The US 30 year fixed rate mortgage is now at its lowest level in almost four decades. According to the Federal Reserve's database of interest rates, it is now hovering around 4.78 percent. In the past, this would have been sufficient to generate massive increases in house prices. However, US banks haven't yet recovered from the last housing bubble. Although we haven't yet heard from the Fed's big stress test exercise, most US banks are undercapitalized, and this hyper low mortgage rate has yet to feed through into the housing market.
With this crisis, you get the feeling that no one thinks too far ahead. What happens when freshly recapitalised banks meet an ultra-low mortgage rate? Could the answer be a sudden return to hyper-inflated housing prices?
Right now, the idea of a reinvigorated housing bubble seems a stretch. But a lack of foresight has always been the Federal Reserve's fatal weakness. It rarely thinks through the consequences of any policy action beyond the time horizon of more than six months. This is why the solutions is that it offers to today's problems always seem to create even greater difficulties in the future.
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