FRONT PAGE CONTRIBUTOR
Mortgage Interest Rates
There are always unintended consequences. And they’re always so easy to see in hindsight.
So the government announces that banks will not be allowed to fail. What do you do if you’re a rational investor? You reason that there’s a floor under the debt-securities issued by these banks. You figure you might be able to exchange them for honest-to-goodness Treasury paper later on.
So you buy up bank-issued paper. What do you sell, to make room in your portfolio? Fannie/Freddie debt, which costs more because it’s presumed to be safer, so it yields less. It’s something like a pair-trade, or an arbitrage.
Unintended consequence? Retail mortgage rates have shot up nearly a full percentage point in just the last few days. Which makes housing all the less valuable and exacerbates the underlying problem.
This is fun, isn’t it?