Read this:
http://www.bloomberg.com/news/2013-01-17/fed-concerned-about-overheated-markets-amid-record-bond-buying.html
"The first sign of Fed tightening may set off a hair trigger in the bond market, said Drew Matus, senior U.S. economist at UBS Securities LLC in Stamford, Connecticut"
"There are extreme market distortions occurring due to the unusual monetary policy,” said Lawrence Goodman, president of the Center for Financial Stability and the former director of Quantitative Policy Analysis at the U.S. Treasury. “The upshot is we are seeing increasing debate in FOMC (Federal Open Market Committee) meetings.”
Before you read any further the following assumes that you are very familiar with the theory of Mortgage finance as explained in a number of my other blogs. One of the better ones at the moment is this one:
http://macro-economic-design.blogspot.com/p/new-frontiers.html
This is a brief description of what I keep on saying in those Blogs:
The longer you unbalance the economy the greater the price both on the way in and on the way back. And especially on the way back.
The remedy has been missed AGAIN.
The remedy would be to use a stretched version of my ILS Mortgage structure.
Normally this would offer around 3.5 times income as a mortgage repayable over 25 years (30 years is a bit too far for good sense and risk management).
The payments would reduced at 4% p.a. relative to the average borrowers' incomes ending at just over 11% of income.
The above assumes that interest rates are on average, 3% above the rate of average incomes growth, or whatever index is chosen to represent that. This is a cost that is slightly less than the long term return on equities - the Siegel Constant says. It is also the average interest rate cost of mortgages in the UK 1970 to 2002 before it became fashionable to impose long term low interest rate distortions on the market.
So the remedy is to lend more to prop up property prices which is what the Fed is trying to do to protect banks and collateral. This is affordable even as interest rates rise as long as the payments reduce slightly less than 4% p.a. There are ways to make everything very safe. For example by fixing the marginal interest rate.
As recovery sets in and as incomes rise, the mortgage size / income multiple can be reduced back to normal over time.
GOVERNMENT BONDS
As for the bond market - Well that is hopelessly unsafe for the economy. They have to exchange all of the government bonds for wealth bonds - bonds that are index-linked to the GDP or similar. I think the market may prefer an index link to incomes. But at 1% interest coupon and a link to GDP the government can borrow a lot more and allow economic recovery to set in. When they repay they will still owe the same multiple of GDP as they borrowed - not more. The cost will have been 1% p.a.
SWAPPING GOVERNMENT BONDS FOR MORTGAGE BONDS
A much safer bet. Would anyone like to join a group interested in this? Bonds index-linked to Average Earnings/Incomes Growth (AEG% p.a.) with a small fixed interest coupon can be used to fund quite large mortgages with almost zero risk of arrears other than from interrupted income.
And a credible way to deal with interrupted income has been suggested too.
These bonds grow at about the same rate as real economic growth and cost borrowers no income to repay over and above the number of average incomes that they borrowed. The interest adds 10% to 40% more to that cost depending on market rates of interest. Payments fall every year relative to the index, making the bonds highly affordable as a means to finance a mortgage.
Enquiries by email to
eingram@ingramsure.com
Fed Concerned About Overheated Markets Amid Record Bond Buys
http://www.bloomberg.com/news/2013-01-17/fed-concerned-about-overheated-markets-amid-record-bond-buying.html
"The first sign of Fed tightening may set off a hair trigger in the bond market, said Drew Matus, senior U.S. economist at UBS Securities LLC in Stamford, Connecticut"
"There are extreme market distortions occurring due to the unusual monetary policy,” said Lawrence Goodman, president of the Center for Financial Stability and the former director of Quantitative Policy Analysis at the U.S. Treasury. “The upshot is we are seeing increasing debate in FOMC (Federal Open Market Committee) meetings.”
Before you read any further the following assumes that you are very familiar with the theory of Mortgage finance as explained in a number of my other blogs. One of the better ones at the moment is this one:
http://macro-economic-design.blogspot.com/p/new-frontiers.html
This is a brief description of what I keep on saying in those Blogs:
The longer you unbalance the economy the greater the price both on the way in and on the way back. And especially on the way back.
The remedy has been missed AGAIN.
The remedy would be to use a stretched version of my ILS Mortgage structure.
Normally this would offer around 3.5 times income as a mortgage repayable over 25 years (30 years is a bit too far for good sense and risk management).
The payments would reduced at 4% p.a. relative to the average borrowers' incomes ending at just over 11% of income.
The above assumes that interest rates are on average, 3% above the rate of average incomes growth, or whatever index is chosen to represent that. This is a cost that is slightly less than the long term return on equities - the Siegel Constant says. It is also the average interest rate cost of mortgages in the UK 1970 to 2002 before it became fashionable to impose long term low interest rate distortions on the market.
So the remedy is to lend more to prop up property prices which is what the Fed is trying to do to protect banks and collateral. This is affordable even as interest rates rise as long as the payments reduce slightly less than 4% p.a. There are ways to make everything very safe. For example by fixing the marginal interest rate.
As recovery sets in and as incomes rise, the mortgage size / income multiple can be reduced back to normal over time.
GOVERNMENT BONDS
As for the bond market - Well that is hopelessly unsafe for the economy. They have to exchange all of the government bonds for wealth bonds - bonds that are index-linked to the GDP or similar. I think the market may prefer an index link to incomes. But at 1% interest coupon and a link to GDP the government can borrow a lot more and allow economic recovery to set in. When they repay they will still owe the same multiple of GDP as they borrowed - not more. The cost will have been 1% p.a.
SWAPPING GOVERNMENT BONDS FOR MORTGAGE BONDS
A much safer bet. Would anyone like to join a group interested in this? Bonds index-linked to Average Earnings/Incomes Growth (AEG% p.a.) with a small fixed interest coupon can be used to fund quite large mortgages with almost zero risk of arrears other than from interrupted income.
And a credible way to deal with interrupted income has been suggested too.
These bonds grow at about the same rate as real economic growth and cost borrowers no income to repay over and above the number of average incomes that they borrowed. The interest adds 10% to 40% more to that cost depending on market rates of interest. Payments fall every year relative to the index, making the bonds highly affordable as a means to finance a mortgage.
Enquiries by email to
eingram@ingramsure.com
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