I think they also both buy their clothes from Banana Republic!
Enough kidding. This is actually a very serious situation.
Massive easing through bond and mortgage backed securities purchases causes massive distortions but does not achieve what they say they want to achieve, lower unemployment.
They believe that their buying reduces interest rates which therefore causes people to want to buy houses which then leads to new houses being built and therefore unemployment comes down.
The problem is that they are trying to repeal the Law of Supply and Demand.
This sounds good in theory but not in practice.
Certainly, lowering the price of mortgages increases the demand for mortgages. Until May, we were seeing massive amounts of refinancing of old mortgages. The pop up in interest rates has largely ended that surge in refis.
But wait, there was no surge of new mortgages for new houses! How could that be possible, Mr. Bernanke and Ms. Yellen?
The problem is that the price is too low for lenders to be interested. Lenders look at mortgage rates around 4% and know that they cannot make money over the life of that mortgage. Inflation and taxes will eat them alive. Plus, of course, they have to also cover the cost of some of those mortgages defaulting.
So mortgage lending is very very slow largely because interest rates are too low for lenders to want to make loans.
In other words, there is no supply of mortgage money at the rates that Bernanke and Yellen believe should stimulate new housing.
They need to stop this insane policy and let the market adjust. It will heal naturally.
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Life is good.
I’m literally on the beach. A couple of kids are playing in the sand. A couple of boats are drifting by in the distance.
Island music in the background.
My eyes are drooping from the relaxation. I feel like I’m going to turn into a lizard if I stay here any longer!
Wait, maybe life isn’t so good.
I’m about to take a plane up to cold New York. Don’t get me wrong, I love New York. But not when it’s freezing. Particularly when I’m coming from the tropics!
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