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Mortgage Meltdown: What does the rapid rise in mortgage rates say about economic recovery?

Federal Reserve Chairman Ben Bernanke merely hinted that the Fed MIGHT START to TAPER its quantitative easing MONTHS from now, and that breath sent mortgage rates soaring in one of the steepest rates of rise the U.S. has seen. This confirms one of the primary themes of this blog in the starkest way possible:


Mortgage meltdown confirms “No economic recovery!”

I have been arguing here for two years that what we have been seeing in this jobless “recovery” is a mirage — that we are still in The Great Recession. We are still in it in that none of the fundamental causes of the 2008 economic meltdown have improved. The economy is still built on the unsustainable principle of teasing consumers to buy more via cheap debt. All efforts have been to re-expand the economy by re-inflating housing. I have argued that what we have seen since summer of 2009 is nothing more than the propping up of the bottom with a series of massive crutches created by the Federal Reserve.

Consider that 1) a mere tapering of Q.E. that 2) might 3) start 4) months from now has sent the bond and stock market both into disarray. That, in turn, has caused the low mortgage rates that kindled a small housing recovery to rise at one of the fastest rates of rise in history. What does that tell you? It tells me that the economic underpinning of the bond market, the stock market, the mortgage market, and the nascent housing market are all built on nothing but the Federal Reserve’s unsustainable hyper-creation of money known as quantitative easing. Ben Bernanke breathed the subtlest of hints that the free money might start to fade months from now, and that caused the following news to dominate the entire month of June:


Central banks sold a record amount of US Treasury debt last week and bond funds suffered the biggest investor withdrawals on record as global markets shuddered at the prospect of the US Federal Reserve ending its quantitative easing program. (CNBC – “Central Banks Sell Record Sums of US Debt“)


A record amount of money poured out of exchange-traded and mutual bond funds in June, according to a fresh report by TrimTabs, nearly double the amount pulled out of bond funds at the height of the financial crisis in October 2008. (CNBC – “Unprecedented’ $80 Billion Pulled From Bond Funds“)


It seems everyone was startled by this. Even I, who knew the economy was groundless, was surprised at the panic that ensued from such a far-advanced hint of change in the wind. Many went into damage-control mode.

I have said consistently that the bottom will fall out of this economy and reveal that we are still as much in the Great Recession as we ever have been. You’ll see the Great Double Dip, where the bottom of the economy fell away in 2008, was propped up by the Federal Reserve’s Q.E., and then fell away again as soon as Q.E. ended. In other words, there is nothing but the props supporting this false appearance of a bottom to the Great Recession.

Yet, I did not expect to see the cracks in the ground appear at a mere breath. I also predicted this year that we would not see a 2013 economic collapse.

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Does the mortgage meltdown mean my 2013 economic predictions were wrong?

Categorically no, and here is why: The present mortgage meltdown and plummet in the stock market is exactly the reason I said we are unlikely have a collapse like we had in 2008 — that is, not in 2013. The present turbulence is nowhere near as great as the nose dive we took back in 2008 when banks began to collapse. This time the banks are in control. They run the Fed. They own the Fed. Because the present economy is running primarily on the fumes of money created by the Fed, they own the economy. Last time the banksters didn’t see what their own greed was creating. This time, they can plainly see what removing Q.E. will create. When the banksters running the Federal Reserve System see that the economy takes a nosedive because they talk about winding down quantitative easing, they will feel a great deal of pressure that rests on them to crank the easing back up in order to save their own fortunes and keep the good times (for themselves) flowing. They will do their best to wind it back up.

BUT the banksters have made the situation much worse for themselves once again. Each round of Q.E. has seen diminishing returns. Now it will take Japanese-style quantitative easing to prop the markets up because they’ve likely opened the eyes of a few people to see what a mirage this economic recovery has been. That means the running buyers are going to be slower to re-enter the marketplace. Some will have seen how fragile the whole economic system really is and will not re-enter.


