Refinance Activity Suggests Shift To Centrally-Planned Economy

We live in the era of Big Government and increasing expectations from the government. Food stamp participation has doubled over the past 5 years, and nearly every uptick of consumer activity during this economic depression--whether it be car purchases or home purchases--has been a function of a federal stimulus program. Now it appears American homeowners have been conditioned to make refinance decisions based on the irrational expectation that the Fed will indefinitely keep interest rates historically low and continue to print piles of money to grease the mortgage market. Case in point: the number of refinances have dropped significantly during a 5 week period of nominally rising rates, as if homeowners have been conditioned to believe that Helicopter Ben will absolutely continue to crush rates down to their historic lows.

A rational borrower, of course, would look at the preceding chart and conclude that rates have bottomed; therefore, the time to refinance at near-historic lows is now. But look at the rapid fall of the top line of the chart. Refi applications have dropped like a rock during a period of time in which rates have risen a paltry 1/10 of 1%. This suggests that borrowers expect QE3 and a continuation of ZIRP, which may or may not happen. The take away from this? Like a Pavlovian dog, the American consumer has been conditioned to make major financial decisions not based upon the health of the private sector economy (as he had for more than 2 centuries), but rather based upon the actions of Washington and the nation's central bank. This paradigm shift is characteristic of consumer activity in a centrally-planned economy.

Update: Economic Policy Journal is reporting that Bernanke himself refinanced his mortgage last year. If that's not indicative that rates aren't going anywhere but up, I don't know what is.