Tuesday, March 2, 2010

An unequivocal warning from Bernanke & Greenspan

Well, the Olympics are over and I'm exhausted.

I'll have comments on the experience and I have a ton of pictures for you, but I'll save that for later in the week.

For now, back to the main focus of the blog.

As I have repeated over and over again, the story of Vancouver Real Estate (and real estate in Canada) is tied to the story of interest rates.

If interest rates go up significantly, the real estate bubble will burst in spectacular fashion. If interest rates fail to rise, real estate will continue to climb in value at ridiculous rates.

And, as I have posted over and over again, I believe world events - particularly as they relate to sovereign debt - make significant, prolonged rate hikes unavoidable.

Naturally, I think interest rates will shoot up. That's why my advice to anyone who cares to hear it is to eliminate/reduce debt now and extract capital gains on real estate ASAP.

Reinforcing this position are comments made at the highest levels.

Last week, as reported in the Washington Times newspaper, US Federal Reserve Chairman Ben Bernanke delivered a blunt warning on U.S. debt and outlined how the stage is set for a Greek-style debt tragedy in the United States.

Now this is nothing new. Your dilligent scribe has been pounding that drum relentlessly.

But when the current and former Chairman's of the US Federal Reserve start saying it publically, you should stand up and take note.

From the article:

  • With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

    Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said.

    "It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability [of yearly deficits over $1 trillion], and we may find ourselves facing higher interest rates even today."

Now the key element of this article is that Bernanke, for the first time, addressed concerns that the failure of the US to address debt will eventually force the Federal Reserve to accommodate deficits by printing money and buying Treasury bonds — effectively financing the deficit on behalf of Congress and spurring inflation in the process.

Interestingly, Bernanke declared flatly that the Federal Reserve won't do that. "We're not going to monetize the debt," Bernanke said.

If the Fed, in fact, stands firm on this then Congress will have to slash and cut like never before. But the problem is that no one believes Congress has the resolve to do that.

Even Alan Greenspan (the former Chairman of the US Federal Reserve) is cited in the above article stating that "Congress and the White House have been unable for years to control spending by making tough decisions to raise taxes or cut spending."

This lead Greenspan to note that the current situation is so dire that he believes we could see a sudden, sharp increase in interest rates at any time. Greenspan keeps daily watch on the interest rate on 10-year Treasury notes and 30-year Treasury bonds and calls them the "critical Achilles' heel" of the economy.

Thus the stage is set for a Greek-style debt tragedy in America.

And you can bet the farm that, when it comes, a 'sudden, sharp' increase will occur in hours, not days or weeks. It means there won't be any time to move out of your variable interest rate mortgage and into a fixed term mortgage at a rate anywhere near what it is now.

Now I ask you to consider... if Ben Bernanke is adament that the debt situation and high interest rates are "not something that is 10 years away" and Alan Greenspan fears a "sudden, sharp increase in interest rates at any time", then I would humbly suggest that higher interest rates are not the vague, distant possiblity that so many Vancouverites keep telling themselves it is.

To ignore the threat of looming high interest rates and dismiss them as simple fear-mongering is foolish rationalization that can completely destroy you financially.

The warnings are being issued almost on a daily basis now.

When the time comes, you can rest assured the central bankers and your local banker will adopt the same mindset that lies behind this telling quote from Ben Bernanke uttered on October 15th 2007...

"It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."

There will be no bailout for the common borrower.


Email: village_whisperer@live.ca
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  1. Excellent post! This was very informative and extremely well written as usual. Thank you for sharing your insight and for providing a dose of reality. Love it.

  2. I also agree.......very well written. Clean, clear and concise. Simple and to the point, a great read.