about moving, says what direction it might go in and at what speed, and provides a specific date on which it will act. It does so because it wants to avoid spooking the market. But it also means that the market tends to react well ahead of the actual event. Look at the path of the 10-year bond over the last several weeks. The interest rate on the 10-year bond has fallen from 3.2 percent on July 1 to about 1.9 percent today. The mere anticipation of the Fed's move has caused the market to do much of the Fed's work.
Second, given how low long-term interest rates already are -- they've fallen by 40 percent in the past three months -- this action is like pushing on a string, or adding another drop of water to a full pitcher. Pick your metaphor. Long-term borrowing costs for creditworthy borrowers are already at Crazy Eddie levels -- they're so low, they're insane. In August, according to Freddie Mac, the average commitment rate on 30-year mortgages it backed was 4.27 percent. Disney in August sold 30-year bonds that yielded 4.375 percent. Google in May sold three-year notes that pay a paltry 1.25 percent in annual interest. The government borrows for 10 years at less than 2 percent. That's all to the good. These lower rates help free up more cash for some people to spend, help corporations pay their bottom line, and lessen the fiscal bite of high deficits. But when you get close to zero, it becomes harder to make a bigger percentage difference. Money simply can't get much cheaper.
In recent years, lower interest rates have generally allowed people who are already able to borrow do so at lower rates. Homeowners who have a lot of home equity and are current on their mortgages may be given an opportunity to refinance. But the lower rates haven't generally led to the extension of credit to people who badly need it. If a home is underwater, it's very difficult to refinance, no matter how low rates go. Check out page 9 of Fannie Mae's recent earnings report. The average loan it has been acquiring over the last few years has a loan-to-value ratio of just 68 percent, and only six percent of the loans it bought in that period had a LTV ratio of 90 percent. Meanwhile, value of the collateral for mortgages continues to fall. According to the National Association of Realtors, the median price of an existing home sold in August 2011 was down 5.1 percent from August 2010.
In theory, lower long-term capital costs should lead to filter through the system in the form of cheaper (and hence more plentiful) credit. And banks are finally lending more. The FDIC reported that in the second quarter, "total loans and leases at insured institutions rose by $64.4 billion (0.9 percent) during the quarter."
That was essentially the first quarterly increase since the second quarter of 2008. The balances of commercial and industrial, auto, credit-card and first mortgages all rose, while home-equity lines and construction loans fell. "A majority of banks (53 percent) reported growth in loan balances in the second quarter." But banks, like mortgage lenders, are still maintaining high standards. The reaction after years of lending recklessly is to be careful, to husband resources, and to not lend unnecessarily.
In their defense, banks generally claim that the demand for credit is low. And across the board, slack demand is plaguing the economy. Unemployment is at a very high level. Those with jobs are saving all they can. Consumers are reluctant to buy big-ticket items because they remain focused on paying down debt and are fearful about losing jobs. Companies aren't hiring and investing in the U.S. in part because the demand simply isn't here. This latest move by the Fed doesn't do much to address that shortfall. Lower interest rates alone can't counteract contractionary forces, like states and cities laying off tens of thousands of people each month, or a poor job market, or wages that don't go up.
There's one item likely to be overlooked in all the discussion over Operation Twist. For the last three years, even as it has made extraordinary efforts to keep money cheap, the Fed has also given banks incentive to sit tight. The central bank requires banks to keep a certain level of reserves on deposit at the Fed. Legislation passed in 2006 permitted the Fed to start paying interest on those reserves starting in 2011. The change was accelerated due to the financial crisis. In October 2008, the central bank announced it would pay interest on those reserves, as well as on reserves posted in excess of the requirements. The amount is small: .25 percent per year. But essentially the Fed provides banks with an incentive to husband resources more carefully. As this data series shows, banks now have $1.57 trillion in excess reserves parked at the Fed, up from $981 billion a year ago. Imagine if the Fed stopped paying interest on those excess deposits -- or if it imposed a penalty on them. Bankers do respond to incentives. And if they had less incentive to lock cash up at the Fed, they might buy bonds, or get a little more aggressive about lending.
The upshot: This move is better than doing nothing. But there's no reason to think it will make the difference between unsatisfying and satisfying growth. The Republican leaders who wrote Bernanke this week to complain that the Fed doing too much about helping the economy shouldn't fret so much
3) Home Forecast Calls for Pain-From The Wall Street Journal
Economists, builders and mortgage analysts are predicting the weakened U.S. economy will depress housing prices for years, restraining consumer spending, pushing more homeowners into foreclosure and clouding prospects for a sustained recovery
Home prices are expected to drop 2.5% this year and rise just 1.1% annually through 2015, according to a recent survey of more than 100 economists to be released Wednesday. Prices have already fallen 31.6% from their 2005 peak, as measured by the Standard & Poor's Case-Shiller 20-city index.
If the economists' forecast is accurate, it means housing faces a lost decade in which home prices recover just a fraction of what was lost between 2005 and 2015, leaving millions of homeowners with little, if any, equity in their homes. The survey was conducted for MacroMarkets LLC, a financial technology company co-founded by Yale University economist Robert Shiller.
