The game of "Grecian chicken" flaps and clucks on, with Greece near default and likely to leave the euro, which would ruin its economy; and Europe withholding new money until Greece agrees to austerity that will ruin its economy.
The 10-year Treasury note’s yield needs no scary help from Europe to stay low. The Fed’s "Operation Twist," swapping short Treasurys for long ones, has since Nov. 1 kept the 10-year between 1.82 percent and 2.05 percent, and mortgages close to 4 percent. Zzzzzzzz.
Economic news didn’t amount to much this week, except the encouraging drop in weekly unemployment insurance claims, now below 375,000, which is half the level of the worst in 2009.
Public policy follies and heroics dominate everything, with economies and markets still in one intensive care unit or another. For slapstick, it’s hard to beat the mortgage servicing settlement with states’ attorneys general — a tasteless joke on people in trouble, and housing.
Eighteen months ago state attorneys general (AGs) discovered they could hold foreclosures hostage to infinite litigation by accusing servicers of procedural shortcutting — true, but not material error.
Servicing banks have bought their way out for $26 billion (0.00251 percent of mortgages outstanding), which might as well be extracted directly from taxpayers (the banks’ customers will pay) and deposited in the AGs’ re-election campaigns.
The only real effect of settlement, and question: Now released by the protection-payment to AGs, what will be the new volume of foreclosures and how soon?
The second policy matter is genuine good news: Clear evidence is mounting that the Fed’s extraordinary interventions are beginning to have effect.
The Fed’s rescue measures since 2008 are three times removed (maybe three orders of magnitude) from actual historical experience, supported only by theory … but working.
1. When Lehman failed, the Fed flooded the banking system with reserves, trying to keep credit flowing and to prevent an asset "fire sale" — the theoretical should-have-done in 1930, but never actually done. Brief injections at the 1987 stock crash and 9-11 were hardly comparable. The $1 trillion injected in a week after Lehman … did nothing.
2. Four months later the Fed began "quantitative easing" (QE) — buying mortgage-backed securities and Treasurys (another $1.2 trillion). QE is the measure that Japan theoretically should have adopted in 1990 but did not.
"QE1," the first round of quantitative easing, did knock down mortgage rates, but the idea was to create credit: pull safe investments from the market, and thereby force investors to take risk. That didn’t work. The world went to cash and stayed there through QE2.
3. Beginning in 2011 and through today, the Fed has "walked out the yield curve," a theoretical antidote to asset deflation described in a Ben Bernanke speech 10 years ago. Translation: "After holding cash yields at zero for three years and watching you idiots stay in cash, now we’re telling you we’ll hold them at zero for three more years. If you still stay in cash, we’ll pull more of your safe investments and promise to stay at zero until somebody younger and smarter takes your job or inherits your assets."
This theory-based offensive has opened potshot season for every other theorist, and fear, and the blame game of "Who took my cheese?" Please pay no attention to the "inflationists," the "shut-the-Feds" and goldbugs, and the bond-fund managers and wealthy coupon-clippers who feel entitled to good yield on cash and no-risk investments.
To make some money you’re going to have to take risk. And now we can see the first pinstripers crawling from muddy bunkers, squinting into sunshine.
Consumer credit since November has rocketed at a 9 percent annual pace. Bankers in action! Paul Kasriel at Northern Trust has been one of the very few to understand the Fed’s operations, and his newest analysis finds a sudden net increase in bank loans and securities held.
Credit! The mortgage-backed-securities-to-10-year-Treasurys spread is the narrowest in a year, with fear fading for holding super-low mortgages.
Yield hunger has junk bonds in a huge rally, and corporate finance of all kinds is cheap. New home equity lines of credit had rate floors at 5 percent and 6 percent, with banks fearful of Fed reversal and rising deposit costs. No more!
We see two-year specials just above 2 percent. Even mortgages — "Hallelujah!" — collateral circulation is opening around throttled Fannie and Federal Housing Administration, and banks are actually making loans.
The Fed set out to cap the 10-year T-note, and capped it has been. Don’t fight Mother Nature.
It’s early, but this is the first solid increase in consumer credit in four years.