Thursday, October 6, 2011

Freddie Mac Brings Rates Under 4%

The interest rate on a 30 year mortgage just fell under 4% for the first time in history.  Truly incredible times we live in.

The government now issues all new mortgages, (or insures them) allowing lenders to lend an unlimited amount of tax payer money into the market for toxic mortgages.  This has the effect of pushing rates downward (higher demand) just as it did during 2000 - 2006 when loans were packaged as CDO's and sold off to Wall Street.

While the government is spending our future today by lending money to Americans to purchase homes they should not be buying, the Federal Reserve is now purchasing 30 year government bonds.  This action has brought the interest rate on a 30 year treasury bond under 3%, also closing in on record territory.

When bond rates fall, their principle value rises.  When bond rates rise, their principle value falls.  It is like a see-saw.

To compare the government and Fed's actions today, imagine if they stepped into the market to purchase worthless dot com stocks in the year 2000 (to try and push prices higher), or entered the residential real estate market in 2006 and began purchasing homes on your street at bubble prices to keep them artificially afloat.

It is no different.  When the interest rates on these bonds rise, the asset values will be destroyed.

In 2000 and 2006 the government and the Fed stepped in to bail out Wall Street when they were buying the assets at bubble prices, but who will bail out the government and the Fed when the assets they are purchasing today fall precipitously?

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