But you did earn that increase in value. A home you couldn't afford in 2006 because it cost $300,000 is now affordable at $175,000. The purchasing power of your dollars did go up (actually it didn't "go up" - it is reaching it's fair value - earlier your purchasing power was less). What the Fed did wrong was it didn't stop your purchasing power from decreasing back in the 2002-2006 era because it thought home-based credit supply would support the decrease in your income-based purchasing power (they never knew how interconnected banks with high leverage would soon destroy that fantasy - although they should have known.)
What the Fed tried to do after the crisis was to avoid deflation (which is as bad and as self-fulfilling a prophecy as inflation). Say I am a highly creditworthy homebuyer. If I had $175,000 (continuing with the example above) in my bank account, I would buy that house right out of the market. But most people don't make a downpayment of 100% (liquidity is precious to everyone).
I would take out a 30-yr mortgage at, say, 5%. Say, home prices are falling every year by 2%. So, if I make a purchase now - I end up paying 7% - 5% interest and a 2% loss in my home's value - that's the concept of a a real interest rate = (nominal rate - inflation), deflation being negative inflation). Now I am not protected by this capital destruction from my bank (they aren't paying me 7% on my equivalent-term deposits - they would be paying me something like 5% - similar to what I am paying for the mortgage).
So I would delay my home-purchase. That causes a further fall in home prices and so on - a deflation death spiral (something which happened in the 30's). As a corollary, in an inflationary scenario, people bring their purchasing decision forward ("it's cheap now, it'll be expensive later") which causes a rise in asset prices - which is again bad if not controlled (we know what happened, right?).
What would break this loop, though? Well, if the mortgage rate went down to 3%. That's exactly what the Fed did in QE1 (and in part, in QE2 and Operation Twist) - it stepped in to buy long-tenor MBSes directly, inflating their price and lowering their yield - causing mortgage rates to fall. Now you'd say, wouldn't depo-rates fall as well to 3%. Yes, they would - but they are more "sticky" than mortgage rates. That delay in money-market/depo-rate cut allows asset prices to recover - opening up non-money market avanues for investment - bonds/stocks etc. Also, the economy's "natural" growth-rate gets a chance to show its effect (which in the US's case was led by the tech and manufacturing sector).
There's another reason mortgage rates couldn't go down - the whole US MBS system is screwed up with stupid servicing, refinancing and foreclosure mechanisms - making it difficult to assess true recovery in case of default. While the government and the legislature kept on debating about HARP/HAMP/TARP/ARRA what-not, this deflationary spiral had to be stopped - the Fed did so. To get an idea of how a non-Freddie/Fannie system can work, look at the world's second largest MBS market - Denmark - not a single MBS default in 200 years! - http://www.coveredbondinvestor.com/sites/default/files/Danis...
What the Fed tried to do after the crisis was to avoid deflation (which is as bad and as self-fulfilling a prophecy as inflation). Say I am a highly creditworthy homebuyer. If I had $175,000 (continuing with the example above) in my bank account, I would buy that house right out of the market. But most people don't make a downpayment of 100% (liquidity is precious to everyone).
I would take out a 30-yr mortgage at, say, 5%. Say, home prices are falling every year by 2%. So, if I make a purchase now - I end up paying 7% - 5% interest and a 2% loss in my home's value - that's the concept of a a real interest rate = (nominal rate - inflation), deflation being negative inflation). Now I am not protected by this capital destruction from my bank (they aren't paying me 7% on my equivalent-term deposits - they would be paying me something like 5% - similar to what I am paying for the mortgage).
So I would delay my home-purchase. That causes a further fall in home prices and so on - a deflation death spiral (something which happened in the 30's). As a corollary, in an inflationary scenario, people bring their purchasing decision forward ("it's cheap now, it'll be expensive later") which causes a rise in asset prices - which is again bad if not controlled (we know what happened, right?).
What would break this loop, though? Well, if the mortgage rate went down to 3%. That's exactly what the Fed did in QE1 (and in part, in QE2 and Operation Twist) - it stepped in to buy long-tenor MBSes directly, inflating their price and lowering their yield - causing mortgage rates to fall. Now you'd say, wouldn't depo-rates fall as well to 3%. Yes, they would - but they are more "sticky" than mortgage rates. That delay in money-market/depo-rate cut allows asset prices to recover - opening up non-money market avanues for investment - bonds/stocks etc. Also, the economy's "natural" growth-rate gets a chance to show its effect (which in the US's case was led by the tech and manufacturing sector).
There's another reason mortgage rates couldn't go down - the whole US MBS system is screwed up with stupid servicing, refinancing and foreclosure mechanisms - making it difficult to assess true recovery in case of default. While the government and the legislature kept on debating about HARP/HAMP/TARP/ARRA what-not, this deflationary spiral had to be stopped - the Fed did so. To get an idea of how a non-Freddie/Fannie system can work, look at the world's second largest MBS market - Denmark - not a single MBS default in 200 years! - http://www.coveredbondinvestor.com/sites/default/files/Danis...