The Fed announced on 9/13/2012 that it wants another housing bubble. Well, actually, the Fed announced that it would purchase unlimited Mortgage Backed Securities.
Mortgage Backed Securities, or MBS, allow irresponsible banks to offer easy money loans and pawn them off to unsuspecting investors. In this case, the pawn receiver is the Fed, who will be the buyer of all these securities.
Now, one presumes that the Fed is trying to jump start the business of securitization. They will buy 1/2 of the securitized bonds. Once the Fed is up to its eyeballs in these bonds, will the private sector jump in as the Fed pulls back? That is the question. And if the private sector jumps in, will there be government guarantees, as the Fed and the TBTF banks and the IMF want?
Securitization of long duration mortgages gives the TBTF banks, their shadow banks and the hedge funds the opportunity to get rid of questionable mortgages, and receive money to make more questionable mortgages. I have predicted that the Republicans really want the repeal of Dodd-Frank and the Volcker Rule in order to speed up the securitization project.
Now that the Fed is involved, look for every effort to be made to weaken the rules in Dodd-Frank to accomodate easy money lending.
The only question that remains is if Americans remember and if they won't play the game. The Fed wants to throw an easy money party. Are we all going to attend and how much of this toxic punch will we be drinking?
As regular QE punishes savers with low interest rates, MBS securitization will punish renters, as house prices will appreciate with no real basis in fundamental valuation, that is, based upon wages and rents. House prices should be based upon rents, not the other way around.
The question remains for me, who will be the shadow banks? Where will the next Ameriquest and Countrywide come from?
People must be warned that this is an attack on the middle class, like they can afford it.
Bernanke is proving that the banks are in a lot worse shape than we previously thought. This new QE is no guarantee that they will get better. Multi generational living and the new love of IPads instead of cars and the new frugality could stand in the way of this silly scheme.
Bottom line, it has been less than 10 years and the central bank wants another housing bubble. Housing should be based upon wages and rent, not upon a scheme to attack the middle class, leaving them with houses that are grossly overvalued when the crash comes.
The Fed has big shoulders, able to tolerate totally useless loans that will never be paid back. This is because the Fed does not have to have a market for these securities. The Fed can just hold onto them forever. Some will fail, some will be paid down.
It won't matter to the Fed, who is putting the US government on the hook for all these mortgages. The Fed doesn't do this for free. Once this bubble gets going, you may want to sell your house as prices appreciate, and certainly do not borrow against it, because the Fed will pull the plug on this little buying spree at some point. Then you won't be able to give away your house.