Bernanke and 87-year-olds with mortgages
James Saft is a Reuters columnist. The opinions expressed are his own.
A financial advisor who counsels 57-year-olds to lock themselves into large loan payments until they are approaching 90 probably ought to be looking for another line of work.
And yet here we have Ben Bernanke, perhaps the most powerful man in the global economy, following exactly that course. The Federal Reserve Chairman is putting his own assets on the line to walk that reflationary walk in a move that tells you a lot about the theory, practice, risk and rewards of the economic remedies he champions.
Bernanke, who turned 58 this week, refinanced his mortgage in September, less than two years after the last time he refinanced, according to a report in the Wall Street Journal, citing sources and public records.
Bernanke owes $672,000 on his house, about 80 percent of its appraised value. The mortgage has a 30-year term, implying that repayments are fixed and that it likely carries an interest rate of about 4 percent.
The most recent refinancing came not long after Bernanke launched Operation Twist, a Fed bond buying program partly intended to drive down mortgage rates and thus hopefully stimulate the economy.
To be clear, I see no conflict of interest in Bernanke refinancing his mortgage, and his actions are entirely consistent with the way you would expect someone who has pursued his monetary policy to behave. He’s within his rights to refinance, and indeed refinancings like his are one of the most important channels through which monetary policy can stimulate the economy.
That said, what we have here is a man who was approaching 58 saddling himself with a debt that will have to be paid down over 30 years, at the end of which time he will be a hopefully sturdy 87-year-old.
That is not the way in which mortgages were originally intended to be used. In the now quaint days of the 1950s and 60s, people actually took out mortgages with the idea that some day they would retire them as opposed to using them as a sort of permanent source of leverage. Typically borrowers would time their mortgages so that it would be retired shortly before they did, thus leaving them better able to cope with reduced retirement income.
In fact, the Chairman is not too far off the age at which you’d expect him to be taking out a reverse mortgage, one which pays out monthly in exchange for a lump sum repayment on death.
POLICY MADE MANIFEST
An important thing to note is that repeated refinancings bring with them more risk to the borrower because every time you refinance your mortgage into a fresh loan you extend the term over which you will repay the loan, getting ever further away from repaying in full. This is especially true with 30-year loans, where the bulk of the payments in early years are simply debt service rather than repayment.
So here we have U.S. monetary policy made manifest: keep borrowing and let the future look after itself. It’s absolutely true that mortgage refinancings at lower rates – and U.S. 30-year rates have dropped to below 4 percent from 6 percent in 2007 – help to stimulate the economy. It’s also true that those debts must eventually be repaid, though if monetary policy is aggressive enough that repayment will be in dollars that are worth less.
It’s also fair to note that Bernanke is not your typical guy pushing 60. While he makes a good salary of about $200,000 as Fed Chairman, his earnings parabola will not follow the usual course. As Alan Greenspan has amply demonstrated, the late-in-life post-government-service income of former Federal Reserve chairmen is a fair bit higher than that of the average 58-year-old. In this way it may just be a clever example of shifting consumption forward, while not taking undue risk.
That may be true for well paid professionals in finance but the risks for the rest of us have obviously risen. The world we live in, in which housing and the means to finance it are used in essentially speculative ways, is one with far more risks and inherent instability. Housing tends to get ever more expensive, and people tend to take ever greater risks to obtain it, taking a personal and global toll.
Bernanke did not create this world, but his policies helped to foster its growth. It’s unclear if or how the U.S. goes back to being a place where your typical 60-year-old is coming close to having paid off her house, but we can be sure that the forces that might make that happen will be opposed by almost everyone making economic policy now.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)