At that point, pundits assumed it was the end of the decline. On a net basis, the creation of mortgages in the U.S. was practically down to zero. "So how much further could it possibly fall?" they asked.
Meanwhile, Bernanke apparently assumed that by buying unprecedented amounts of mortgage bonds, he could somehow stop the decline -- or at least offset its impact. But the decline in the mortgage market didn't end there in 2008. And in 2009, it got even worse -- a lot worse! Not only was new mortgage money largely unavailable, but OLD mortgage money was pulled out. Result: We saw net mortgage liquidations of $283 billion!
And for the first quarter of 2010, as already mentioned, the Fed reports net liquidations running at an annual pace of $560 billion, the worst in history.
The Unavoidable Consequences
The impact of these mortgage liquidations is going to be more enduring than any monetary policy, and is bigger than the likely impact of any government policy.
Bernanke can try to make believe these impacts and consequences don't exist. But the rest of us cannot afford to participate in this kind of make believe. We must face the truth and understand the likely consequences that he's trying to avoid talking about.
Consequence #1. Though many on Wall Street would like to believe otherwise, the truth is that in this situation, Bernanke is nearly powerless. For no matter how many more bonds he has the Fed buy, he cannot save the (alleged) economic recovery. Sure, he could push 30-year fixed mortgage rates down some more. But the bald truth is that even the lowest mortgage rates in recorded history haven't thus far made a bit of difference. In fact, despite their unprecedented low rates, mortgages are being liquidated at an ever FASTER clip. Home sales are falling even MORE rapidly than they were before.
Consequence #2. Double dip. The double-dip recession you've been warned about is now well on its way. Meanwhile, administration economists still swear on a stack of Bibles that the double dip is not in the cards; and corporate economists say the probability of a double dip is only 20 to 30%. This is sheer delusion.
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