Governent Spending Programs Designed To Save Economy Having Opposite Effect?

MarineReconDad — Mon, 08 Jun 2009 01:31:50 GMT

The Federal Reserve announced a $1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.
But this and other big government spending programs are turning out to have the opposite effect. Rates for mortgages and U.S. Treasury debt are now marching higher as nervous bond investors fret about a resurgence of inflation.
That's the Catch-22 threatening to make an awful housing market potentially worse and keep the economy stuck in a funk. Kick-starting the economy requires higher spending, but rising rates mean fewer Americans will be able to refinance their home loans. And some potential buyers will be shut out of the market by higher monthly payments they won't be able to afford.
To understand how this is all connected, you have to think like a bond trader. Inflation is their enemy because it means the purchasing power of the dollars they receive when bonds eventually are paid off will be diminished. The only question is by how much.
Yields on 10-year Treasury notes, a benchmark for home mortgages and other consumers loans, jumped from 2.5 percent in March around the time of the Fed announcement to as high as 3.7 percent in recent days as signs that efforts to stabilize the financial system and economy were starting to pay off. And 30-year mortgage rates jumped more than a quarter-point this week to 5.29 percent, the highest level since December, Freddie Mac reported.
"If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity," said economist Ed Yardeni, who runs his own investment firm. "Even worse, they could abort any necessary recovery in home sales and prices."
Yardeni coined the term "bond vigilantes" in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn't doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time.
So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?
One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation.
The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year - more than four times last year's all-time high.
"The bond market is calling the Federal Reserve out," said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. "Investors are saying that the Fed can't just print money out of thin air to finance a massive deficit."
Fed Chairman Ben Bernanke acknowledged Wednesday in congressional testimony that large budget deficits could threaten financial stability by eventually eroding investor confidence and endangering the economy's prospects for long-term health.
"Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House Budget Committee.
That kind of talk is meant to calm bond investors' nerves. It also shows the quandary faced by Bernanke and other federal officials. They need to hold down interest rates through massive government spending at the same time they have to deal with worries over how that spending could damage the economy over the long term.
After Fed policymakers this spring said they would buy billions of dollars of government debt and more than $1 trillion of mortgage securities, 30-year fixed mortgage rates fell to 4.78 percent in April, the lowest since Freddie Mac started surveying rates in 1971.
Sales of new and existing homes began to trend higher. Mortgage refinancings also jumped, allowing borrowers to lock in lower rates. Fee income from this activity helped lift profits at many battered banks and gave consumers more disposable income to spend, which helped lift their confidence about the economy's prospects. All that was good for the nation's businesses.
But now, surging mortgage rates are threatening to undermine all that. Seventy percent of refinancing activity could be knocked out as rates close in on 5.5 percent, according to Mark Hanson, a managing director at the independent research firm Field Check Group of Menlo Park, Calif.
That's because homeowners wouldn't get much of a benefit if a refinancing only reduces monthly payments a tiny bit while they are stuck paying closing costs that typically run about 2 percent of the loan amount.
Also, many homeowners who wanted to refinance didn't lock in the super-low rates in April when the refi boom took off. "Half the deals in the pipeline are dead," Hanson said. "People were applying to refinance to improve their situation, but now they are seeing it won't be much improved."
All this means that even though mortgage rates are still low by historical standards, many of the trends that seem to be pointing to economic recovery in recent months could be undone fast.

RE: Governent Spending Programs Designed To Save Economy Having Opposite Effect?

stevor — Mon, 08 Jun 2009 05:21:53 GMT

Obummer is totally screwing up our economy (not just the USA but the whole world). I was lucky to be one of the few to be able to refinance my home at 4.75% but that's history. This whole mess is beyond words.

RE: Governent Spending Programs Designed To Save Economy Having Opposite Effect?

A Brown — Mon, 08 Jun 2009 15:03:45 GMT

I feel dense on this sometimes. How can the government put money out that most of us will not see. Construction is up, but are the jobs still going to the illegals like before? Arel probably go higher they spending the money helre or sending it home to their families?That is thei problem in the county I live in. This morning I read that some of the banks want to p ay back their TARP. Why do they have to get the governnment's permission to pay it back? They don't want the government or Obama to take it over. Seems smart thinking to me. The mortgage rates are up and will go higher because the refinancing was looking good several months ago and Obama was asking people to refinace. I think it was a ploy to get us sucked in untill people has to go to public housing, owned by who? The government.This is the way I look at it.

RE: Governent Spending Programs Designed To Save Economy Having Opposite Effect?

A Brown — Mon, 08 Jun 2009 15:06:35 GMT

Sorry about the first of my answer, but this site has been rolling untill I can't type sometimes. Hope you get what I mean.

RE: Governent Spending Programs Designed To Save Economy Having Opposite Effect?

Moosemose — Wed, 10 Jun 2009 00:35:31 GMT

This "Dragging of the Feet" has been on Purpose as part of the "Deal" cut with these Home Loan Companies to "Pay Back" the "Feds Bail Out Money". It was to allow them "Slack" in hopes of the "Market" springing back quickly limiting the amount of "Damage" these companies would be subjected to. And as we are seeing, it is working, making it not worth the "Effort" to Re-Fi. thus "Limiting" the "Loss" for these companies!!! WE STILL DON'T SEE ANY PROGRAM FOR FHA/VA AS THE GOVT. CAN'T CUT A "DEAL" WITH ITSELF LIKE THIS THAT WOULD "LIMIT THEIR EXPOSURE"!!! Holy "Smoke & Mirrors" Batman!!! John

RE: Governent Spending Programs Designed To Save Economy Having Opposite Effect?

stevor — Wed, 10 Jun 2009 03:17:44 GMT

Obummer likes to technically do what he promised to do. He promised to help the housing market with low-term loans. I waited for months, keeping on my broker the whole time, to get me one. Finally, it was 4.75% and we jumped on it. The next day it was over 5%.

So, technically, Obummer did what he said he'd do. He doesn't care what the result is. He is just trying to have one fewer thing he promised turn out to be a lie.

The Fed says they're going to try to keep the rate down. Well, that's manipulating the market again. The market has to move to inflation as it rebounds from the extra smoke and mirrors money that Obama and Geithner have created. I figure that when it all breaks loose, the inflation will be even worse.

I hope all you out there have incomes that tend to go up with inflation. Unfortunately, mine won't and thus I will have to continue working beyond the Obama years (decade of pain like the "lost decade" of Japan?) to retire.

RE: Governent Spending Programs Designed To Save Economy Having Opposite Effect?

lawbug — Sun, 11 Oct 2009 17:39:20 GMT

No the 1.2 trillion plan three months ago designed to push down mortgage rates and breathe life into the housing market.
Has had no effect on anything just try asking your banker.

RE: Governent Spending Programs Designed To Save Economy Having Opposite Effect?

atbdavis — Sat, 28 Nov 2009 01:53:10 GMT

what can generally be expected when the economy enteres a recession and a boom?