The housing bust has chilled consumer spending—the largest single driver of the U.S. economy—with eroding home equity contributing to the so-called reverse wealth effect that prompts people to spend cautiously because they feel poorer.
One in five Americans with a mortgage owes more than their home is worth, and $7 trillion of homeowners' equity has been lost in the bust. Homeowners' equity as a share of home values has fallen to 38.6% from 59.7% in 2005.
"With all of the economic turmoil, both domestic and international, there's not much that points to an improving housing market at any point in the near future," said Ara Hovnanian, chief executive of Hovnanian Enterprises Inc., the U.S.'s seventh-largest builder by deliveries.
While home prices aren't falling at anywhere near the pace of 2008, one worry is that even modest declines become self-reinforcing, pushing more homeowners underwater and exacerbating the downdraft caused by more foreclosures.
That, in turn, could prompt more credit tightening by lenders, further shrinking the pool of home buyers when more are needed to purchase bank-owned foreclosures.
The housing bust is weighing on the economy in part because bank-owned foreclosures have sidelined new construction, a traditional employment engine following a downturn.
The Commerce Department said Tuesday that single-family housing starts fell by 1.4% in August from July to a seasonally adjusted annual rate of 417,000.
Over the past 35 years, housing has contributed just 0.03 percentage point to annual growth in gross domestic product, according to research from the Federal Reserve Bank of St. Louis. But in the two years following most recessions, housing adds around 0.5 percentage point.
Recently, that contribution has been negative. The housing market needs the economy to add jobs, but the economy isn't able to rely on the job boost housing normally provides in a recovery. "We're in uncharted territory," said David Rosenberg, chief economist at Gluskin Sheff.
The fallout from the housing bust hasn't been easy on Greg Rubin, owner of California's Own Native Landscape Design, a landscape contractor in Escondido, Calif.
With sales down by half from 2007, Mr. Rubin has reduced his work force to nine people from 21. He now does jobs for as little as $4,000 versus no less than $10,000 in the past.
With home values no longer increasing, the few people who are hiring Mr. Rubin are paying with cash savings instead of home-equity loans, substantially decreasing their purchasing power.
Also, Mr. Rubin said, home prices have been battered for so long that many people have stopped believing home improvements will increase the value of their property.
"There's this psychology that home prices are dropping independent of whatever improvements they make, so it's a lost cause to do them now," he said.
Rising home prices traditionally lead homeowners to spend more money, even during periods of economic sluggishness, creating jobs.
But "that cycle can cut the other way," said James Parrott, a top White House housing adviser. "As the value of a family's home drops, that can really go from a lever of savings to a drain on that savings."
Those concerns prompted the White House earlier this year to begin canvassing experts on how to attack the excess inventory of distressed properties and troubled mortgages.
Officials are studying ways to encourage banks to write down loan balances for borrowers that are seriously underwater and to allow more underwater borrowers with government-backed loans to take advantage of low mortgage rates by refinancing. They are also working with federal regulators to study ways to rent out or clear the inventory of foreclosed homes.
Earlier initiatives encouraging banks to voluntarily modify mortgages haven't reached as many borrowers as hoped, hindered in part by stubbornly high unemployment.
Banks hold nearly 500,000 homes on their books, but more than four million additional loans are in some stage of foreclosure or are considered "seriously delinquent" because they have missed three or more payments.
That bad debt is "dragging the nation's economy underwater," said Lewis Ranieri, the pioneer of the mortgage-bond market, in a speech warning of the growing risks of policy inaction at a conference Monday.
"In truth, we seem very paralyzed and slow to act," he said, chiding policy makers and industry executives for "wasting time engaging in self-interested bickering" while the housing market rots.
While mortgage rates have fallen to their lowest levels in decades, applications for home-purchase mortgages are mired near 15-year lows, according to the Mortgage Bankers Association. Applicants today face "a mountain of paperwork and never-ending reverifications," said Stuart Miller, chief executive of home builder Lennar Corp., in an earnings call Monday.
Financing remains available to only "the most credit-worthy purchasers," he said.
Mortgage-finance giants Fannie Mae and Freddie Mac sharply tightened their standards three years ago, and many banks continue to do so because of concerns they will be forced to buy back defaulted mortgages.
The bust has hit some markets harder than others. In Nevada, Arizona and Florida, many homeowners can't move to take new jobs because they owe far more than their homes are worth. But even some markets that have shown resilience over the past year, such as Washington, D.C., could be at risk if job growth peters out.
Housing markets are also in bad shape because would-be first-time homeowners have retreated amid grim economic news. Many current homeowners, meanwhile, don't have enough equity to move, chilling the crucial "trade-up" market. That has left housing heavily dependent on investors buying homes at discounts with cash.
Quote of the Day from Dave Ramsey.com:
Disgust and resolve are two of the great emotions that lead to change. — Jim Rohn
No comments:
Post a Comment