Notes From Underground: Bernanke, Housing Fails to Provide Economic Foundation

In a BLOOMBERG article published today, “Bernanke Doubling Down on Housing Bet Asks Government to Help,” it appears that the Obama administration and the FED are in sync that something needs to be done to lift the moribund residential real estate market. This is certainly not a new development but it shows how the FED is at a loss to explain how the ultra-low interest rate policy for the last three years has FAILED to stem the decline in housing prices and ultimately foreclosures. The FED and others don’t want to admit that this IS A BALANCE SHEET RECESSION.

Low interest rates can not solve the problem of systemic deleveraging. The paying down of DEBT continues to act as a drag on economic activity, especially when the primary asset on the balance sheet of so many people continues to decline. Add to the mix, stagnant wages over the last 10 years and a cyclically high unemployment rate and the economy has to overcome severe headwinds.

The Japanese “BALANCE SHEET RECESSION” had the advantage of a somewhat healthy global economy, while today’s situation from the U.S. perspective is of an extremely fragile financial world. Europe is also being burdened by negative economic growth while undertaking a massive deleveraging by the GIIPS and its consumers. This is a toxic brew and regardless of what President Plosser believes, rates are not going higher for the foreseeable future.

***Tomorrow morning the Bank of England and the European Central Bank announce their interest rate decisions. The consensus is for the BOE to leave its entire policy unchanged, leaving the official bank rate at 0.50% and the QE program at its present 275 BILLION POUNDS. The POUND STERLING is weak against most currencies but the EURO so the Monetary Policy Committee can wait to see if the U.K. economy gets any type of boost from foreign demand. The ECB is also expected to maintain rates at its present official rate of 1%. Italian Prime Minister Mario Monti made calls on the ECB to lower rates so as to aid the Italian effort to reform its economy. However, ECB President Draghi has already presided over rate cuts at his first two meetings so he will be reticent to move again.

Besides, the LTRO program has already been effective in dynamically changing the slope of the peripheral yield curves which should buy the ECB a little bit of time. Also, the EURO has lost 7% of its value since Mario Draghi became president and if the rates were cut and the currency declined more there might be noises from Berlin. IF THE ECB WERE TO CUT RATES, THE IMPACT ON ASSETS WOULD PROBABLY BE FELT MOST IN THE METAL AND EQUITY MARKETS for a compliant ECB would provide more power to THE GLOBAL PORTFOLIO BALANCE CHANNEL and a GLOBAL WEALTH EFFECT.

More important will be Draghi’s press conference at 7:30 CST to see if he provides any clues to ECB concerns about the impact on the European economy from the various austerity budgets. A declining EURO and steepening 2/10 curves … It’s all GOOD for now.

***QUICK HITTER: It amazes me how the group idiocy of Europe dominates policy. French President Sarkozy and U.K. Prime Minister Cameron have a major fallout about whether or not London will continue to be the financial heart of Europe. The Deutsche Börse and the NYSE merger would seem to provide the perfect platform for Frankfurt to gain traction as a global financial center. The U.S. regulator and Justice Department have consented to the “merger” and yet the European Competition Commission is apparently providing the impetus to block the deal. Is this a case of the right hand not knowing what the left is doing? Is there anyone in Europe capable of setting a policy in action and seeing it through? As in the movie “The King of Hearts,” the inmates are definitely in control of the asylum.


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