Mortgage Resets Cripple Fed Exit
As you’re probably already aware, the worst has still yet to come to the residential real estate market in the United States. To date, only $400 billion of housing bubble loans have yet to be reset, and another $900 billion are to come down the pipeline by the close of 2012.
The Fed Can’t Exit
The Federal Reserve which has thus far kept rates at a record low 0-.25% cannot even yet think about an exit strategy, including rate hikes. Since some $900 billion in residential real estate is being primed for resets, both in the interest rate and monthly payments for balloon borrowers, rate hikes would be devastating. Already cash strapped consumers would have to spend even more to keep their heads above water.
Inflation City!
Inflation is the name of the game. Despite concerns that crippling deflation is around the corner, the Fed’s moves to reinflate a dying bubble have already covered any possible inflation. Remember, Federal Reserve operations (quantitative easing, etc) all happen at the reserve, or at M0. M0 money supply can be multiplied by as much as 10 times through fractional reserve banking. So, with more than $1 trillion added to M0, we can expect as much as $10 trillion to eventually appear out of thin air. That’s no small sum.
Depression Risks
The next wave of housing resets is sure to send even more shockwaves through a brittle economy. The residential real estate market can’t afford any more strain, nor can the faltering consumption economy. Should the next wave of resets occur at a time when rates are rising, even more homes will fall into foreclosure. Even more wealth will evaporate. I’d hate to be Ben Bernanke right now.
