E The Fed Did Not Save Real Estate But Gives Banks Welfare Checks

 It is very clear that the Fed saved big business, but not the consumer real estate market. As we can see, the Fed has kept the money stock high, but the red line in the Fred chart below shows that home mortgages have taken a nosedive beginning with the Great Recession and continuing. Certainly the commercial banks lend in real estate, but it has been mostly for big business's benefit.

At the end of this article I will show, with the help of Kevin Erdmann, that all of subprime real estate did not deserve to die. But the Fed (a private bank according to the Lewis VS USA court case in 1982), killed it all anyway, and now gives banks welfare checks from the citizens of the United States in the form of interest on reserves (IOR).



I think I know the reason why the Fed did this to the real estate market.  Steven Williamson, VP of the St Louis Federal Reserve Bank was kind enough to post my question:

Prof, I have a question for you. Why did Bernanke save big business but let the RE industry decline and crash in 2008? Was it because the bonds backing RE were inferior to the bonds backing big business? I noticed big business bonds are used as collateral more and more, and I don't know if MBSs are used again as collateral.

If that was the case, I am a bit disappointed in the Fed because the Fed adopted the flawed David X Li Copula that led to so many MBSs going bad. I would have thought the Fed had a responsibility to fix that mistake by saving the Commercial Paper market that was the foundation of subprime lending during that time.

Now, he didn't answer the question. But clearly, we can see what the Fed did to help big business in the aftermath of the Great Recession by being lender of last resort and forcing yields down. The Fed even saved junk bonds while killing subprime lending:

Federal Reserve Bank of St. Louis, Moody's Seasoned Baa Corporate Bond Yield Relative to Yield on 10-Year Treasury Constant Maturity , retrieved from FRED, Federal Reserve Bank of St. Louis; August 27, 2016. BofA Merrill Lynch, BofA Merrill Lynch US High Yield Option-Adjusted Spread, retrieved from FRED, Federal Reserve Bank of St. Louis; August 27, 2016.
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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Chee Hin Teh 5 years ago Member's comment

thanks for sharing