Two reasons, which I touched upon in my previous answer:

1. Massive refinancing needs by global government needs, corporations, municipalities, individuals. (Not all of these groups will gain access to credit).

2. Inflation and equally as important the fear of inflation. Remember, the greatest component of inflation is the mere expectation of inflation. In my opinion, we are developing those expectations currently.

In regard to your second question: whether the government would like to slow the housing market down . . .

I would ask, who is “they”? If they is Uncle Sam, then the answer is categorically “NO!!” In fact, Uncle Sam has done, is doing, and will continue to do anything they can to support housing. What are they doing? The Federal Reserve’s massive purchases of mortgages via the mortgage-backed securities market, the mortgage modification programs, and forestalling foreclosures.

If “they” are private investors, then you are headed in the right direction with your intuition. Private investors view the massive flows of liquidity into our economy (please read my post from the other day, “What’s Driving the Market”) along with the equally massive borrowing needs by Uncle Sam and are shying away from buying bonds. Why?

1. inflation….too much money chasing too few goods….

2. Uncle Sam’s demand for credit (borrowing) will be approximately 4 times greater in 2009 than prior years. Some of that borrowing is to support programs initiated by Bush and plenty of it is to fund the massive budget and government initiatives proposed by Obama.

So I do not think the government wants to temper the economy or merely housing. The group tempering the situation is collectively known as “bond vigilantes,” that is, bond investors in general.

Standard operating procedures of a market trying to pretend it is adhering to rules of “free market capitalism.”

Hope this makes “sense.” Please visit and comment often!!

rates have backed up a staggering 1-1.25% in the process. Why? Inflationary fears

The next question is where do you think this is headed?
Will rates continue to climb? This sudden hike in rates has stalled the Real Estate purchasing and refi market even though rates are still not that bad yet. I mean the low 5% rate and under was really stimulating the economy but that’s all come to a premature and abrupt end and during peak selling and refi season.
What’s on your radar with this?
I noticed that a gallon of gas has risen more than a dollar since Jan 20th, 2009.
Food prices are as bad or worse than they were this past Fall. Has inflation begun? If so, people will stop spending again, so where does that leave the market?
I have a hunch this may have been manipulated due to the enormous amounts of Mortgage loans being processed, so much so, that they are backed up for 1 month turn time and taking up to 60 days or more to complete the loan.
They want to slow the housing market down for now to get a breather and like you said to assess the situation? FHA loans written in the past few months are off the charts. Is this absurd or could there be a sliver of truth to this hunch of mine?

As such inflation can pick up much more easily.

In regard to learning, the issue I see here is the massive violations of moral hazards. We may think we are learning but those lessons may yet to be truly learned.

Time will tell…

Interesting perspective on Squawk Box this morning from one of the guests commenting about inflation. He was not worried because we are simply in undercapacity utilization of production. Hence as soon as there is a demand, production will be available and the resources are not necessarily scarce, keeping prices reasonable.

I wonder if the inflation is driven by liquidity and scarce resources. I.E. you need both.

For certain the Economists are in a new area and the tools are new. However from Krugmans book, the some of the theory has been applied in other countries with mixed results.

Hopefully our kids learn from this.