The Fed and interest rates

[Cigarbutt]

Trump whining could be absurd but, the rate of change is the concern IMO and not absurd.

 

As I explained in my anecdotes in my original post, going from something like 2.8% to 3.5% in the course of one year on a mortgage represents a 25% increase in interest paid. This is very significant for lower income people.

 

Where is the outrage about income inequality here?

 

Moreover, I don't believe that economic impact is well understood at all on the combined effect with unwinding of QE.

 

So yes I am concerned. The Fed has never engineered a soft landing. Never!

 

Booms and busts are something that once again is very hard on lower income folks.

 

Cardboard

Not sure I can build a constructive discussion here (and I take responsibility for it) but I have a question.

 

This is about sharing the gains and the pain but, in a previous post you mention: "Oh yeah, and all Presidents push the Fed. Maybe less publicly but, when the big guy tells you to do something, you tend to obey. I actually think that words behind closed doors are stronger than what Trump is doing: Trump will get backlash if the Fed bends."

 

Can you elaborate on the bolded part.

Asking because of an article I read recently. I won't refer to it directly because it is coming from a "source" which is quite typically biased and the article itself focused primarily on form (irrelevant personal details) over substance but the title was: "Trump Vows to Continue Trashing Jerome Powell Until Fed Chair Bends to His Will".

 

BTW, I plan on reading Mr. Volcker's to-be-published memoirs. Because of his personality traits and seemingly impervious nature to biases, the value of the thoughts may be particularly significant because he is 91 and dying.

[SharperDingaan]

We all know that RE values fall as rates increase, and that it will not slow untill foreclosures have burned through the bulk of the FI loan loss provisions. We just don't like what it means.

 

Yes it means that there are going to be a lot more foreclosures, and bankruptcies. The party is over folks.

Yes, responsibility sucks! - & the economy is going to slow as a result. That's the way monetary policy works.

I was stupid, I made bad choices, is not an excuse. You f'd up, you wear it.

 

The great depression scarred an entire generation, as the great recession has scarred Gen Z - which will outnumber Millenials by the end of this year. Everyday, Gen Z is seeing what over-leverage has done/is doing to their parents (You/I), & doesn't want to mimic us. We f'd up. https://www.bloomberg.com/news/articles/2018-08-20/gen-z-to-outnumber-millennials-within-a-year-demographic-trends.

 

Hard to lend money when your future customers dont want to take it.

Hard to issue mortgages, when customers choose to rent vs buy, and be cash rich/house poor vs house rich/cash poor

Harder to control the supply-chain as customers become independent.

Equals a smaller FI industry.

 

Not a bad thing.

 

SD 

 

 

 

 

[John Hjorth]

Cigarbutt,

 

Thank you for the reference to Mr. Volcker's book soon to be released [October 30^th 2018, I think it is]. I'll buy it also - for pushback. Supplementary question here [and then back on topic again]: Is Mr. Volcker ill? - Or do you use the word "dying" in the meaning that he is approaching his [unknown?] expiry date for every day that goes, the same way all mortals do every day?

 

Personally, I think there is a lot of truth in Cardboard's last post.

 

And yes, SharperDingaan, with regard to taking responsibility for own actions [, as an alternative to blame others, society, lenders, Wall Street, government, or whoever]. Even if one has screwed up, one can decide consciously to change behavior, to get it right. Here, we call it to take the spoon in the other hand. Where there is will there is a way.

[Cigarbutt]

...

Thank you for the reference to Mr. Volcker's book soon to be released [October 30^th 2018, I think it is]. I'll buy it also - for pushback. Supplementary question here [and then back on topic again]: Is Mr. Volcker ill? - Or do you use the word "dying" in the meaning that he is approaching his [unknown?] expiry date for every day that goes the same way all mortals do everyday?

...

No inside or privileged information. I have followed Mr. Volcker (with respect) and have compared, for pushback, to others such as Mr. Greenspan, on how one can/should evolve with thinking (keeping what is essential and getting rid of nuisance) and infer rather indirectly that he has his share of ailments for his age and have found that he has tended to speak in terms of legacy which usually corresponds to one feeling his own end coming.

