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Old 07-07-2013, 06:24 PM   #21
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The Fed Reserve hurt retirees most (along with the rest of the country) when Greenspan refused to stop the housing bubble, the inevitable collapse of which caused the Great Recession with the effects of which we are still living. Greenspan could have regulated the unregulated mortgage companies and he could have enforced minimum down payment requirements. He could also have regulated the derivatives market. All of this he refused to do.

Regardless of what the Fed did once the crisis hit interest rates were going to go down indeed to the point of negative real rates. The Fed lowered short-term rates to the lower bound of zero and then did its succession of Quantitative Easings in lieu of increased spending by Congress which is what was required, but, alas, not forthcoming. The QEs probably did not have much effect on the economy and very little on interest rates since the amount of bond buying has been so small relative to the size of the bond market.

While it may seem satisfying to identify an individual such as Bernanke as the enemy, in reality monetary policy doesn't have much effect in a liquidity trap and probably didn't in this case.

Well to be fair to Greenspan, I don't believe he had the power to regulate down payment. Almost all mortgages were sold to Freddie or Fannie. AFAIK changing down payment requirement would have been the Office of Thrift Supervision, who regulated Freddie and Fannie, and was part of the Treasury dept. With both parties pushing home ownership that was unlikely to happen. And the Office of Thrift Savings is textbook example of horrible regulators. According to Wiki both Bernanke and Greenspan urged congress to regulate Freddie and Fannie more. Strict regulation of shadow banking and derivatives may have not been possible, but ignoring them like he did was a bad move so I agree.

I am not really blaming it all on Greenspan and Bernanke. On the other hand they are smart guys and i am sure they realized that lowering interest rates by a few percent so Spendthrift Sam could have a nicer car or a large house, meant that lower interest rates on saving for Frugal Fred. He cut out family pizza night and saved more for retirement. While Grandma Rose reacted by canceled the trip to see the grandkids and cut down bingo from 3 nights to 2. It isn't clear that Sams gain makes up for the loses suffered by Fred and Rose. It is difficult to model the economic impacts. But it is clear that the Fed picked winners and losers and the losers were savers. It is also pretty clear that lower rates have done very little to spur borrowing and investing by business.

Now as far as the bond buying being small I really disagree. As of July total Fed balance sheet is 3.45 trillion dollars. That is 17% of the US government bond market (including mortgages and agency) and about 11% of the total US bond market. One of the consequences of the 5% drop of the bond market is the assets on the Fed balance sheet(aka all these mortgage and US treasuries) dropped by $175 billion (5%*3.5 trillion). Now ultimately we the public own a share of the Fed's assets and also are obligated for their liabilities.

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Old 07-07-2013, 06:43 PM   #22
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Hopefully the Fed can manage to get interest rates back to market based rates without crushing bonds & equities.
Thanks for posting but I don't see how interest rates can be raised without affecting bond prices (and the longer the duration the greater the impact).

While the article makes some valid points and there is no doubt that some people have been disadvantaged by the ultra-low interest rates, it ignores the fact that many retirees (and others) have obtained at least some benefits from the low interest rates - rising bond prices while interest rates were being reduced, refinancing mortgages to lower rates (with consequent ability to pay off sooner or put more money into other investments), (probably) a boost to stock market portfolios, (probably) a lower possibility of being unemployed.

Personally, the low interest rates have helped get me to FIRE sooner. Post-retirement, it would certainly be nice to get a positive real return on nice safe fixed interest but that would probably bode ill for my other investments.
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Old 07-07-2013, 08:38 PM   #23
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Well to be fair to Greenspan, I don't believe he had the power to regulate down payment. Almost all mortgages were sold to Freddie or Fannie. AFAIK changing down payment requirement would have been the Office of Thrift Supervision, who regulated Freddie and Fannie, and was part of the Treasury dept. With both parties pushing home ownership that was unlikely to happen. And the Office of Thrift Savings is textbook example of horrible regulators. According to Wiki both Bernanke and Greenspan urged congress to regulate Freddie and Fannie more. Strict regulation of shadow banking and derivatives may have not been possible, but ignoring them like he did was a bad move so I agree.
Fannie and Freddie have never been regulated by the OTS. At the time of the housing bubble they were regulated by OFHEO, which has since been reorganized as the FHFA.

