As housing prices have skyrocketed in California, it is not surprising that it’s also the state with the highest poverty rate when housing is considered. The state median housing price is $800,000. As prices for goods, services, foods and now energy are surging all across the U.S. Housing prices have increased by almost 20% at the end on 2021 from the previous year. It’s imperative that we look at the root of the problem.
Quantitative Easing Impact on Housing
Quantitative Easing is a monetary policy used by central banks to increase the money supply by purchasing treasury bonds and mortgage back securities, which in turn lowers interest rates, making lending easier.
Three unintended consequences of QE are inflation, stagflation (inflation without economic growth) and currency devaluation (which makes imports more expensive).
The “Test”
1.- The 2008-2009 recession in the US resulted in the Federal Reserve Bank purchasing the staggering $120 billion per month in bonds and mortgage-back securities. Hoping that it would “save the economy,” by essentially bringing interest rates down to zero.
The result was that instead of promoting corporations to create jobs, they started buying back their own company stocks. Causing the stock market to go up and increasing the Financial Sector Gross Domestic product (GDP) sharply.
Unfortunately, while millions of Americans struggled to make their mortgage payments and many of them were loosing their jobs. Wall Street was thriving.
2.- On March of 2020, once again the staggering $120 billion/month injection was implemented to stimulate the economy and lower interest rates as a result of the COVID-19 pandemic and lock downs. Once again, we witnessed a stock market rally to the highest ever and housing prices soar as the result of lower interest rates.
The unlimited amount of money supply in the economy that has mostly benefited the banks and corporations. It’s not surprising that investment corporations such Black Rock have been buying important real estate markets across the U.S. Outbidding the average home buyer and purchasing well above asking price and cash. This has certainly contributed to the housing shortage across the country, as prospective home buyers have not other choice than to either continue to rent (often from BlackRock) or to move out of cities, which has also contributed to rising prices in areas suburban and rural areas.
The question remains; What is the proper role of the Federal Reserve Bank? when we see that they implement monetary policy such as QE that essentially creates a money transfer from the average American to big Corporations. By printing massive amounts of money, increasing debt, generating housing crisis, inflation and currency devaluation.
Sustained and artificially low interest rates as a result of increased money supply come at a high price. Perhaps we should END THE FED.
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