As incredulous clients are learning, mortgage rates are higher now than last week, back up to 6.5 percent for vanilla 30-year. Yes, higher. (“Sonny, you should be ashamed to try to trick an old lady! I still read the newspaper! You rotten crooks.”)
Federal Reserve Chair Ben Bernanke probably has the same frustrated shoulder sag that we do: he played this thing exactly right, and has gotten nothing for his trouble but a run on the dollar. The markets have been seized by Amateur Hour: inflation bears, gold bugs and the Buzz Lightyears of global growth. Doubly, triply frustrating — they may be right.
The Fed’s 0.5 percent was actually two quarters: the federal funds rate had been trading near 5 percent, 0.25 percent off-peg, for a few weeks. That was an intermeeting ease not formalized, a deft piece of central banking: if formalized, and then the crunch dissolved by itself, the Fed would have had to execute an embarrassing formal reversal. Instead, Sept. 7 news of sinking payrolls (an economic fade additional to and independent of housing and the crunch) made it easy to formalize the first quarter and add another.
At this moment the economy receives some dinky benefit from the cut (Construction money is 0.5 percent cheaper — wanna build a house? Short-term rates are down — how about a nice new neg-am pre-pay-penalty ARM? No?), but the crunch is still in place, especially in Mortgageland.
Other benefits have been cancelled. The 10-year T-note, driver for all long-term credit, has soared from 4.35 percent to 4.7 percent. The dollar run (I hate to use the term, but that’s what it has been since Tuesday) has been to the euro (now all-time $1.41) and to hard assets: gold at a 27-year high $744 and oil at one moment yesterday $84.
A great deal of domestic money has joined the run, buying into the fingernail-on-blackboard theorizing: there was no reason for Fed action; it guarantees a resurgence of inflation; it’s just Bernanke’s Put; and all bailouts all the time are bad.
This run has foreign fingerprints as well; Asia’s currencies are dollar-pegged, but a race to hard assets is typical of our Persian Gulf friends and their several-trillion-dollar-hoard. Big currency moves often involve confidence, and it is disturbing in a time of financial crisis to find money running away from the dollar, the historical safe-haven. Confidence has aspects beyond interest rates and inflation: at some point, the average Persian Gulf observer of U.S. leadership, present and forthcoming, might well conclude that we don’t have the good sense that Allah gave to the camel.
OK, who is right, the Crunchers or the Good-Time Inflationists? Two weeks from today, Oct. 5, 8:30 a.m. EST, we will get September payrolls, and either confirmation of a deeply slowing economy, or not. The Department of Labor is infamous for big revisions (don’t forget California, guys), and the June-August weakness in hiring has not been confirmed by an increase in new claims for unemployment, still flat. A new, weak number that day, and Bernanke will be a genius, more cuts in prospect, long-term rates falling. Strong job gains … a bond market disaster and a discredited Fed.
Many other indicators point to weakness ahead: real estate bubbles in Europe are about to blow; the eurozone export economy cannot make a living with a euro north of here; Asia is terribly dependent on exports to us; and most important of all: global credit is still vastly tighter than it was six weeks ago. Liquidity loosening, credit not.
In defense of the Good Timers, the global economic superstructure still looks gorgeous, demand largely intact. However, the balance-sheet evaporation in this crunch is like a corroding hull, out of sight; patch and pump and you’re OK. Fail, and the top-deck dancers never know they’re in trouble until they’re in the water.
The Inflationists I don’t think have a case. Asian labor still undercuts any threat of wage-price spiral outside of Asia, and a new spike in oil does more damage to fixed-wage consumers here. Yes, Asia has an inflation problem, but it will not survive a cut in demand for their exports. Yes, Asian wages will one day rise, but one billion Asians went to work to earn less than $2 for this day’s labor.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.