"More Market Manipulation" (Again)

CULVER CITY, Calif. - Aug. 14, 2013 - PRLog -- “More market manipulation.”  This is a phrase from the July 11, 2013 Provident Bank weekly email on the direction of mortgage interest rates.  I think this phrase is apropos.  This Wednesday, the 31^st, the Fed will meet and issue another statement.  Markets, fuelled by the media, will react in their usual knee-jerk ways.  To refer back to my first 2013 newsletter, this year will be a rocky ride with interest rates as a result. How can we truly know the “value” of anything with the level of manipulation that exists?  What is the true value of interest rates, the true value of homes?  What do we as Americans value?  It seems that we value avoidance.  We don’t want to feel the pain.  We don’t want to pay more for goods and services.  We don’t want our home values to decrease.  Bill Gross discusses this in his May 2013 article, “There Will be Haircuts.”  In his words, “As central banks surreptitiously inflate, they also devalue their currency and purchasing power. . . these haircuts reduce an investor’s purchasing power.”  So while we live more happily in our manipulated environment, our purchasing power and our wealth is decreasing.

How do our national leaders deal with the market when it responds negatively?  Take Bernanke’s comments from about a month ago.  When he discussed the Fed beginning to pull out of buying mortgage backed securities, interest rates jumped by nearly 1%.  This jump upset the housing market, and the real estate industry began immediately complaining about how fewer buyers could afford homes, home values would decline again, etc.  So, to quote the Provident article, “Bernanke was obviously shocked at the swift and deep market response; [so] yesterday more market manipulation.  He called for maintaining monetary stimulus.”  

I’m troubled by the degree to which our leaders seem willing to avoid “pain” at any cost.  I think that with Detroit declaring bankruptcy we see one example that manipulation and artificial stimulus can hide structural issues only so long.  I don’t know what the answer is, but I think we need to spend real effort on forging long term fiscal solutions, even if they are painful in the short term.