We have talked before about how the Fed is trying to stimulate our economy by making new money available to banks. They want banks to write more mortgages and stimulate the housing sector. They also want them to lend to small business and stimulate hiring.
Unfortunately, the Fed has no way to direct funds toward these goals. They can only flood the banks with money and hope some of it goes where they want. This is what the Fed calls a “transmission mechanism,” and it’s not working. After $3 trillion of new money, it is clear that the stimulus is outweighed by the side effects:
- Big companies get cheap loans to buy back stock
- Bubbles in the U.S. and foreign stock markets
- Wild swings in currency values
- Hedge funds buying thousands of houses
Some of these were expected, and some are novel. We’ve already covered the currency war, but – no one expected hedge funds to start buying up whole neighborhoods. This is the very model of an unintended consequence. It seems obvious now, but it was completely unexpected.
First-time buyers simply can’t compete with the investors offering cash, some of whom are buying properties above retail cost. And investors don’t have to have worry about their credit score.
So, the housing market may rebound, but ordinary Americans won’t enjoy it. For clarity, let’s define “ordinary Americans” as owner occupants of single family dwellings. We all learned a lesson from the housing bubble, and the lesson the banks learned is that eviction is easy but foreclosure is difficult.
Americans won’t be homeowners anymore. We will all be Blackstone’s tenants. The chain of unintended effects goes all the way back to the mortgage interest deduction, the Community Reinvestment Act, and a variety of other schemes to stimulate home ownership. It has now snapped back in the opposite direction.
See also: Bonds and Discipline