A few more questions :-)

[eugenekop]

1.

From: http://marketplayground.com/2012/09/17/peter-schiff-operation-screw/

Given that 30-year fixed mortgages are already at historic lows, there can be little confidence that the new plan will succeed in pushing them much lower, especially given the upward spike that occurred in the immediate aftermath of the announcement. Instead, Bernanke is likely trying to provide the confidence home owners need to exchange fixed-rate mortgages for lower adjustable rate loans – which would free up more cash for current consumer spending. He is looking for homeowners to do their own twist. If he succeeds, more homeowners will be vulnerable to increasing rates, which will further limit the Fed’s future ability to increase rates to fight rising prices.

How does Bernanke create incentives to take adjustable rate loads? Does he buy more of these type of mortgages? Why is he even interested in this?

2.

What's the difference between what ECB and the Fed are doing? Both pay banks on excess reserve in order to avoid inflation. Yet what ECB is doing is called "Sterilization" and not quantitative easing, and it is supposed to be less inflationary.

Thank you.

3.
When Fed buys mortgage based securities, shouldn't it decrease the prices of 10 year government bonds? After all why would people buy 10 year government bonds if they can buy buy mortgage based securities for which there is a guaranteed buyer?

 

[presence]

I don't know the specifics of what the fed does, but some general incentives to ARMS that can be manipulated:

lower down payments
Adjust FHA lending limits and regulations
ARM fee schedule adjustments
Lower credit score requirements
203k rehab loan regulations and incentives

Sterilization:

if a central bank were to buy assets and put money into the system, then sterilization is any operation that takes exactly that cash injection out of the system. There are three major ways a bank could do this:


1—Term deposits
2—Reverse repurchasing agreements ("reverse repos")
3—Hiking reserve rates

Read more: http://articles.businessinsider.com...ntral-bank-commercial-banks-ecb#ixzz26pCyl3LZ
​

 

[Paul Or Nothing II]

1.

From: http://marketplayground.com/2012/09/17/peter-schiff-operation-screw/



How does Bernanke create incentives to take adjustable rate loads? Does he buy more of these type of mortgages? Why is he even interested in this?

2.

What's the difference between what ECB and the Fed are doing? Both pay banks on excess reserve in order to avoid inflation. Yet what ECB is doing is called "Sterilization" and not quantitative easing, and it is supposed to be less inflationary.

Thank you.

3.
When Fed buys mortgage based securities, shouldn't it decrease the prices of 10 year government bonds? After all why would people buy 10 year government bonds if they can buy buy mortgage based securities for which there is a guaranteed buyer?

The article already explains why Bernanke is doing it. Mortgage-rates are tied to government-bonds & he is trying to drive down the rates so that people would buy more houses on loans, which will drive up demand & prices of houses & make people "feel" more wealthier than they are (just like they did before the bubble burst) so he's basically trying to re-inflate the bubble & hoping that people will then spend more & the economy will get moving again.
Keynesian economics is centered around demand & spending, they believe demand & spending is what drives economies so they are always trying to get the government & private sector spend, spend, spend more; they generally believe in jumping from one bubble to another, for them inflation & money-creation is essentially the solution to every economic problem.
On the other hand, free market & Austrian economics is centered on supply & savings, we believe that the more people save & produce, the more purchasing-power & capital they make available to others, which is what drives the economy.

QE & sterilization are different things & in essence, both are being done by Fed as well as ECB. But ECB calls its program SMP instead of QE because QE has inflationary connotations.
QE is just buying various securities with newly created money but it's primarily focused on getting the economy moving (although it's helping out government too) while SMP is primarily directed at financing troubled Euro-nations by ECB buying their debt/securities with newly created money.
Both Fed & ECB are trying to sterilize, & thereby prevent all this new money from getting into the economy thru banks & causing massive inflation; Fed is trying to do that by paying interest on excess reserves while ECB also has a similar facility but it's primary sterilization tool has been what they call "weekly deposit tenders" where they allow banks to make weekly fixed-deposits with ECB for an interest, it's the same thing but they just think it's new & fancy, just trying to make everyone think they are doing something new & great.

Central-banks are always the guaranteed buyers for their respective government's bonds so anyone seeking to receive small but "assured" return on their capital generally always looks to government bonds.

 

[eugenekop]

Thank you Paul.

My first question though was specifically about "adjustable rate loans". How does the Fed encourages people to buy those instead of fixed rate loans?

Also about question 3, am I right about that analysis?

Thanks.

 

[Aurave]

1.
What's the difference between what ECB and the Fed are doing? Both pay banks on excess reserve in order to avoid inflation. Yet what ECB is doing is called "Sterilization" and not quantitative easing, and it is supposed to be less inflationary.

Interest on reserves (IOR) doesn't have much of anything to do with "Sterilization", unless central banks and their perfidious financial semantics are bringing about a change in the use of terms.

Sterilization has generally been a way to "cancel out" out money creation in the banking system that results from an intervention. A classic sterilization example one learns:

Bank A owes Bank B $20 billion. Federal Reserve loans Bank A $20 billion by depositing that money in Bank A's reserve account with the Fed. Bank A then pays Bank B those $20 billion, money which is ready to be lent out and "multiplied" by Bank B. "Sterilization" would be the Federal Reserve selling assets worth $20 billion to effectively take that extra $20 billion it created out of the reserves in the banking system.

IOR isn't sterilization in the normal use of the word. If one uses sterilization in a financial context I have an exact idea of what that is. I don't know what the ECB is doing, but my guess would be that it is doing no actual sterilization, save for using the word to evoke certain connotations in people's mind, simply because IOR has the effect of keeping reserves from leaving a system. Its not the same thing as "getting rid" of new reserves created. I have to stress again I have no clue what the ECB is doing.

It is likely similar to the scientific and vernacular uses of the word theory. In science a theory is something akin to fact, in every day language theory just means a guess. Enterprising individuals make use of such semantic games all the time- Creation theory, trying to make religion seem scientific; "evolution is just a theory", religion trying to replace the vernacular definition over the scientific.