Is the Fed Propping Up Housing?

Posted by: Peter Coy on July 8, 2005

Societe Generale, the big French investment house, came out with a report today arguing that the Federal Reserve wants to—needs to—prop up the U.S. housing market. The firm e-mailed copies to clients and some journalists. (Sorry, I can’t provide a link to it.) Here are some key sentences:

“About a third of total U.S. job creation over the last year can be attributed to the pickup in [housing] construction and borrowing. … Borrowing … [has] a symbiotic relationship with U.S. bond yields. …

The Federal Reserve cannot afford to frighten the bond market …

So, a sharp rise in bond yields is unlikely over the coming years: home demand is likely to grow strongly, and U.S. house prices most likely will continue to rise rapidly.”

Although the piece isn’t signed, it seems to be coming out of SG’s London office. Not saying I agree with the analysis, but it’s more grist for the mill.

Reader Comments

Wes

July 11, 2005 4:22 PM

BW had an op-ed piece in June about how the money could be better used to support other sectors of the economy.....hope Greenspan and Co don't allow this to get out of hand as they have done with the past two bubbles

Niels

July 15, 2005 5:01 AM

How about Greenspan purposely set the low interest stage for the housing bubble to replace the dot com bubble? It does take some nifty acrobatics to stay on the high wire above an abyss of 8 trillion in debt... I'm just curious how the next chairman will stay up on that wire.

Bill Young

September 16, 2005 11:53 PM

I still believe that the US govt induced housing bubble will burst. However, I have to revise my analysis, as I have come to realize that, just as the phoney "Drug War" will never be won, because the US financial system has come to depend on its proceeds, so the Fed-made "Housing Bubble" is too big to let it burst.

You might say that Fannie Mae is too Big to Fail. We certainly know it is too big to Bail!
Its one thing if they were liable for only a few hundred million, or even a couple Trillion like Long Term Capital Mangement a few years ago. You know the old joke, if you owe the bank $100,000 and can't repay, you have a problem. If you owe $5 million and can't repay, the bank has a problem!

Fannie Mae is liable for the largest debt pool in the world! Larger even than the US Federal Debt. And, with liabilities exceeding assets by more than 3 to 1, it is technically insolvent if it were called upon to meet its extant guarantees!

The US government will do everything, everything, in its power to keep Fannie and its smaller sibling, Freddie Mac from failing as it would pull the entire financial system down with it.

However, besides the quite obvious danger of the Bubble bursting for internal reasons, lack of affordability, increased mortgage defaults, etc., there are other events that could prove to be catastrophic to the houseing market and thus bring to pass the bursting of the housing bubble and along with it the entire US and possibly world, financial system. Can you name one financial institution or pension fund or even foreign government that has not gorged on the safe, US government backed (NOT!) Fannie Mae and Freddie Mac bonds or Mortgage Backed securities?

Think about another terrorist attack inside the US, another failure of the derivative house of cards, a trade war with China or a complete collapse of a couple of our major auto companies...

After the economic shocks of Katrina, look for Greenspan to lay off the negative comments on the housing market and slow or even stop the rise in interest rates,by which he was attempting to at least attentuate the runaway housing inflation. "We" cannot afford for housing to slow down!

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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