“The herd is scrambling for the exit this month as bond yields back up across the board and central bankers hint that they might provide less monetary stimulus in the future,” TrimTabs CEO David Santschi said…. The rush out of bonds could be about to get even worse, according to the research firm, which says that more bond investors could take flight after receiving their quarterly statements in the coming weeks, noticing that their “safe” bond funds are delivering losses instead of gains…. TrimTabs call the liquidation “unprecedented” (CNBC)


The rats are fleeing a stinking ship

Two other things I have argued for the better part of two years are that 1) interest on the federal debt is low because the Federal Reserve is buying most of the United States’ debt. The second the Federal Reserve talks about ending its purchases of federal debt (known as quantitative easing), the price of U.S. debt will start to rise because very few institutions, including especially foreign governments, want it any more. They buy it only because resale is guaranteed by the Fed. The above articles prove the extent to which no one else really wants to fund U.S. debt. So long as the Federal Reserve was promising to buy U.S. bonds, there has been a market for those bonds, so foreign central banks were willing to buy the bonds. Take away the Fed’s support, and the central banks of the world run from U.S. debt. In fact, merely HINT at taking away that support, and they flee!


“People are throwing in the towel,” said Markus Rosgen, chief Asia equity strategist at Citigroup. “It’ll drag the market down lower over the course of the summer. (CNBC)


2) The U.S. will be buried in its own national debt when interest on the debt has to rise significantly to find buyers. Look at what the news above reveals. A hint that the Federal Reserve will stop being the end buyer of U.S. debt causes the ground under the stock market and bond market and mortgage market to break up as if the earth’s crust is going to sink into the mantle.

Nevertheless, I think most people do not realize these cracks for what they are. The CNBC article continues…


“We can only speculate at this point about which countries were selling, and what maturities were being unloaded,” said Lou Crandall, economist at Wrightson Icap. “One obvious possibility is that emerging market nations whose currencies have been under heavy pressure sold shorter-dated Treasuries for intervention purposes.”


Economists — almost none of whom saw the Great Recession coming when they should have — can speculate however they want. They don’t understand how simple it is to understand what these cracks are about because they are in denial about the entire economy. They think there has actually been sort of sustainable economic recovery because the stock market has soared and the housing market has started to improve. The fact is that an economic breakup will happen as soon as quantitative easing ends because Q.E. is the only thing holding up this thin crust of an economy.

The Fed is made up of bankers and U.S. government appointees (who are also mostly bankers). I don’t think either want to see the fragile veil of economic recovery they have created collapse into nothingness. Because it is their restoration of the old dinosaur economy that gives off a death shudder the second their hero, Gentle Ben, reaches to take away the life support, they will make the same kind of Herculean effort Japan is making to prevent the death of the old economy. Their resuscitation of the old economy has made them even richer than they were before the collapse — though it has stopped helping anyone else a long time ago. That’s evident by the stagnation of the job market. So, I believe a breakup is yet a ways off because of the kinds of efforts the government and bankers will make in consort to right themselves once more, but the economic malaise will worsen, nevertheless, until there is nothing the banksters can do to hold the center together.

There is one caveat here: the Fed has proven remarkably dumb a number of times in backing off its stimulus the second it thinks it is seeing recovery. They could just be dumb enough to do that all over again and trigger something they cannot stop. Given the size of fall that has started with a hint, it should be clear that it would not take much from the Fed to trigger a landslide that even the mighty muscle of the U.S. Federal Reserve cannot stop. It would not take much for them to overestimate their footing and go on down the slippery slope.

The mortgage meltdown is clear proof that the economy is addicted to quantitative easing and has become entirely dependent upon it. That is why Bernanke’s breath about tapering Q.E. sent shudders throughout the earth. He is well enough aware of that to show that he knows he must speak about the end of Q.E. in breathlike tones to prepare the world for the possibility of coming out of it. Rarely has one man’s hint so caused the earth to shake. It is not that this man is really so wise or powerful but that the recovery he has engineered is an illusion (even to him) that nearly everyone has believed in. At some deep level, I think people know that the recovery is an illusion, but it is a bankable illusion so long as most people believe in it. Perception is reality … until it gives way to reality. And, so, the hint that the illusionist will stop his magic sends markets running for cover.

Mark my words: this, too, shall fail. When the entire global economy trembles at a breath, what you should be able to figure out is that the present economy is nothing more than a thin web, stretching across a great chasm. When the web shakes, people run for the sides because the economy has no bottom. The web would not shake at a breath if it were any less thin than spider thread.


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