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October 9, 2009
Long-term rates are rising today, the all-important 10-year Treasury suddenly above the 3.16-3.28% range that gave us sub-5.00% mortgages for the first time since spring. Gone now, pushing 5.125%, the 10-year trading 3.37% at this moment.
Ordinarily, a range breakout like this would signal a run to the top of the old range, 10s testing 4.00% as in summer, mortgages 5.75%. However, nothing in this moment is ordinary -- not remotely predictable with normal tools.
In the short-run dynamics of supply and demand, the brief interval sub-5.00% ignited refinance and purchase mortgage applications -- up 18.2% and 13.2% respectively last week. As there is no private investor demand for mortgages, once borrowers overshot the Fed’s constant purchase volume, rates had to rise to choke off applications. The surge in purchase applications was the first since spring, which says a “4” prefix is required to get housing going.
The devil is the long Treasury market: no matter how many MBS the Fed buys, if Treasury yields won’t stay down, neither will mortgages’. The fate of long Treasurys depends entirely on the pace of economic recovery, and the recovery argument is descending farther into chaos. I think these last two weeks are instructive: if you see a mortgage close to five-flat, just take it. A no-fee “4” is just good luck.
The central policy lessons from the Depression (which more resembled this episode than anything since): don’t let your banking system collapse, and don’t try to balance your budget in the middle of a terrible economic contraction.
Today we have rival armies of analysts, salesmen, and policy-makers trying to apply the lessons of this episode before it is over, hawks and punishers predominant. The themes in their certainty: stimulus is excessive, will cause inflation, and imperil the dollar, and must be withdrawn soon; greedy bad guys caused all of this, and new regulation can’t be too tough; the nation needs a long-term process of deleveraging and must embrace frugality and saving; and too many resources have gone to housing and it must muddle its own way out.
The leadership at the Fed is clearly more worried about downside risk. Vice-chair Donald Kohn delivered a wonderfully exasperated response to the hawks last week, joined by Dudley at the New York Fed, Rosengren in Boston, Yellen in San Francisco, and the staff. However, other regional-bank rock-heads (Hoenig, Lacker, Bullard, Plosser, Fisher) have prevented thinking about “What if we haven’t done enough?” Bernanke has retreated into opaque Fed-speak, trying to hold consensus.
Larry Summers, White House money czar, announced that a “new normal” of low GDP growth was incorrect, and the economy could and would grow quickly. Was that for political consumption, to make the unemployed and foreclosed feel better? If so, not worth it, as it immediately reinforced the hawks’ fears of a too-stimulative Administration, and undercut bond investors’ faith in a slow-growth future.
Treasury Secretary Geithner has disappeared. Citi’s management got a pat on the butt for good behavior in a government study on Wednesday, and yesterday wacky Sheila Bair’s FDIC said they’re still bad guys. The Fed released news of the seventh-straight monthly decline in consumer credit, deepest ever measured, without comment.
I feel caught in one of the great good-news-bad-news deals of all time. The longer the authorities wait to take effective action on housing and credit, the better the chance of an economic breach big enough to get them off the dime. The incremental alternative is to stumble along, pecked at by hawks. Renewing the first-time-buyer credit and fiddling with mortgage modification won’t do it.
In this astonishingly passive and leaderless economic Administration, one voice stood out: Elizabeth Warren, Congressional TARP oversighter and blunt Harvard prof spoke the unspeakable yesterday: foreclosures are completely out of control and threaten the whole economy. |
