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Yale economist and bubble-spotter Robert Shiller talks to Bloomberg’s Matt Miller and Carol Massar about double-dip recessions, animal spirits, and a “highly priced” U.S. stock market.
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At about the 8:30 mark, the discussion turns to the nation’s housing market and Shiller notes, “I think this is a time of exceptional uncertainty about home prices. They could go up and they could go down – and they could go down substantially”.
In today’s commentary at Bloomberg, Caroline Baum looks at the central bank’s latest excuse – the European sovereign debt crisis – to keep interest rates at their current freakishly low levels, an act that is likely sewing the seeds of future crises.
There is never a good time for central banks to raise interest rates. Some times are worse than others. A crisis qualifies as the worst of times, providing an opportunity, and excuse, to keep rates low.
What happens when crises start to run into one another? At some point, the Federal Reserve will have to depart the safety of its near-zero-percent interest-rate mooring, balancing the financial system’s current readings with the potential for gathering storms.
A brief history is in order.
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Them’s a lot of crises for the “Great Moderation,” an apt description of the low-inflation era that began in the mid- 1980s. The term is ill-suited to the series of rolling financial crises that seemed to have thrived during the reign of stable prices, at least as measured by conventional consumer price indexes.The Fed responded to Europe’s troubles by reopening its swap lines to European banks. “Crisis” can now be added to the list of reasons to keep the federal funds rate at near zero: “substantial resource slack” (shorthand for high unemployment and low utilization rates); a tepid recovery (a forecast); stable inflation expectations (a hope); and a contraction in credit (a reality).
It’s hard to believe that, during the last decade, short-term interest rates in the U.S. were over five percent for less than two-and-a-half years. Probably more damaging was the fact that the Fed funds rate averaged just 2.8 percent during those ten years.
Of course, we’re off to an even worse start in this decade.
Here’s a chart to go along with yesterday’s excellent commentary by Diana Olick of CNBC on the disturbing trend in back-end debt-to-income ratios for so-called “permanent” mortgage modifications and how they might factor into rising default rates, part of the government’s Home Affordable Modification Program otherwise known as HAMP.
Note that front-end debt service (i.e., PITI, etc.) stays fixed at 31 percent (per program rules) while back-end debt service (i.e., all debt) has no upper bound, now at 64.1 percent. Yes, that leaves borrowers with 35.9 percent of their income to pay for taxes, utilities, insurance, food, gasoline, clothing, save for retirement, and have some fun from time to time.
What was funny about preparing the above graphic was that the source had to be cited. In doing so, it became quite clear that the government probably has the wrong name for their website – while the name may say “financial stability”, the figures in the chart say something quite different – perhaps “financialmadness.gov” would be better.
Wow. You’d think that we all just did a time-warp back to the middle of 2008 based on today’s collection of inflation reports from around the world. Producer prices in the U.S. were down from March to April but are a full 5.4 percent higher than a year ago according to the Labor Department. It’s a good things those costs aren’t getting passed on to consumers because that would put real interest rates at … let’s not go there.
In Europe, where memories of hyperinflation from Weimar Germany are still vivid, they are petrified at the thought of where central bank money printing to fund the latest bailout might lead. Oh right, they say the bailout money is to be “sterilized” and won’t add to the money supply – we’ll see how that goes. Germany’s Der Spiegel notes in this report that the biggest danger from the bailout is a changed central bank.
There is a growing fear that a gigantic wave of debt will soon roll over Europe and the euro-zone countries will deal with it as elegantly and unscrupulously as they have so often done in the past — by allowing inflation to reduce their debts. These concerns are shared by more than just the notorious paper money skeptics who predict the return of hyperinflation.
Even serious experts like Joachim Fels, a top economist at Morgan Stanley, have no qualms about addressing the likelihood of such a development. Although it is an extreme scenario, says Fels, it certainly cannot be dismissed out of hand. At the very least, the central bank can apparently “no longer resist the temptation to use inflation to reduce the mounting public debt.”
The way things have been going lately, maybe it isn’t nearly as extreme as Mr. Fels thinks.
In the U.K., inflation just jumped to a 17-month high of 3.7 percent, up from an annual rate of 3.4 percent the month before, and you know what that means – Bank of England Governor Mervyn King has some ’splainin to do in the form of writing a letter new Chancellor George Osborne who surely has other things on his mind.
The Census Bureau reported(.pdf) that housing starts rose 5.8 percent from March to April but permits for new home construction fell 11.5 percent.
Housing starts rose from a seasonally adjusted annualized rate of 635,000 to 672,000, the highest level since October 2008 and an impressive 40.9 percent above the level of a year ago. Of course, building activity in April of last year at a rate of 477,000 marked the low point in the current cycle, almost 80 percent below the peak in 2005. The current rate of housing starts is only 71 percent below the highs seen at the peak of the housing bubble.
Permits for new construction, a leading indicator for future homebuilding, dropped from a rate of 685,000 to just 606,000, the lowest level in six months but up 15.9 percent from last year at this time. Current levels of both housing starts and permits are still well below the inflation-adjusted low seen in 1991 and, with so much inventory either on the market or yet to come in the form of bank-owned properties and short-sales, conditions don’t look to be improving for the homebuilders anytime soon.
TOP STORIES
Mortgage Mods Doomed by Back End Debt – Olick, CNBC
Treasury takes $1.6 billion loss on Chrysler loan – AP
Greece Gets First Installment of Emergency Loans – Bloomberg
Stephen Roach: It’s Still All Greenspan’s Fault – Business Insider
Twice As Many Kicked Out Of Foreclosure Program As Given Permanent Relief – HuffPo
Congress blocks indiscriminate IMF aid for Europe – Telegraph
More homeowners choose to default on loans – MarketWatch
Return to the Abyss – Roubini, Project Syndicate
Six Reasons to Buy Gold Right Now – CNBC
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MARKETS/INVESTING
Oil rises above $71 after 2-week sell-off – AP
Gold slips as risk appetite lifts other assets – Reuters
Paulson & Co Ups Stake in BofA, Buys More Gold Stocks – Street Insider
Crack of Doom: Truly Bad Investment Advice from the Maestro – Housing Doom
Investors Should Avoid Banks ‘At All Costs’: Meredith Whitney – CNBC
How to profit from the sovereign debt crisis – MarketWatch
“Rough Riders” – Saut, Raymond James
By Tim Iacono, Since 2005
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