I refinanced my mortgage several months ago, seeking to capitalize on the ridiculously low interest rates the Fed insists in poisoning our economy with. While they may be a boon to me, ultimately, these low rates will lead to money creation and ultimately a bubble somewhere; If I had to guess, probably in US Treasury bonds.
This post could go several ways, as there are a couple of problems here. One is the low interest rates, courtesy of the central bank, and not market forces. The second is the function of Fannie Mae in the marketplace.
Are low interest rates good? If you are a borrower, I’m sure you would answer in the affirmative. If you are a lender or investor, they may not be such a boon. I don’t know what the magic rate for interest rates, but I think it should be set in the marketplace without interference from the Fed or the government. Because of the practices of the Fed, specifically purchasing treasuries and setting the interest rates that banks are charged, interest rates can be manipulated to be either high or low, which impacts decisions that market participants make.
Often we hear complaints about capitalism, and some may have validity. Unfortunately, if you are looking at the United States and complaining about some excess or another, I don’t think you can pin the problem on capitalism, since we don’t have it here. There are some elements of capitalism, but in my opinion, there are more instances of government interference that impact the market, minimizing its ability to correct imbalances or misallocations of capital. The method used to keep score in the marketplace, money, is subject to manipulation. As a business man, decisions you make can be severely impacted by a subsequent decision by the Fed or the government. It is like attempting to play a game with the rules constantly changing. Imagine playing football where the field changed dimensions, or where the football changed shape or weight. Certainly, it is still possible to play, and the game could certainly be interesting, but as a coach or player, it is difficult to be consistent, as what worked one week may not be effective the next week. The manipulation by the Fed and the government by picking winners or losers makes our markets not free, and our economic system not capitalistic. We currently have a form of crony capitalism that is trending towards socialism.
As an investor, government manipulation of interest rates and the resulting bubbles makes investing very treacherous. What may be a good strategy with one Fed stance may suddenly prove to be unprofitable when the Fed changes direction. I believe that this uncertainty is at least partly fueling the uncertainty that is gripping our economy.
What the heck is Fannie Mae doing purchasing my mortgage? While there may be some well-intentioned purpose for this risk transference scheme, the eventual effect of such a transaction is to eliminate risk from the bank that issued the mortgage and transfer the risk to Fannie Mae. But guess who ultimately guarantees the mortgages held by Fannie Mae? The US government, or all of us, ultimately, since Fannie Mae is a government-sponsored enterprise. The government is still purchasing mortgages, thus relieving the banks of long-term risk from the mortgages if they are risky. Certainly the level of documentation required to get a mortgage is much higher than it was in 2005 when we obtained the mortgage. I’m sure the banks are doing a better job of ensuring that the people that they sell mortgages to can pay them back, but I submit that if they were going to keep the mortgages on their books, they would have a different level of scrutiny than if they can off-load them to Fannie Mae within 6 weeks of closing.
Have we learned anything since the last meltdown? It appears that it is still business as usual. What do you think?
