The Road to Monetization is Paved with Good Intentions

Bernanke Mortgage Rates Get 4% Handle First Time: Chart of Day
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By Kathleen M. Howley
March 20 (Bloomberg) -- The lowest fixed mortgage rates on record may fall further after the Federal Reserve tripled its commitment to buy securities backed by conventional home loans.
Lenders will be setting rates “with the knowledge that there is a large buyer in the market ready with a bid at prices deliberately aimed at bringing down spreads,” said Jay Brinkmann, the chief economist at the Mortgage Bankers Association in Washington.
The CHART OF THE DAY shows spreads on mortgages and consumer loans versus benchmark interest rates. The gap between 15- and 30-year fixed-rate mortgages and the 10-year Treasury note narrowed since the Fed started buying mortgage securities in January.
The average U.S. rate on a 30-year fixed mortgage fell to 4.96 percent during the week ended Jan. 15, the lowest according to Freddie Mac data that goes back to 1971. This week the rate is 4.98 percent, the McLean, Virginia-based mortgage buyer said in a report yesterday. The 15-year fixed rate is 4.61 percent, the lowest since 2003.
The Fed said March 18 it would increase its purchases of mortgage-backed securities this year by up to an additional $750 billion, adding to the $500 billion it pledged between January and June. The central bank also said it would buy as much as $300 billion in Treasuries during the next six months.
The moves are aimed at giving “greater support to mortgage lending and housing markets,” the Fed governors said in their March 18 statement.
To contact the reporter on this story: Kathleen M. Howley in Boston at

Buying your own treasuries is Monetization. Monetization is very, very bad (VVB), just ask any Argentinean.

"How come when I put my AmEx bill on my VISA, it's stupid, but when the government does it, it's stimulus?" - Tamara K., View From The Porch Blog

This is an example of government deficit spending being rolled over. Monetization is worse.

1. To turn anything into money. 2. To convert government debt into currency

The Fed is creating money out of thin air to buy real bond debt in a vain attempt to force down long term interest rates for house mortgages. To understand why they will attempt this folly, consider the Automatic Reset Mortgages (ARMs) on this chart.

As you can see, ARMs are as big a problem as Subprime. They will start resetting in Jan 2010 and continue until Jan 2012.

Think we are out of the woods on the housing problem? I think it is just starting.