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Fed keeps twisting the night away

By - Last modified: June 29, 2012 at 8:43 AM

As a reader, you know I have been saying that our government is not yet done with the bailouts. Ben Bernanke proved that last week when he announced that “Operation Twist" would continue.

This means that the Federal Reserve will continue selling short-term bonds and buying longer-term bonds in the hopes of lowering interest rates even further.

They hope that the lower rates will spur economic growth in hard-hit areas such as the housing market. The government seems to believe that the only reason Americans aren't buying more houses and expanding businesses is the "high" interest rates at which we are forced to borrow money.

I have so much trouble believing this that it actually makes my head hurt. We are sitting at some of the lowest interest rates in the history of this country (you can buy a house at less than 4 percent). There was a time when a 14 percent mortgage to buy your dream home was not uncommon, and people were doing it without reservation.

Analyzing the demographics of potential buyers and sellers can paint a clearer picture of the health of our housing market.

Back in the '80s, we had roughly 80 million baby boomers attempting to buy houses from roughly 30 million members of the World War II generation. Logically, prices would rise if there are more buyers than sellers.

Additionally, during the '90s and early 2000s we were experiencing both an economic boom and lax lending guidelines by the banking industry. All this led to the biggest housing bubbles in the history of our country.

But today, those same boomers are looking at retiring and perhaps downsizing. Census numbers show they did not have as many children as their parents, thus the potential customer base of Gen Xers in the housing market is significantly smaller, around 51 million people.

Now consider the economic slump the country still experiences and the tighter lending standards many financial institutions have initiated, and you get a recipe for a potentially disastrous housing market — one that I don't believe can be fixed by simply lowering interest rates.

Subtler factors also contribute. Many homeowners have used their homes as piggy banks and drained equity from them. And today, supply exceeds demand, because there is still a large inventory of houses available from the recent rout of foreclosures.

So with all this attention on lowering interest rates to save the housing market, the fixed investment market bears the brunt of the fallout.

Seniors and retirees living on fixed incomes can't generate reasonable rates of return in "lower-risk" investments and may be forced to take risks with their retirement accounts just to make ends meet.

I wish Washington could come up with new approaches to the problem, instead of continuing to back failed efforts. Wasn't it Einstein who defined insanity as "doing the same thing over and over again and expecting different results"?

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