Despite the surge in interest rates we continue to see various pundits calling QE2 a success. Well, in order to put the fantastic failure of QE in perspective it’s helpful to see just how much the latest surge in rates is impacting housing prices. A very basic example will help put things in perspective:
Let’s say you want to purchase a new home costing $300,000. You have above average credit and cash in the bank so you put down 20% and get approved at the current rate of 5.19% for a 30 year fixed rate mortgage. Your monthly payment is $1,317. But what if you had purchased that home just 9 weeks ago when mortgage rates were at their lows? Your monthly payment would be 11.7% lower or $1,179. It might not sound like much, but to the average American family who is suffering from stagnant wages, excessive debt and an economy with 10% unemployment it makes a big difference.
Mr. Bernanke is hoping to induce a bout of inflation in the economy, but thus far the job’s data and recent inflation numbers show that we’re far from achieving that. Without a subsequent rise in incomes it’s impossible to argue that Mr. Bernanke is succeeding. In fact, thus far it’s safe to say that he is failing fantastically in achieving his goal of keeping long rates low and inducing borrowing and economic growth. If Mr. Bernanke were in fact willing to commit to QE in a manner in which he actually controlled the long-end of the curve it’s likely that rates would be much lower today and Americans could benefit from an environment of low rates and marginal economic growth. Instead, we reside in a world where bankers control the long end of the curve and attempt to squeeze every last dime from an already fragile US consumer.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.