So we all waited over the weekend and until this morning to hear about what’s happening in the currency markets to the dollar and what Fed Chairman Bernanke would have to say at the FDIC; Fed sponsored conference on dealing with foreclosures. Here’s what we got, confirmation of no surprises.
The Fed has been talking about QE2, more quantitative easing – that is to say expanding the money supply, for several weeks. The traditional argument against QE2 is it devalues the dollar and transfers wealth from creditors to borrowers. The old saying “inflation is the debtors friend” remains as true today as it was at anytime in our past. Not surprisingly QE2 is not a popular concept with our trading partners and creditors specifically the Chinese. Mainly because it will make their products more expensive in the country and our products cheaper in their country as well as make their investments in mortgage backed securities less valuable. More importantly it would probably lead to higher oil prices and higher real estate prices.
Without higher real estate prices and the expectation of higher real estate prices the real estate market is likely to remain stagnant. Inflation, late 1970′s Jimmy Carter style, would change this leading to a reflation of real estate prices which would solve much of the problem with the current housing situation. Bernanke stated this morning that approximately 23% of Americans owe more on their homes they are worth: a true statement which does not lead to a stronger housing market.
So how does this tie into this morning’s comments? This morning’s comments were principally focused on curbing fraud and abuse in lending practices. Few people familiar with underwriting and lending practices between 2004 and 2007 with any depth of experience in the Housing Industry would not confirm that lending practices became increasingly irresponsible in that time period. Bernanke noted that home ownership peaked in 2004 at 69% however it is of no benefit to put people in homes that they cannot afford or that are over mortgaged. Literally trying to correct fraud and poor underwriting practices now would appear to be closing the barn door after the cows are out so why this speech now?
Because its part of the balance against the inflationary pressures that the Fed more than likely is about to release. In the inflation of prices that may well occur over the next several quarters the Fed and FDIC are saying effectively, “we will let prices rise but we will not allow irresponsible lending”. This move is designed to ensure the security of investor and attempt to restore confidence in the Mortgage Backed Securities which are critical to any housing recovery and positive future for American housing.
Bernanke is as much as saying trust us we won’t do this again, lend us some more money.