The latest reality check to gobsmack the Fed is the housing market, which is heading for a significant downturn.
As MBA reports, the Refinance Index plunged 16% from the previous week and was 56% lower than the same week one year ago.
But most notably, the seasonally adjusted Purchase Index tumbled 10% from one week earlier - after holding up for a few weeks amid rising rates. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 6 percent lower than the same week one year ago.
The reason mortgage applications and housing purchases are down is because interest rates are rising, at least in part because the Fed is committed to a rare increase next month, and a few more beyond.
It is worth noting the 2008 financial crisis was catalyzed in part by Ben Bernanke's interest rate hikes deliberately designed to “choke off” the subprime mortgage market. He succeeded only too well.
Yet this is the expected result of an interest rate rise. Raise rates to stop inflation and more than just financial markets collapse.
Yeah, the housing market has been nukcing futs. But there are major differences between now and the mid-late 2000's. The quality of mortgage credit is much better than it was then, and substantial portion of purchases have been all-cash. So I do not think it will be the housing market that leads the credit-collapse this time. It will be other, over-leveraged portions of the economy -- businesses with a lot of debt that they can't service at higher rates and so on. Then of course there's the 30 trillion pound elephant in the room...
Depends on which mortgages. In 2008 the trigger was residential real estate. This time commercial real estate is the unhealthy sector.
But you are right that we are not likely to see wave after wave of residential mortgage defaults.
Unfortunately, the financial markets have been floating on magic monopoly money courtesy of the Fed for so long that even a modest decline in housing will burst the asset bubbles that are Wall Street today.
It's been pretty taken as gospel since Milton Friedman that inflation is a monetary phenomenon.
The simple explanation for inflation is too much money chasing too few goods. That is ultimately a combination of money creation and the velocity of money.
For the longest time the velocity of the dollar was low. Which is how the Fed's quantitative easing expanded the money supply -- most of the printed money never left the financial markets--where, incidentally, there has been steady asset price inflation since 2009-2010.
The stimulus checks bypassed wall Street and injected money directly into the mainstream economy, triggering consumer price inflation.
Now we're on the verge of a wage price spiral like what we saw in the 70s, and that inflationary episode ended with Volcker taking interest rates to 20% and sending the economy into a three year recession.
If we take history as the guide, the Fed is going to have to do something similar this time, and with similar results.
There is a (mass) psychological component to it as well. If people come to believe that inflation will continue for some time, they will spend their money faster, which increases monetary velocity, and leads to further price increases. Now consider that the velocity of money has been near an all-time low since the start of the pandemic...
Feb 23, 2022·edited Feb 23, 2022Liked by Peter Nayland Kust
Yes, agreed. Velocity is a critical component. Excellent point about slow velocity during the pandemice. So lots of money creation during/ongoing coupled with higher velocity now will lead to massive inflation. (Especially if people are concerned about inflation and want to buy before prices go up!)
Yeah, the housing market has been nukcing futs. But there are major differences between now and the mid-late 2000's. The quality of mortgage credit is much better than it was then, and substantial portion of purchases have been all-cash. So I do not think it will be the housing market that leads the credit-collapse this time. It will be other, over-leveraged portions of the economy -- businesses with a lot of debt that they can't service at higher rates and so on. Then of course there's the 30 trillion pound elephant in the room...
Depends on which mortgages. In 2008 the trigger was residential real estate. This time commercial real estate is the unhealthy sector.
But you are right that we are not likely to see wave after wave of residential mortgage defaults.
Unfortunately, the financial markets have been floating on magic monopoly money courtesy of the Fed for so long that even a modest decline in housing will burst the asset bubbles that are Wall Street today.
Inflation is strictly a monetary issue, imho...
It's been pretty taken as gospel since Milton Friedman that inflation is a monetary phenomenon.
The simple explanation for inflation is too much money chasing too few goods. That is ultimately a combination of money creation and the velocity of money.
For the longest time the velocity of the dollar was low. Which is how the Fed's quantitative easing expanded the money supply -- most of the printed money never left the financial markets--where, incidentally, there has been steady asset price inflation since 2009-2010.
The stimulus checks bypassed wall Street and injected money directly into the mainstream economy, triggering consumer price inflation.
Now we're on the verge of a wage price spiral like what we saw in the 70s, and that inflationary episode ended with Volcker taking interest rates to 20% and sending the economy into a three year recession.
If we take history as the guide, the Fed is going to have to do something similar this time, and with similar results.
There is a (mass) psychological component to it as well. If people come to believe that inflation will continue for some time, they will spend their money faster, which increases monetary velocity, and leads to further price increases. Now consider that the velocity of money has been near an all-time low since the start of the pandemic...
Yes, agreed. Velocity is a critical component. Excellent point about slow velocity during the pandemice. So lots of money creation during/ongoing coupled with higher velocity now will lead to massive inflation. (Especially if people are concerned about inflation and want to buy before prices go up!)