March 31, 2020
To: All SLG Clients and Affiliates:
From: Spencer Scheer
Subject: JUST PRINTING MONEY WILL NOT BE ENOUGH. MNUCHIN TASK FORCE ON LIQUIDITY PROVES THE POINT.

Deflation or Inflation? Mortgage rates have initially begun to slide because of COVID-19 (“C19”) crises [1] However, counter-forces are also at work. Already, the first ripples of uncertainty are playing out. On March 15, 2020, Federal Reserve restarted quantitative easing by purchasing $500 billion dollars in treasuries and $200 billion in mortgage backed securities. In effect the Fed is acting as a backstop to the world, instead of relying on traditional buyers of treasury and mortgage debt i.e. China, lenders, GSE etc. [2] It is questionable whether the “world” will keep lining up for promises of the US government to pay 3% or less for thirty years, or whether there will be a loss of faith and the need for the Fed to increase the rates to attract buyers, leading to inflation, lots of inflation. For those who remember the 80s when the combination of high oil prices and a recessionary environment resulted in stagflation and treasury bill rates nearing 20%, this is not a pretty picture.

On March 27, 2020, Treasury Secretary Mnuchin highlighted another side of the same problem by pointing out the extreme peril that may be brought on by a liquidity shortfall faced by mortgage services because homeowners stop making payments. He worries that lots of mortgage services could collapse if the C-19 crises last for more than two months.

https://www.bloomberg.com/news/articles/2020-03-26/mnuchin-forms-task-force-to-confront-mortgage-firms-liquidity

The C-19 crises is not merely a financial crises. It is a structural crises that threatens the underpinnings of the entire financial system. Not a time for doom, gloom or panic. It is a time for prudent and far ranging planning and coordination to ensure the structural integrity of the financial systems. Printing money will not be enough.

[1] See e.g. https://www.nerdwallet.com/blog/mortgages/current-interest-rates/, showing the 30 year dropping to 3.29% on March 2, 2020, from 3.516% on February 25, 2020.

[2] Federal Reserve Bank of New York. “Statement Regarding Treasury Reserve Management Purchases and Repurchase Operations,” Accessed March 13, 2020.

Please call or email if you have any questions.

Spencer Scheer