Lots of folks on the right (Paul Ryan is the newest member of the scrum) have gotten on the case of the Fed as it tries to game the yield curve with a third bout of buying long-term debt; mortgages are the target in this tranche of "quantitative easing." Normally, the Fed buys short term-stuff, mostly Treasury bills, when it wants to add liquidity to the system, but with short-term rates near zero, they've shifted gears to buying long-term debt, trying to drop long-term rates in order to stimulate capital spending.
The lower rates would lower the cost of borrowing for both homeowners and businesses, which (in theory) should prompt them to buy more houses or do projects that didn't make financial sense with higher costs of capital.
The problem seems to be that the cost of capital might not be much of an issue if
(1) you're too lame of a credit risk to be lent to
Cheap mortgages are nice, if you can get them. Banks have been skittish about lending money in a rough economy, especially with a risk-adverse regulatory system giving banks the white-glove treatment. Low interest rates mean a small margin of error for banks, which contributes to their gun-shyness.
or , (2) those projects you want us to do are iffy given the economy and the lay of the land in Washington.
Businesses have been playing things close to the vest, partly due to the lack of available capital and partly due to the added regulation and possible tax increases that a second Obama term would bring. Even a Romney win might not help much, as budget cuts might slow the economy down and what would be left of the Affordable Care Act might still be not all that affordable for businesses.
Glad to see that the Fed is doing more; still need fiscal policy.
Posted by: NKR | September 17, 2012 at 12:43 PM