Bernanke Out of Arrows

December/19/2010 16:21PM
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The man who has really been running the country for the past three years, Ben Bernanke, is running out of arrows in his quiver. If he’s wrong on his last shot, we may be in real trouble.

He can’t lower interest rates more, or he will pay you to borrow. He’s worn out the presses to print much more money. He’s tapped out the credit lines.

The last gasp is to buy his own treasury bonds. Not directly, of course, commissions to Goldman are always a prerequisite. As he is embarking on this little idea to buy $600 billion in treasury bonds, he is finding it may be going very badly for him. The interest rates are being driven up.

The side effect, in fine print like the big new drug claims, may be higher interest rates on mortgages. Not what the housing market, already in hospice, needs. If Bernanke’s plan causes another meltdown in the housing market, it could be catastrophic for the US economy.

The failed Obama plan to offer homeowners in trouble a new mortgage plan isn’t working. Most can’t qualify. Not a big shock to anyone except Washington, since they didn’t qualify the first time and nothing has changed. Of the few who have qualified for new terms, far too many are already behind on their new mortgages. The bank shortcuts on foreclosures are delaying the process of finishing those foreclosures. Hence, the banks are not getting the bad loans off the books and houses are not being sold. Banks are being required to keep safe levels of capital, so they won’t make more questionable loans. Record low mortgage rates have given the housing market a little stimulus. The drop in prices combined with the low interest has enabled more families to qualify to buy a house.

Run this reel backwards. If mortgage rates go up due to the QE2 plan, the treasury bond buyback, fewer people can buy a house. When the logjam breaks on the foreclosure debacle, all those houses will go on the market at even lower prices. That will put downward pressure on all housing prices. As more Americans find their house is worth less than the sale price, some will stop paying the mortgage. This will push more into foreclosure.

So, if QE2 creates a big problem rather than solve the one it was designed to fix, deflation, where does Ben go next? Several Republicans have been on the warpath to audit the Fed and see what they have really been doing with trillions of dollars at their use with zero accountability. Maybe the new Congress will get that done. We might find we aren’t happy with what President Bernanke has been doing with our money. We may find we need another round of financial reform with the Fed.

Regardless, if QE2 goes bad, it could go very bad for all of us.

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