Just look at how spectacularly unsuccessful all the bail-outs, and easy lending, have been in the last year.

I don’t know that they’ve been completely unsuccessful. I remember in September and October, people were talking about Mad Max scenarios (and probably still are, just less imminently). Letters of credit weren’t being honored, commercial paper was in dire straits, and the administration was holding the threat of martial law over Congress if they failed to pass the bailout bill. In fact, going back to the bailout bill, you don’t see that kind of terror in Congress now.

I agree that deflation can’t be stopped, but if the choice is spend or anarchy, the government doesn’t have much choice.

as sniglet has been preaching Ben B. is now making moves to stave off deflation.

Unfortunately, there is nothing the policy makers can do. Japan tried to stoke inflation with super-low interest rates and massive government spending but it didn’t do much good. It is unlikely things will be any different in the US. Just look at how spectacularly unsuccessful all the bail-outs, and easy lending, have been in the last year. And more stimulus will finally do the trick?

I have some articles on my blog about why deflation can’t be stopped.

http://www.surkan.com

Lowering rates will stem the bleeding caused by resets. Those people who were suckered into teasers won’t actually “reset” right now since many rates are based on the 10-year Treasury. For example, a friend bought in 2005 at a rate of 5.375%, and her mortgage resets in 2010 at the 10-year Treasury Note (currently 2.53%) + 2.75%. Her rate just dropped temporarily to 5.28%.

This won’t drive the housing markets, but it might keep people from abandoning their homes and mortgages.

Crappy lending standards caused the bubble. The low interest rates added a tiny bit of wind to the sails, but the bubble could not have happened on low interest rates alone.

I’m interested in people’s thoughts on building. Will it be a good time to take out a loan to build your dream house on property you already own free and clear? Or will deflation drive down the cost of materials and labor such that it will be cheaper to build 2 years from now?

As to your 3rd point, I think that is the goal. It may be good to halt the price drop in other places where prices have already adjusted and may overcorrect. There maybe more people should buy but are just scared. It will definitely be bad for the Puget Sound though, where homes are still way overvalued, and this will only slow the correction.

“At present around 12 million homeowners, a quarter of those with mortgages, are underwater with their houses worth less than their mortgages. Among those who bought their homes in the past five years, 29% are underwater. If our forecast of a 37% house price fall is reached, about 25 million, or almost half the 51 million with mortgages, will be underwater. Adding in the 24 million who own their houses free and clear, and one-third of the total will be in trouble. The destruction of the American Dream of homeownership for so many people will force a political response, even though the cost of subsidizing their mortgages down to their house values would be about $1 trillion.

http://www.sensibletalk.com/images/mortgage-resets.jpg

More importantly, low interest rates are a VERY ominous signal. Rates are low precisely because we are headed into deflation and everyone is rushing to put their money into government backed securities.

I have a podcast on why low mortgage rates are something to fear at http://msurkan.podbean.com.

I don’t see how lowering the interest rate to 4.5% is going to entice enough buyers to buy in a market that will likely be declining at double digit rates for the next year or more!

We need to let the market take it’s course, not try to manipulate it and extend out everything that caused this bubble in the first place.