we're turning japanese

In my previous blog post I mentioned about a possible QE3. Highly doubtful. Rates are too low. QE1, QE2 and Operation Twist were meant to bring down long-term interest rates. With the 10 year Treasuries at record lows of 1.439% on Friday, the Fed has the U.S. economy and markets turning Japanese. The 10 year Japanese bond was .82% on Friday (06/01/2012).

The 10 year Treasury began its decline from 5.25% in mid-2007 after the Fed's final rate hike, which pushed the federal funds rate up to 5.25%. Since then, the decline in yield has been dramatic. Once the Fed began to cut rates in September 2007 the yield decline accelerated. On December 16, 2008 the Fed cut the federal funds rate to zero to .25%, and that's where it has been ever since without a major positive effect on the Main Street economy.

Talk about dead money. Instead of a QE3, the Federal Reserve should create a lending facility to funnel mortgage money to community and local banks through the Federal Deposit Insurance Corporation. The FDIC could use this fund to refinance any mortgage where the borrower has been current on all mortgage payments. The new 30 year fixed-rate mortgage offered at a rate equivalent to the 10 year yield plus 100 basis points. This would be 2.50% for a 30 year fixed rate mortgage.

What would this do? Help families facing foreclosure stay in their homes. That's all.

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