In a speech today, the president encouraged American homeowners to take advantage of current low rates by refinancing their mortgages, and therefore potentially saving thousands of dollars in interest each year. The speech (full text here) was widely and uncritically covered in the mainstream media, but I haven’t found a single article which actually explains the mechanics of this issue. Allow me, if you’re interested.

Here’s a bit of what he said:

What you’ve seen now is rates are as low as they’ve been
since 1971. …[T]here are 7 to 9 million people across the country
who right now could be taking advantage of lower mortgage rates. That is
money in their pocket. And we estimate that the average family can get
anywhere from $1,600 to $2,000 a year in savings by taking advantage of
these various mortgage programs that have been put in place.

He’s not wrong, either. Interest rates are astoundingly low right now. The average fixed rate mortgage today is between four and five percent, which is a fantastic deal if you’re a borrower. Rates are just about as low as they can possibly be, so if you have a mortgage with a higher interest rate–and many Americans do–then you stand to save a significant amount by refinancing and locking in today’s rock-bottom rate.

That’s where most of the reporting on this issue ends. Whether you’re reading The New York Times, The Washington Post, or The Wall Street Journal, you will only find fluff piece on this story. It’s not surprising, but these crack journalists simply don’t add anything useful beyond the basic facts about his speech’s contents. However, they’ve left critical, relevant facts out of their stories, and I suspect it has more to do with their general ignorance of the topic than with any maliciousness or political bias. It’s important, though.

For instance: Why are interest rates so low right now? Obama doesn’t explain it in his speech, except to say that it was, “brought about in part by some extraordinary actions by the Federal Reserve.” And once again, he’s not wrong. The Federal Reserve has done something truly extraordinary. Lead by chairman Ben Bernanke, ‘The Fed’ has reduced its target funds rate to nearly zero percent. That’s the interest rate that banks borrow from each other at in short term lending situations. The Fed lowers that rate by buying assets (usually bonds) on the open market.

That’s confusing, though. What does it really mean?

It means that the Federal Reserve can drive down interest rates by buying assets with money that it creates out of thin air. The Fed is the organization that is in charge of the U.S. money supply, so when it buys assets it doesn’t pay for them the same way that you or I would. It pays with money that didn’t exist before. It simply writes a check on itself. And when it does this it drives interest rates down. The reason this works is because interest rates are a measure of the scarcity of money. When there isn’t a lot of money available for lending, interest rates are high. When there’s a lot of money available for lending, interest rates are low. And by ‘printing’ money, the Fed ensures that there is money to be lent at those low rates.

Which leaves us with Obama’s speech, and his suggestion that American homeowners save billions by taking advantage of the Fed’s recent generosity. Is that what it really is, though? Generosity? The mainstream media is silent on the issue. They simply report what Obama is saying, that the Federal Reserve has lowered interest rates, and that this is a boon for borrowers. The trail of money and numbers says something more interesting, though.

According to Obama, the average family can save upwards of $2000 a year on their loan payments. And if they have 20+ years left on their mortgage, that’s no small sum. Where is this money coming from? Anyone who’s been following the news for the past six months knows that the banks certainly don’t have that kind of money to just give away. No, the banks are not losing out on these refinances, precisely because they’re in a similar situation to the homeowners themselves. If homeowners have easy access to money through banks, the banks have even easier access to money through the Fed, via the open market operations that I described above.

And the Fed, as we’ve seen, simply creates that money out of thin air. So what we are talking about is not really all that complicated at all. In fact it’s not much more complicated than a giant printing press. We’re simply talking about inflation. The Federal Reserve has ‘printed’ huge quantities of new money, and it’s injected that new money into circulation, as it always does, through our banking system.

Every single person who owns U.S. dollars is poorer because of this. Our dollars are worth less now, although we have not all realized it yet. The reason for the delay is that the Fed doesn’t simply dump cash evenly onto the population at large. Their new money begins its life, via open market operations, in the banking system. From there it works its way into the rest of the economy through further lending and borrowing. This is not an instantaneous process.

As result, the chief beneficiaries of this new money are the people who have access to it early on. An increase in the supply of money necessarily results in an increase in general prices, but those price increases don’t occur overnight. Institutions which receive it before this happens get the benefit of buying goods and services at old prices, using new cash. But no new value is created through inflation. Each individual dollar is worth less as a result. And so the value of new money is, in essence, *extracted* from the value of the old money.

So who is paying for these refinanced homes? Who is footing the bill for the billions of dollars in reduced mortgage payments?

**You are.**

President Obama knows this. His appointed friends in the Dept. of Treasury and the Federal Reserve all know this, too. They are subsidizing overpriced homes and overvalued financial institutions by sapping value from everyone else’s dollars. If you have money in your savings account, it’s going down in value. Your balance may stay the same, and you may even rest easy knowing that the government-run FDIC is insuring its safety, but it’s all a farce. Through the secret tax of inflation, they are taking what little wealth we have left. And they’re trying to convince us that we’re all getting a great deal. We’re not. If you save any money, if you work hard for your paycheck, if you didn’t overburden yourself with foolish loans, then you are probably on the losing end of this bargain.