The Fed, as one of the regulators of the banking industry, could have imposed minimum down payment requirements for the banks it regulated. It had the authority to regulate the mortgage lending industry, including Countrywide, although Greenspan claimed at the time that he did not have such authority. That claim is disingenuous because, even if it had been true, Greenspan had only to go to Congress at any time and ask for such authority. Congressmen of both parties would have fallen over themselves to comply, such was the regard in which Greenspan was held. Instead he used the substantial influence that he had to squelch efforts by the Commodities Futures Trading Commission to regulate derivatives, with disastrous consequences.

It's naive to imagine that Greenspan's forbearance arose out of mere sympathy for the acquisitiveness of the lower classes. Greenspan was on the side of the bankers. All of his actions were taken to enable the bankers and shadow bankers to maximize their profits while the taxpayers were unknowingly taking the risks. A Fed Governor, Gramlisch, warned him of the housing bubble early and urged him to take action. Greenspan took no action. By 2004 the FBI was reporting widespread fraud in the mortgage lending industry. Greenspan again took no action.

The cumulative efforts by the Fed to mitigate the effects of the crisis have indeed enlarged its balance sheet. However, the Fed's current program involves buying $80 billion of longer maturity bonds each month. That effort is not very large relative to the size of the bond market.
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Old 07-07-2013, 10:43 PM   #24
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You are right it was the OFHEO I got confused on my government regulator. The important thing is was a agency who had a single job to regulate Fannie and Freddie and it failed.

I am not nearly as optimistic as you that Congress with have given Greenspan the power to regulate Countrywide, not with Countrywide's Mozillo handing out sweetheart mortgages, and campaign contributions to key Congress critters like they were party favors.

Still I don't disagree with your larger point that Greenspan screwed up badly. I read Woodward's book about Greenspan Maestro many years ago, not something I'd call the guy with the benefit of hindsight.

I guess it depends on how you measure the bond market. If you count the trading volume of the bond market, than no it isn't huge. On the other hand if you look at the true liquidity meaning who do the bonds go home with for months or years after spending a few milliseconds being traded by computers than 80 billion monthly purchase it is very large indeed.

For instance the Vanguard long term treasury bond fund is only 3.2 billion. Vanguard Long Term bond index 6.1 billion. The ubiquitous Vanguard Total Bond index is 118 billion and the biggest of the all PIMCO is 268 Billion. Which means the Fed's purchase dwarf specialized Vanguard funds, and ever 6 weeks the Fed makes a VBTLX and every quarter makes another PIMCO total return.
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Old 07-08-2013, 06:40 AM   #25
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I guess it depends on how you measure the bond market.
The US bond market is estimated to be $35.2 trillion.


Bond market - Wikipedia, the free encyclopedia
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Old 07-08-2013, 12:22 PM   #26
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any time anyone bets on one asset class no matter what it is they will hit a time that is bad for that asset class.

cash is an asset class.

cash instruments have had negative real returns at times through history.

the fed did everything but drop leaflets from helicopters warning folks about rates.

all a risk adverse person had to do is slide over to treasury bonds and they would have made a killing in capital gains.

those that paid the price by thinking they were avoiding risk found out out how wrong they are and risk cannot be avoided no matter what the asset.

those who did the correct thing and diversified did okay just because of those low rates.
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Old 07-08-2013, 02:27 PM   #27
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any time anyone bets on one asset class no matter what it is they will hit a time that is bad for that asset class.

cash is an asset class.

cash instruments have had negative real returns at times through history.

the fed did everything but drop leaflets from helicopters warning folks about rates.

all a risk adverse person had to do is slide over to treasury bonds and they would have made a killing in capital gains.
.
Sure most board members were well aware of what was going on. But as I said most everyone on the forum is an investor. 70% of American don't know that if interest rates fall bonds increase in value. So telling them interest rates are going to fall and "remain low for an extended period of time", is of no benefit because they don't know what to do. I doubt 10% of the public would know how to buy a treasury bond if you stuck a gun to their head.
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Old 07-08-2013, 02:36 PM   #28
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sadly you are right. once again it all boils down to ones own financial ignorance put them on the path to committing financial suicide , not the fed.
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Old 07-08-2013, 06:16 PM   #29
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The government screwing with the economy is just another reason to save/invest as much as possible along the way. That's the only thing you can really control.

I read about folks that are concerned about saving too much and I just scratch my head...
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