Interest rates are doing the opposite of what the Fed wants

A Foreclosure sign is seen in front of a home in Miami Beach, Fla.

TEXT OF INTERVIEW

JEREMY HOBSON: Now let's get to the Fed's plan to boost the economy. As we've reported the Fed is pumping another $600 billion into the economy to spur more lending by bringing down long term interest rates. Well guess what? Long-term rates are going up.

Let's bring in our regular Tuesday market analyst Juli Niemann of Smith Moore and Company. She joins us from St. Louis. Good morning.

JULI NIEMANN: Good morning.

HOBSON: First of all, why are long term interest rates rising and what does that mean for us?

NIEMANN: The Fed is only focusing on inflation here, and core prices are actually going down. The problem is inflation is going up on the rest of the world, not Europe, but in Brazil, Russia, India and China. You've got inflation five percent and higher out there. Industries booming, interest rates rising and investors are buying bonds there to get some higher yield. So interest rates rising there, you've got the fallout effect.

HOBSON: So, inflation means that investors are less interested in the government bonds here. Now, one of the reasons the Fed wanted to bring down long term rates was to get mortgage rates down and spur the housing market. And today we got a report from the Congressional Oversight Panel and it says that all those the mortgage documentation issues we've been hearing about could could cause a real problem for the financial system. I spoke with the chair of the committee, Senator Ted Kaufman, earlier this morning. Here's what he said the government should do:

TED KAUFMAN:We think they should go to stress tests, and really test the banks. They've not done that since 2009, because look we could have systemic problems there.

So another tests for the banks. Juli Niemann, what do you make of that?

NIEMANN: Well, you heard it here first. The stress tests were bogus to begin with. They had to look rigorous. Bank accounting income is fictional, they have real loan losses, they don't have to call it a loss until they actually sell the repossessed house. And some of these guys own entire subdivisions. The bad loans aren't being recognized, but at least we assumed they knew how to do the paperwork and obviously they didn't. But secondly the stress test economic assumptions were just wrong. Unemployment they said would not get any worse at nine percent -- it's really at 19 percent -- and they said real estate prices were stabilized. It's still going down. So you're looking at the government throwing a lot of money at the problem. They didn't tackle the real problem. That's bank reform. Oh by the way, Europe has the same problem, only worse.

HOBSON: Juli Niemann -- analyst at Smith Moore and Company, thanks.

NIEMANN: You bet.

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