Driving Up Interest Rates Will Deepen Housing Slump - Stiglitz

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by: Peter Cooper

Nobel prize winning economist Joseph Stiglitz has warned that the Federal Reserve’s decision to end its $1.4 trillion mortgage debt purchase program this month is going to worsen the slump in the US housing market by driving up interest rates.

There has been no recovery in the US housing market this year, the biggest item of expenditure in the world’s biggest consumer market. New home and previously owned home sales are still falling. House prices continue to fall.

Mortgage rates to rise

In a Bloomberg interview in Tokyo Stiglitz said:

This withdrawal of the support risks increasing interest rates, increasing the number of foreclosures and exacerbating the strain, the stress, that American families are already facing.

He claimed the main danger to the global economy presently is that central banks will ‘exit too rapidly’ from the emergency measures put in place to offset the financial crisis in 2008. He said it was ‘irrational’ to worry about inflation with consumer demand so subdued.

The former World Bank chief economist thinks there is a ’significant risk’ of a double dip recession with growth weakening towards the end of the year.

The US housing market is locked in a deep depression. Mortgage resets over the next couple of years already threaten three to four million more foreclosures that will keep the market depressed and put further pressure on US bank balance sheets.

US mortgage rates are linked to the headline Fed funds interest rate but remain significantly higher for borrowers. So while the Fed may not have raised its key target overnight rate at its meeting this week, the withdrawal of mortgage debt-repurchase programs is as good as doing the same thing.

US economic slump

‘The deeper risks I see for the global economy are continuing weakness in the American economy’, Stiglitz therefore concluded. Indeed, the US housing sector is an enormous driver for the world economy consuming huge quantities of industrial materials from timber to aluminum.

It is even possible to attribute the global financial crisis and the recession that has followed to the collapse of the US housing market, due to the subprime loan implosion.

To recover from the financial crisis the root cause will have to be addressed first, and that means getting the US housing market on the road to recovery, not derailing it again with higher interest rates.

Disclosure: No positions