NRO’s eye on debt and deficits . . . by Kevin D. Williamson.

Subprime Nation: The High Price of Cheap Money


It’s a great time to buy a house: Mortgages are at record lows — 4.4 percent for a 30-year loan.

It’s a terrible time to buy a house: Real-estate is still overpriced and likely to decline at least 5 percent — or as much as 20 percent if the double dip we’re apparently heading into turns out to be a deep one.

So the question is: How cheap does the money have to be before you decide to pay too much for the asset? That dilemma is the U.S. economy in miniature. Government borrows tons of money to get monkeys high on cocaine and other (economically, un)stimulating projects, but it gets to print all the money it wants and thus to repay the debt in devalued dollars. When the dot-com bubble turned out to be built more on gee-whiz tech enthusiasm than on real profits, we flooded the system with cheap money in the hopes that suckers investors thus armed would be up the price of those devalued assets. They bid up the price of real estate instead — and when that cheap-money bubble went south, what did we do? What are we doing? Flooding the economy with cheap money in the hopes that we can reinflate the real-estate bubble and start the whole thing all over again.

Now, with interest rates at basically zero and the economy probably headed back into recession, what is the Fed going to do? It can’t very well cut interest rates. Instead, it’s buying up Treasury debt. The Fed acquired a bunch of mortgage-backed securities as part of the bailouts. The Fed had planned to return that money to the taxpayers and let those assets disappear from its balance sheet as they were paid off. (Note: Never trust the government to do what it says it is going to do with the money it takes from you.) Instead, the Fed is taking that mortgage-bond money and investing in Treasury bonds — a subprime-for-subprime swap. The government is, in effect, buying its own debt. The Fed has a $2.3 trillion portfolio, and about $200 billion of those mortgage-backed securities will mature each year — more than the budget of the United States Army (2010 budget: $142 billion).

The problem for the economy at large is precisely the same as the problem for the housing market: the underlying assets have lost a lot of value, and you can’t make money cheap enough that paying too much for them makes sense. With our public debt headed toward Greek levels thanks to Obama & Co., and a deeply damaged financial system, we are due for a deep and intense national restructuring. There’s no way around that, and all of the cheap money that Helicopter Ben wants to throw at the problem won’t make it go away.

Tags: Fiscal Armageddon , Housing


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