 

An interesting part that has filtered around the publication of the memoirs and which is relevant to the noise heard about others who have recently published material potentially tied to vested interests, is that it appears clear that noboby (the publisher, the editor, or any other) could have told Mr. Volcker what and when to write.

https://dealbreaker.com/2017/10/paul-volckers-memoir-will-be-less-arousing-than-warren-buffetts/

When asked about the motivation behind the ultimate piece: ""I had no intention of writing a book, but there was something that kind of was irritating me," he said. "I'm really worried about this governance thing."

 

These people have huge responsibility, have to deal with diverging interests and deserve a lot of respect.

I thought Mr. Buffett expressed an aspect of this fiduciary responsibility in this video (2012).

https://www.youtube.com/watch?v=bPk0UFKHEHs

Mr. Buffett has a way to wrap tough messages into softer choices of words but he seems to say that a man's got to do what a man's got to do.

 

[Cardboard]

"Trump will get backlash if the Fed bends."

 

Every President went to the Fed and asked for rate increases to be delayed and the like. Greenspan was notorious for it and always avoiding raising rates around election time. So he can go F himself regarding earmuffs as I consider him one of the worst Fed Chairman ever or one who entertained both major bubbles.

 

https://www.cnbc.com/2018/10/18/greenspan-says-that-before-trump-other-presidents-criticized-fed-policy-all-the-time.html

 

Now, because Trump did it publicly, he will get disapproval from Democrats and whatever committee is responsible at Congress to supervise the Fed. This opens the door for the Fed to ignore him and do whatever it wants IMO.

 

Not long ago, a mere 10 years, people were rushing to save the financial system from a disaster with TARP and all kinds of new means. The cause was banksters, politicians via Freddie/Fannie and everyone wanting to be into a home and causing a huge bubble. Home ownership reached almost 70%. Now look at this chart:

 

https://en.wikipedia.org/wiki/Home-ownership_in_the_United_States#/media/File:Home_Ownership_rate.png

 

We have gotten out of the emergency room, got rid of crutches and now walking again. When I look at this chart, I don't see a bubble or a party. I am seeing the largest expenditure made by a family getting back on track.

 

While I am a very strong advocate of personal responsibility, I am not in favour of pulling the rug from under people's feet who have qualified for a much more stringent mortgage after all that has happened just because the Fed thinks that inflation may come back. Even less to enrich some of the folks on this thread who are salivating at opportunities from a bust.

 

Cardboard

 

 

[SharperDingaan]

If you buy more house than you can afford, and get foreclosed on - what happens to you is on you.

At any time, you could have sold and bought a smaller house in the same location, the same size house in a cheaper location, or just rented instead. You could also have taken in lodgers, or shared ownership. Yet, you chose to do none of these things?

 

Nobody wins when somebody gets foreclosed - but it does force long overdue change.

And therein is the rub - it's not the way it was anymore.

 

SD

 

 

 

 

 

[Spekulatius]

Trump whining could be absurd but, the rate of change is the concern IMO and not absurd.

 

As I explained in my anecdotes in my original post, going from something like 2.8% to 3.5% in the course of one year on a mortgage represents a 25% increase in interest paid. This is very significant for lower income people.

 

Where is the outrage about income inequality here?

 

Moreover, I don't believe that economic impact is well understood at all on the combined effect with unwinding of QE.

 

So yes I am concerned. The Fed has never engineered a soft landing. Never!

 

Booms and busts are something that once again is very hard on lower income folks.

 

Cardboard

 

Lower income people probably rent rather than own.

[Cigarbutt]

^For various reasons, home ownership has followed the same curve as the US, but on a slightly delayed basis.

An argument can be made that a segment of the population (lower middle class and upper lower class) were "encouraged" (low interest rates, various policies etc) to buy homes in an unusually favorable environment. Regular folks who don't read the FOMC statements gradually realize that homeownership is no longer affordable and see rising interest rates at a time where wages are not following the cost of living.

 

A similar scenario is playing out for people making (financing) car purchases.

 

https://www.huffingtonpost.ca/2018/09/08/canadas-tradition-of-homeownership-is-at-risk_a_23520973/