How Housing Weakness May Change the Fed's Game

homes.yahoo.com/news/housing-weakness-may-change-feds-152700345.html

When Federal Reserve Chair Janet Yellen testified before the Joint Economic Committee of Congress last week, she added a new variable to the Fed's policy mix, weakness in the housing market.

While in recent weeks, and months, the Fed has focused on two economic variables that are being most closely watched,� unemployment and inflation,� the mention of housing was significant.

Not since the immediate aftermath of the bursting of the real-estate bubble has the Fed focused on the foundation of the American economy as a significant factor is guiding decisions on interest rates and quantitative easing .

It has been a winter of discontent for the economy, as a whole, but even more so for sales of new and existing homes, housing starts, mortgage applications and refinancings. Home-price appreciation has slowed in certain parts of the country, as well, but that hasn't yet sparked a pick-up in demand.


Even with long-term Treasury rates falling to 2.6 percent, pushing mortgage rates back down toward historic lows, the flow of credit to potential home buyers has been choked off, creating a headwind in housing, and for the overall economy, from what was a tailwind a year ago.

If the spring fails to deliver any new "green shoots" to residential real estate, the Fed may do one of several things.

It could "taper the taper," taking a couple months off and then re-start the taper if real estate picks up, or stop for a protracted period.

But with the cost of credit still quite low by historic standards, the Fed may have to reach into its toolbox and try some other unconventional means of reigniting the home fires in residential real estate.

It could stop paying banks the quarter point interest for deposits held at the Fed, potentially forcing banks to take that money and make loans.

Such a move would likely be opposed by banks, that are earning a tidy risk-free sum from the central bank, but the net effect could be quite forceful. It would force nearly $3 trillion of bank reserves held at the Fed into the economy.

Since banks would be earning zero, or even less than zero, on their deposits at the Fed, their incentives to lend could change quickly, particularly if the Fed were to adopt a negative deposit-rate policy, something no one is currently expecting.

With that dramatic step, the Fed could actually charge a fee for holding those deposits. The Fed has written about such a maneuver in its myriad studies on how to get a deflationary economy moving again.

The Fed, FDIC and Comptroller's Office, could also begin to relax credit standards so that qualified U.S. buyers can gain access to cheap money from banks.

Mortgage credit remains as tight and unavailable to most buyers today as it was at the depths of the credit crisis in 2009.

I am not suggesting that regulators relax credit to the extent they did in the years leading up to the real-estate bubble and bust.

However, allowing bankers to make traditional 10-percent down mortgage loans to people with decent, but not perfect, credit should get the looky-loos buying again.

I am betting that the Fed has a few more tricks up its sleeve to take a more targeted approach to getting the economy to fire on all cylinders.

If it doesn't "taper the taper," I still expect the Fed will continue unconventional efforts to get the economy, and more specifically, real estate, rising again.

The economy needs all tailwinds, and virtually no headwinds, if the Fed expects the economy to return to its fullest potential and allow it, ultimately, to restore policy to normal — whatever normal means in a post-crisis environment.

http://bastiat.mises.org/2014/03/the-mythical-banking-crisis-and-the-failure-of-the-new-deal/

http://bastiat.mises.org/2014/04/the-fed-is-not-following-the-law/

http://bastiat.mises.org/2014/04/the-hidden-motive-behind-quantitative-easing/

http://bastiat.mises.org/2014/05/yellen-to-end-qe-someday-maybe-2/

http://www.afn.org/~govern/mcfadden.html

Congressman McFadden
on the Federal Reserve Corporation
Remarks in Congress, 1934
AN ASTOUNDING EXPOSURE

Under Obama they aren't reserved at all!

From CNBC, the network so dumb, even the idiot masses are giving up on watching them, but I guess not some including Yahoo.

This whole article is just one big piece of trash and has so many spins and twist it would even make an acrobat dizzy.


No it can't. This whole economy and the money supply is based on debt. Well, the housing debt bubble burst long ago and has never really picked up. So with car sales down 11% over the first four months this year and an overall dead housing market, there is no new currency coming into the markets except for the QE funds which have dropped from 85 billion a month to 65 billion now to 45 billion under Yellon. But all that money has gone to the banks to buy up all the bad paper still floating around.

And what has the banks done with the money, well not loans, they are speculating on the stock and bond markets running them to all time highs in spite of no gains in fundamentals. And oh by the way these large corporations are so flush with cash they almost need dump trucks to haul it around, so they don't need loans.

So if they back off on QE, then there would be no currency in circulation and down we go. But there is a penalty that has to be paid, inflation. With no new GDP, translated products and services being produced, and more money floating around, prices go up. So all Yellon is trying to do is to keep money in circulation but not so much of it that inflation enters the "hyper" category but that can't last much longer.



But this is the most idiotic of statements and would take an NBC to even even glorify the proposal of using the reserves. Currently banks must maintain on deposit with the Fed, 10% of their deposits as a reserve. They can then lend out the other 90% in loans, or in other words for every $1 on deposit they can end up lending out $10 and still have $10 available for withdrawal by the depositors.

So if there are $3 Trillion in Reserves, then there are $30 Trillion in demand deposits being held by the banks, demand means I could go to my local branch and demand by money and they give it to me.

But what does allowing the banks to operate without reserves, an even more unstable banking system. More unstable because it is already on the brink of collapse, now it would just be more so. And should a run on the banks start, they would have to print money at the rate of almost twice the 2014 projected GDP, instant hyperinflation.

Isn't it amazing at the idiocy the US masses will accept.