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Foreclosed Homes in Asset Choices Was Missed Opportunity

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By : Karim El Sheikh    99 or more times read
Anyone that has turned on the internet, television or radio in the last few days has heard the well advertised announcement that the Federal Reserve Bank will begin purchasing 600 billion dollars worth of long term bonds. Beginning in November 2010 and continuing through May of 2011, the Fed believes these monthly purchases will bring down long term interest rates. The drop in rates is meant to encourage investments in factories and real estate. It is known as quantitative easing, and this latest attempt is the second time the Fed has done this since the recession began.

Many people believe that this is dangerous ground for the Federal Reserve to be treading on. The market has many signals, and now, with the central bank controlling both ends of one of the major indicators of the financial market, future problems may not be able to be seen before a disaster hits.

The Yield Curve And Why It Really Does Matter

The difference between the overnight rate, currently set between 0 and .25%, and the long term rate, which is based on the market value, is the yield curve. This curve, when left alone will show an accurate picture of how the market is doing. While it is just one indicator, it is often a very good indicator if troubles are brewing.

The Fed has been known to largely ignore any indicators in the yield curve which is a shame. At the beginning of the recession the yield curve was showing an inverted pattern which should have sent off warning bells at the Fed. However, it was largely ignored.

There are dangers involved when you tamper with a market indicator such as the yield curve. Much like the way that printing more money does not increase the demand for goods, tampering with the interest rates does not create a stable environment for investments.

Quantitative Easing Is A Repeat Of Past Failures

In 1961 the Federal Reserve and the Treasury Department decided that it would manipulate the yield curve by making purchases of bonds and assorted notes to lower long term interest rates. Known as Operation Twist, the plan was to encourage investments. It was considered an absolute failure. The plan resurfaces at least once a decade, but has not been used again until now.

Wild Idea For The Fed May Actually Help The Economy On Many Levels

The first round of purchases made by the Fed did , in fact, drop interest rates and make mortgage prices more attractive. However, despite these efforts sales of new homes did not increase at all. The sad fact is that the low rate of home buying did not even fluctuate.

The current housing market is flooded with new properties sitting empty and the influx of so many new foreclosed homes are driving down the housing prices. The drop in prices in turn causes more foreclosures due to underwater mortgages and the cycle continues. So, in an effort to boost the market, stop the flood of foreclosed properties and get the economy going again, the Fed should consider investing into foreclosed properties.


While it is not a common practice for the Federal Reserve Bank to do something like this it should be considered. If the 600 billion were invested into these foreclosed homes the available homes on the market would decrease. A decrease in available properties will encourage new home purchases. With a shortage of properties the prices of homes would begin to rise again. As prices rose equity would return. It is a great way to address the problem. On the other hand the Fed would also be able to meet the second demand that Congress has placed on them to help create jobs. These foreclosed homes would need to be repaired and cleaned. Yards would need to be maintained. Agents would need to resell the property. Managers would need to be hired to maintain them. And in the end, as property values began to rise again, the Fed could resell these properties for a profit. And isnít that what every investment is suppose to provide?
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