Federal Reserve | timiacono.com - Part 55

Blame the Fed

Here’s yours truly again in another interview, this one on the subject of the Federal Reserve with Mo Dawoud of Wall Street for Main Street. I followed up sessions with Marc Faber, Peter Grandich, and Fabian Calvo, all of whom had some interesting thoughts to share.

My interview runs for almost a half hour – the longest I’ve been in a one-on-one session such as this in many years. Time really flew and it was great fun.

Meet Janet Yellen, Your New Fed Chair

Ambrose Evans-Pritchard put it best in this commentary at the Telegraph on Fed Vice Chair Janet Yellen’s imminent nomination to succeed Fed Chief Ben Bernanke at the central bank:

Rejoice: the Yellen Fed will print money forever to create jobs

We now know where we stand. Janet Yellen is to take over the US Federal Reserve, the world’s monetary hegemon, the master of all our lives.

The Fed will be looser for longer. The FOMC will continue to print money until the US economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way.

This leaves me deeply uneasy.

Here she is – get used to seeing the new face of the Federal Reserve:

Janet Yellen

The Dangerous Fed

Here’s an infographic that’s been making the rounds this week and for good reason – it paints a none-too-flattering picture of what the Fed is and what it does.

Also, I didn’t know that Ron Paul’s Audit the Fed Bill has been held up in the Senate for over a year now – I guess that shouldn’t come as too much of a surprise.

Dangerous Fed
For the entire graphic, see The Dangers of an All-powerful Federal Reserve.

How to Avoid a Recession in 2014

The most succinct commentary on what Congress and the central bank need to do in order to avoid a recession next year comes from American Enterprise Institute economist John Makin in this op-ed today at Politico that concludes with the following:

Congress needs to adopt quickly a budget for 2014 and raise the debt ceiling high enough to preclude further disruptions for at least a year and a half.

PoliticoMeanwhile, the Fed needs to stop trying to fine-tune its tapering message, end board members’ public second-guessing of its decisions, and declare its willingness to hold steady until the economy stabilizes. The more unlikely these steps become, the more likely a 2014 recession becomes.

The average postwar U.S. expansion has lasted 58 months. In the midst of major policy dislocation in Congress and at the Fed, we are at month 52 of the current expansion, which began in June 2009. But we are running out of time – and luck.

At this point, it’s anyone’s guess what Congress and the Fed will do in the weeks and months ahead, but, one thing is certain – they have both the ability to make conditions much more amenable for growth here and abroad as well as the ability to send the entire global economy and financial system into a tailspin that could be worse than 2008.

Writing in the New York Times, Catherine Rampell details in Boom, Bust, Flip how it is becoming clear to many average Americans just how skewed the financial system is to the rich and powerful in the world of finance as Wall Street’s bailout has allowed investors to buy and then resell at a profit homes of ordinary Americans who didn’t get a bailout.

Now that, in some cases, home prices have risen back to levels that would make foreclosed homeowners whole again (had they gotten a bailout), they’re on the outside looking in.

Tim and Jenni Earll didn’t have a lot of money saved up, but they’d seen enough of their friends buy homes to feel like fools for burning their cash on rent. So they took out a 30-year mortgage and bought a fixer-upper on a quiet street in Seattle’s Roxhill neighborhood for $309,900. That was in the spring of 2007.

Where's My BailoutTim and a cousin spent the next couple of years trying to build some “sweat equity” by redoing the electrical wiring, plumbing and landscaping, but when Jenni lost her administrative position, they had to delay the improvements. Soon after, Tim’s work at a glass company began petering out, too. Desperate to hold on to their house, they sought a loan modification, but by the end of 2010, the bank refused to refinance. The following summer, it foreclosed and auctioned off their home to AKA Investors L.L.C., which paid $155,000 in cash for the house.

Now, five years after the start of the financial crisis, the housing market has come back, and many of these investors are cashing in. According to tabulations by Redfin, an online real estate listings site, banks have already sold about 1.5 million of the nearly 2 million homes that were foreclosed on during the past half-decade. Resales are becoming more common and can be hugely profitable. A house in Redwood City, Calif., for instance, was sold in a foreclosure auction in 2011 for less than half what the evicted owner paid in 2006. Ten months later, it was flipped for close to its previous price. Another house in Los Angeles went into foreclosure in 2012 and was flipped seven months later for a markup of $254,000, or 66 percent. Of the 87,062 foreclosures in the last five years that were bought by corporate investors and have been flipped, about a quarter were sold for at least $100,000 more than what the investor originally paid, according to Redfin. (Although it’s impossible to know how much investors spent on upgrades or renovations.)

That includes the Earlls’ house. Last year, AKA flipped it for $290,000, an 87% markup.

There’s more to this story, but what really grabbed my attention was the idea of the former homeowners driving by their old place, knowing that their lives would be fundamentally different today if they’d been given the same sort of help that big banks were given.

© 2010-2011 The Mess That Greenspan Made