Wednesday, December 31, 2008

Bye-Bye Recession

The FOMC has announced an all-out assault on the housing recession. It will buy 500 billion dollars worth of "mortgage paper" by mid 2009. Big Ben Bernanke has jumped on the mortgage end of the housing see-saw; when the cost of money for 30-years goes down, the net present value of housing goes up. The mortgage-housing see-saw is an Archimedes lever, the kind that can move the world.

Put another way, the demand for mortgage paper just increased by an astounding 500 billion dollars. Banks and insurance companies, which are holding trillions of dollars of deeply discounted paper, can see the light at the end of the tunnel. The value of all of these assets will increase as the supply is soaked up by the FOMC. Our government is likely to make high rates of return on these purchases.

The FOMC is now indirectly financing cars at .25% interest and pushing the price of home mortgages down. The seeds of economic recovery have been planted, watered and fertilized. Bye-Bye recession, you have worn out your welcome. It is time to pack your bags.