Tuesday, December 15, 2015

November 2015 CPI

Here are my updated charts.  Not much to say.  Both shelter and non-shelter core inflation continue to move in the same ranges that they have seen for the past couple of years.

Considering these levels, the expected rise in the Fed Funds Rate is a bit troubling.

As I have mentioned before, interest rates may not be that important.  Now, raising rates will have some disinflationary effect, so there is a danger here.  But, housing is our constraint now, both on real production and on inflation.  As important, or more important, than rates, within some range, is the expansion of mortgage debt outstanding.

There have been false starts before, but recently it looks like mortgage levels have begun to expand again.  So, I still have some hope that some force is leading to mortgage expansion - whether that is regulatory, or from development of unconventional mortgage funding sources, or from continued recovery in home equity.  Maybe this can save us from ourselves.


  1. Kevin, I always thought banks would be more willing to lend if they make money on interest. Now, in a negative interest rate environment, they could make money unless the rates become too negative. Then they could conceivably pay people to take loans or loan at zero interest rate and just collect down payments as a fee. So, if the FFR was 3 percent, as Yellen may want, one would think that would increase economic activity. What am I missing?

    1. I'm not following what you are saying.

    2. Well, I was thinking that long bonds are related to mortgage rates. If the Fed would allow them to go up in yield, by cutting demand for those bonds in the collateral markets, mortgage rates would go up and banks would be more comfortable lending.

    3. So, you are saying mortgages are not linked to long bond rates? If that is true then ok. But if they are linked and will be linked, then long bond demand must decrease or yields will never go up and banks won't make money on mortgages and may not want to lend. Wells Fargo is lending but no one else.

    4. You're pushing quantities and prices around like pieces on a chess board. It's just not how the world works. I can't even figure out how your puzzle fits together, but I can assure you that if the Fed Funds rate goes to 3% because the Fed pegs it there, mortgage lending will not expand. Bank lending always drops when the Fed flattens the yield curve. But, this sort of thinking your doing just isn't going to get you anywhere.

    5. But the yield curve may not flatten if there was less demand for long bonds. At least make the attempt and outlaw them as collateral for derivatives. That collateral demand is outstripping supply. That may not fix the long bond but it would go a long way towards helping.

  2. Looks like residential and commercial real estate "have come back" and banks are willing to extend loans. Of course, both markets have been improving for years.

    In one of my few complains about EMH it sure seems to me that banks lend on real estate, then get more aggressive on lending the longer an upcycle lasts. This helps the upside. On commercial property in good times, buyers can get seconds, and then mezzanine debt, and go "high n the capital stack" and buy with less than 5% down.

    Then, something bad happens. The banks in response pull in their horns---which of course exacerbates the down cycle. A self-fulfilling prophesy. So properties go down for a few years.

    Then we start all over again.

    Maybe this is EMH, or maybe not, or maybe EMH with huge structural impediments. In general I salute EMH.

    I agree entirely with Kevin Erdmann on financial regulations. I guess we want sturdy banks. What is a simple way to sturdy banks? Whatever is the most simple way is the best way. Maybe simply higher reserve requirement, like double-triple what they are now, and no other regs at all.

    Maybe banks can only issue convertible bonds. The bondholders would demand certain covenants. Let the private sector handle it.

    Or maybe do nothing---after all, the Fed can print money (QE) and recapitalize banks at will. If shareholders do not have boards that create sturdy banks, so be it. When the banks fail, then the Fed kicks out the shareholders, prints money and re-caps the banks, and quickly re-sells to new private-sector operators. (Fraud is a separate issue, and deserves prosecution, ala giving out lots of loans to your buddies and then running away, S&L 1980s style).

    Since $4.5 trillion in QE resulted in no inflation, maybe we are worrying about nothing. The Fed can kick shareholders in the nuts, re-cap any bank that fails in an instant, bring in a new board and management, and disappear.

    Or is that too easy?

    1. Benjamin, you hit it on the head. Banks ALWAYS pull in their horns. That is what they do. They may not call in loans, but credit dries up for the new buyer of your house. And supply siders don't adequately cope with this tendency of bankers, to pull in their horns if not their outstanding loans.

    2. I think you would agree with me, Benjamin, that the marriage of risk-free deposits on the liability side with highly leveraged credit risk on the asset side, is entirely a product of the vast regulatory framework, especially public deposit insurance. The public bias for regulation is too strong for this to be widely appreciated.

  3. Kevin--I do agree with you. It may be as a practical matter a government has to provide deposit insurance, in order to prevent disintermediation.

    But as I said, if banks are publicly held, then shareholders and boards should be interested in the survival and profitability of the bank.

    Perhaps we need no regulations. The Fed can simply recapitalize banks that have failed by printing money. Kick out management, kick out shareholders and bring in new management. The recapitalized banks can be resold to the private-sector recurring taxpayer funds. Actually since the Fed printed the money to recapitalize the bank, rescuing a bank could become a profit center for the Treasury.