The goal of then Fed Chair Ben Bernanke was clear: ride the ship of the mortgage market, and therefore the housing market, by vacuuming large chunks of mortgage-backed bonds out of bank portfolios and other institutions while driving down interest rates.
In March of 2009, Bernanke announced the central bank would buy $750 billion of mortgage-backed securities plus $300 billion of U.S. Treasurys.
With the housing market repaired, Americans would once again have the wealth of equity in their homes and the unemployment rate would come back down.
Well, it made a nice story anyway…
According to the New York Federal Reserve report on consumer debt, in the first quarter of 2009 U.S. mortgage debt stood at $9.135 trillion. The Federal Reserve’s plan was to take a full 10% of that out of the market over the course of 15 months. With so much cash flooding into the coffers of banks and other institutions, these entities would be desperate to put the money right back to work, which should’ve driven the demand for more mortgage-backed securities.
At the same time, the purchase of U.S. Treasurys was meant to drive down interest rates, thereby making loans of all stripes, but especially mortgages, cheaper. With cheap borrowed money, consumers would rush out and buy homes and all the stuff to go in them.
It just didn’t turn out that way.
More than five years later we’re financially wiser. We know that borrowers don’t react in the way policymakers want them to (as we’ve said many times, for many years). We know that institutions can sit on cash longer than anyone expects, especially when they’re keeping toxic debt in the closet. And we know that printing trillions of dollars doesn’t always lead to the desired outcome.
While home prices have rebounded some, the market itself is still weak. The number of people purchasing homes remains well off of its highs, with the rate of home ownership falling from a peak of 69.1% to 64.7% in the second quarter of 2014. The rate of home ownership hasn’t been this low in almost 20 years, matching the rate from the second quarter of 1995. And it doesn’t look like things will pick up anytime soon.
Mortgage applications for the purchase of a home are actually falling this year, down 12% from last year. While there’s been a mild rise in the number of homes sold over the past several years, the rate of new homes built and sold remains well off the rates from the late 2000s. This is the crux of the problem. The Fed and so many other policymakers had a goal — creating jobs for middle-class workers through new home construction.
Simply trading existing homes back and forth doesn’t really move the economy forward. We need to see new homes go up so that money is flowing through to carpenters, roofers, plumbers, electricians, etc… This will drive down the unemployment rate and push up the median income of the country. Without new construction, those who used to do such work must find other means of employment.
The chart below shows the number of people employed in residential building from January of 2004 through August 2014, per the Bureau of Labor Statistics.
After peaking at just over one million in 2006, the number fell to about 560,000, a drop of 45%. Since then, employment in this sector has slowly climbed back to 670,000, a rebound of 20%, but it remains at over 30% below its previous high.
Keep in mind, this only deals with the first trillion-plus dollars printed by the Fed. QE1 was actually $1.25 trillion, and it was followed by QE2, QELite, and we’re currently winding down QE3. While these programs have indeed kept interest rates of all sorts ridiculously low, they’ve not done much to goose the housing markets. In their efforts to get more people employed, the Fed could have taken a more direct route.
For $1 trillion, they could’ve employed 2 million people at $75,000 per year (well above the median income in the U.S.) for seven years. The money would have gone directly to consumers instead of being parked by banks, and the unemployment rate would have dropped lower. In this regard, the Fed would have gotten a lot more bang for their buck.
Instead, the Fed has continued to follow the same path that’s failed to produce the desired results, which means it has continually failed in its objective of creating maximum employment in the U.S. through monetary policy. More specifically, the Fed has failed to create the kind of jobs it would like to see, which higher-paying, middle-class positions are.
It’s possible the Fed finally realized that simply printing more cash isn’t helping, which is why they’re reducing their bond buying each month. But with only modest gains in high-quality employment over the past few years, it’s hard to see why the Fed would move to raise interest rates anytime soon, particularly if inflation remains tame.
We expect low interest rates — maybe not zero, but exceptionally low — on short-term securities to be part of our economy for years to come.
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