Last evening CNBC broke into their regular programming to have Steve Liesman announce that The Fed "is not targeting interest rates on the long end."

This, of course, was in response to the action in the market Wednesday, and the widespread expectation that The Fed would intervene immediately - but it did not.

This statement from "people with knowledge of the matter" is rather curious given the March FOMC Statement in which it was said:

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. 

That sure sounds like trying to "buy down" the rate to me!  After all, what else would you be doing with this?

Credit is always available - all anyone ever argues about is the price, and price is comprised of inflation expectations and risk of not being paid back.

As such that paragraph above is an explicit statement of intervention for the explicit purpose of trying to manage the price of credit - that is, demanded interest rates, and claims to the contrary are a flat lie.

If you're wondering if that "little disruption" is material, here's what Mr. Mortgage, interviewed last week on TickerGuy's Blogtalk Radio had to say about it:

Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day.  Jumbo GSE money — $417k - $729,750 — has been blown out completely with some lender’s at 8%. I have seen it all in the mortgage world — well, I thought I had.

....

The consequences of 5.5% rates are enormous. Because of capacity issues and the long time line to actually fund a loan in this market, very few borrowers ever got the 4.25% to 4.75% perceived to be the prevailing rate range for everyone.

....

With respect to banks, mortgage banks, servicers etc, under-hedging a potential sell-off with the Fed supposedly having everybody’s back was a common theme. Banks could lose their entire Q2 mortgage banking earnings and middle market mortgage banker may never recover or immediately have to close shop.

Talk about "moral hazard!"

There were several comments put up about my "All Of It" Ticker challenging some of my assertions on how bad of an impact that "little move" had in the real world.  Here's a screenshot from a PDF sent out by Mr. Mortgage Thursday evening (click for a larger copy):

Argue with that all you want; they're not my numbers.  Where's that 4.5% 30 year fixed mortgage folks? 

Gone, that's where.

Here's reality:

Bernanke has lost control of his supposed "intervention." 

This is because, contrary to popular belief, The Fed does not set interest rates; they at best can intervene for short periods of time but all such interventions are subject to being called by the market.

In fact what is going on is that the bond market is having a minor version of a "hissy fit" over government spending, particularly when tax receipts are crashing (as they are.)  When you start to draw down your credit cards it does not take long before the bank notices and starts raising your interest rate.  That's what's going on here - the "bank" (the market) is raising the interest rate demanded if the government would like to borrow money.

The government's game of "a chicken in every pot" is directly contrary to the desire to have low and stable borrowing rates for mortgages and other purposes.  The Obama Administration is making the precise same set of mistakes that were made in the early 1930s - believing that the government was "omniscient" it spent like a madman and the market forced liquidity to be withdrawn and rates to rise, causing a devastating second-order crash that turned the 1929 market rout into The Depression.

We are headed down the precise same path and intervention cannot prevent it - only an alteration in government policy can change the outcome!

The Fed knows the risks: If they try to meet the "call" of their bluff by the Bond Market, they risk a potentially-ruinous death-spiral of people tendering into The Fed's programs.  That is, increasing the buyback amounts in response to this pressure only leads to the market demanding more, just like a heroin junkie who gets his free "fix".

The Fed has already sabotaged the recovery: By preventing asset prices from correcting they have made the inevitable "work out" out of the bad debt far worse than it would have been back in August of 2007 if they let the people who made the bad bets go bust.  We've seen oil prices double in the last few months despite every possible barrel and ship in which to store it being filled - why?  The reason is simple: The rest of the world believes The Fed is debasing the dollar by effectively exchanging good dollars for trash, thereby "in essence" printing money rather than lending it.  As I have repeatedly pointed out many of these programs, particularly the MBS, AIG and Bear purchases, are unlawful.  The damage already done is severe but it can and will become much worse if The Fed was to "double down"; we could see oil spike up well over $100 and gas rise beyond $4/gallon, instantaneously destroying any prospect for economic recovery.  Bluntly put we cannot recover until the bad debt is flushed out of the system, and attempts to short-circuit this process only cause more damage.

The primary dealers are long Treasuries up to their necks:  This is an unusual situation in that when the securitization pipeline is going they are usually effectively short as a duration hedge.  With no securitization pipeline this normal balancing function is gone.  A crash in Treasury market values is thus highly undesirable for the primary dealers, who are the big banks that Treasury and The Fed rely on to take down Treasury supply.

Now we hear that "6% mortgage rates will sabotage the economy": The demand is in fact for 4% rates.  Folks, do you realize what this means?  That's a 33% decline from where rates were just a year or two ago!  As debt load rises lower and lower rates are required to keep the economy from imploding, but in fact risks rise with higher debt load (that you won't repay) which in turn demands higher, not lower rates.  This cycle cannot end well; at some point you must take the medicine, as rates (obviously) cannot go below zero and forcing rates below the required risk-adjusted return you are simply making the severity of economic contraction to come worse.  This is the true lesson of The Depression and yet nobody seems to have learned it; by interfering with debt liquidation The Fed and Government have effectively forced the nation into a corner where all the remaining options are bad!

The Fed is explicitly repudiating price-fixing: Unfortunately the market was counting on price-fixing.  More importantly, so were the politicians and the Real Estate industry.  A rise in market rates from an honest (no points) 30 year rate from 4.5% to 5.5% reduces the amount of principal you can finance at the same payment by 10.69%.  That is, every home in America's imputed value drops immediately by 10.69% when this change occurs.

How do we know the Real Estate industry was counting on this price-fixing?  Here's an article from RealtyTimes in which it is said:

In this case, the "all available tools" included the equivalent of a massive shot of adrenaline for home real estate: The Fed pledged to essentially flood the mortgage market with so much new capital that loan rates will drop to unprecedented levels - possibly into the mid four percent range for 30 year fixed rate mortgages. Maybe even lower.

If you need an agency jumbo (417K+ to the 729k "new" limit) you're in serious trouble.  With a 30 day lock you'll pay north of 6% pretty much anywhere with no points or games, perhaps significantly more.  That Wells quote is really ugly; they clearly don't want the business as they're "stuffed to the gills" with that sort of paper.

Conforming 30s from Wells carry an APR of 5.719% as of last evening; the advertised "rate" is 5.5%, but this looks like it also comes with one point (current rates from Wells are here).  That's not anything like 4.5 or 4.75% either.

The housing market is not done with its dislocation.  Until people can buy on conventional financing without "Fed-enhanced" rates with a 28% front end ratio and a 36% back end ratio, putting 20% down on a conventional 30 year fixed note, the housing market has not found equilibrium.  This does not mean there won't be false bottoms - there will be, as there is a near-infinite supply of idiots who will throw themselves into the immolating fire of bankruptcy chasing what they believe are "deals", only to have them blow up in their face a year or two down the road.

In short, it appears that Bernanke's bluff got called and he was forced to show his (lack of) cards.

In my opinion we are on the edge of another major problem, this one almost entirely of The Fed's own making, and all the options available to try to deal with it are bad.

Green shoots my tailfeathers.

Disclosure: Short Bernanke up to my neck.