Via Zero Hedge, here is a graph of the spread between Mortgages and the US Treasury 10-year bonds:

Due to the Fed's buying of Mortgage Backed Securities, this spread is now at an all time low. This is completely insane. One of the main reasons we are in this financial mess is because of a complete lack of risk evaluation during the lending process. This chart indicates that, thanks to actions by the Fed, we are now willing to lend more recklessly than ever in an attempt to keep the party going.

Look closely at the progress of the chart. As the economy was turning at the start of the dot.com collapse, the Fed (under Greenspan) flooded the market with cash. A lot of that cash obviously found its way into home mortgages as the spread narrowed quickly from a recessionary 200 bps to just above 100 bps.

Then, during the second half of 2002, the market attempted to return to a more normal state of affairs at around 150bps. However, instead of stabilizing, with the Fed apparrantly unable to get rid of the excess money in the system, the spread quickly collapsed again, bottoming out at under 100 bps in the beginning of 2005. This, of course, aligns quite neatly with the peak of the home-loan insanity, when anyone who could fog a mirror could get a mortgage for pretty much any amount they liked.

Then, as things started to implode, this spread widened out again to around 200bps. Note that if the market had truly overreacted, this spread should have shot up a lot more to compensate lenders for the increased risk of lending in a highly recessionary environment. All the market did was try to price in an appropriate amount of risk, and return to some semblance of sanity in lending standards.

But the financial oligarchy wouldn't have any of that! Instead, the Fed has crushed this spread right back down, to such an extent that, from a credit-risk perspective, we're now even worse off than we were in 2005. Anyone who thinks this could possibly end well is a complete and utter moron. Mortgaging the future, indeed.

Posted by: Hermit Dave at 07:47 PM | No Comments | Add Comment
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