Drunken Spending to Keep the Housing Market Sober

As the legend goes, some 1,600 years ago a Celtic missionary banished the serpents from Ireland, using little more than divine assistance and his walking stick. It’s in fancy paintings, so it must be true:

Were they really snakes, or rather an unpopular religious sect? Was St. Patty even Irish?

We don’t care. It’s a good excuse for a drink…and inspiration to chase out some modern-day slithering here in I.O.U.S.A.:

The Fed did a whole lot of nothing yesterday at the FOMC meeting. Rates stayed the same, and one year after coining the phrase, the Fed insisted rates will stay “exceptionally low” for “an extended period.” In short, it was a snoozer.

“What in the shillelagh is the Fed actually thinking?” Dan Denning asked in response in this morning’s Australian Daily Reckoning.

“To be clear, a shillelagh is an Irish cudgel, used to beat things or threaten drunken bar patrons on St. Patrick’s Day. Ben Bernanke is not Irish, as far as we know. But the Fed has used its digital printing press to beat 10-year interest rates into submission. That’s kept a lid on US 30-year mortgage rates and prevented a further implosion in the American housing market…

“But do you really think the Fed can afford to withdraw its support of the US mortgage market? The Fed’s $1.75 trillion quantitative easing program has kept the US housing market from totally imploding. A spike in mortgage rates would dry up already anemic US housing sales. Prices would fall. Millions more who are hanging on for grim death would see their mortgages go under water. And they would begin to walk away.

“Putting aside the implications for bank collateral, we’re talking a serious systemic collapse of the US housing market…

“We think the Fed will find a way to fund, in some underhanded fashion, a new entity to centralize the risk of the US mortgage market. Risk has been concentrating in fewer and larger institutions over the last few years. But the mortgage debt is still too toxic to be borne by any institution that wants to appear healthy and well capitalized in the market.”

Addison Wiggin
for The Daily Reckoning