While both the S&P/Case-Shiller Report for August and September 2010 Existing Home Sales Report by the National Association of Realtors are painting a gloomy picture of the real estate market, the Fed is embarking on a large-scale purchase of long-term government debt, presumably in an attempt to keep long-term interest rates lower than they would otherwise be. This entire operation has been dubbed QEII (quantative easing part two).
Why don’t we feel like the Fed is doing us a favor?
The purchase of long-term debt of the U.S. federal government is being paid for with short-term debt issued by the Fed. Does it make any sense to you?
If the Fed is desperate enough to pay with short-term debt for long-term debt in hopes of reducing effective long-term interest rates, it could only mean one thing: China may have reconsidered its role as the lender of last resort. It doesn’t take a rocket scientist to figure out that any uptick in mortgage rates would have a devastating effect on home sales.
One major reason the Fed cannot afford to allow for interest rates to go up are ARM loans, which are a time-bomb waiting to go off.