Monday, December 15, 2008

Enter the young*...

Dollars, that is.  Newly created, ready for consumption, the much talked about but scarcely seen trillions of greenbacks may finally be about to enter the world of commerce.

One sign is the indication the dollar has seen it's best level for some time.

To be sure, it still seems to be the haven of security for people who are too scared to contemplate any risk, and hence will accept zero or even negative interest.  But the difference is we can issue more debt that the Fraidy-Cat sector can absorb.

U.S. policy makers are flooding the world with an extra $8.5 trillion through 23 different plans designed to bail out the financial system and pump up the economy. The decline shows that the increased supply of money may be overwhelming investors just as the government steps up debt sales, the trade and budget deficits grow and de-leveraging by investors slows. [More]

More importantly, ideas are surfacing to get the fledgling greenbacks into spender's hands, rather than investors or bankers.

Bloomberg News last week reported that the chairman- designate of the National Economic Council, Lawrence Summers, had been conferring with conservative icon and Columbia Business School Dean Glenn Hubbard about a housing plan Hubbard designed with Columbia colleague Christopher Mayer. Obama’s economic advisers appear to have embraced the proposal, which is already “on a fast track at the Treasury,” according to the story.
The Hubbard-Mayer plan calls for the government to revive the moribund housing market by providing just about everybody with access to a 30-year fixed-rate mortgage with a 4.5 percent interest rate. That’s almost a full percentage point lower than the average national rate of 5.47 percent currently.
Buyers could borrow as much as 95 percent of the value of the home they purchase. The plan might extend to those with existing mortgages, allowing them to refinance and get the same terms. When either type of deal is complete, the lender will place the loan with Fannie Mae or Freddie Mac.
...
The bottom line: if you have a mortgage, this plan would put extra money in your pocket.
Imagine, for example, that you have a $500,000 mortgage with a 30-year fixed-rate loan carrying an interest rate of 6.1 percent, the average rate for a fixed 30-year mortgage issued this year. Lowering the interest rate to 4.5 percent would reduce monthly payments by about $500 monthly. Someone with a mortgage of $150,000 would save about $150 a month.
These monthly payments changes are different from tax rebates because they would last for many years. For that reason, consumers would be fairly likely to increase their spending. After all, if your monthly housing expenses just dropped by $400, then adding a new car payment of $300 a month might seem a lot less frightening, even in these difficult times.
These subsidized mortgages should increase the number of home buyers and help push property values back up. There are a lot of problems in the economy, but they all began in the housing sector and it seems likely that staunching the bleeding there is a prerequisite for achieving financial stability.[More]
Just a guess, but a move like this seems like it could  be executed very rapidly, and inject a truly phenomenal amount of money into consumer hands - about $3.5 trillion.

That won't make the dollar rise, I'm sure. So if we see this kind of stimulus - heck, it may be better described as economic electroshock therapy - the pieces will be in place for significant inflation.  Initially this will be good for the farm sector, and it could even occur fast enough to help me compensate for overly optimistic cash rent bids made earlier this year.

But we should keep in mind the aftermath of inflation, and the preparation for it needs to start now.


* The Association, the soundtrack of my college years.

1 comment:

Brian in Central IL said...

Ok, so here is my excitment and worry all at once. As a consumer who is also looking to get back every penny I can, I get excited to hear I may get to refinance at 4.5 percent. I would fall into that realm of about $150.00 (although the savings would be less because My Wife and I refi'd in the Spring when rates dipped and saved some cash upfront). So let's say $100.00 a month saved, and then added back to the mortgage payment accelerating the mortgage payoff. WOW!!! Can I celebrate now?

My concern however is the potential inflationary presure created. Would I then be able to afford to add that money back to the payment to accelerate the payoff? If I instead have to spend it on anything else my family needs, the savings turn into a cost and end up hurting more. The more I write here the more I begin to feel like this is the 0% OR $1000 off, only choose one and you may not think its the best deal.

I could be wrong, maybe it turns out to be a cheap rate and money back, but I get nervous, sounds too good to me. Maybe I will just stick with my decent rate and try to do this my way, at least my Wife's- she's smart.

BTW- I like "Cherish" best as my song from the Association.