Posted on 03/18/2008 8:18:23 AM PDT by Lazamataz
It’s not the economy, stupid.
It’s the credit crunch.
The size of the Federal Reserve’s expected interest rate cut this afternoon may help stimulate a sluggish economy. But like the several cuts before, it is unlikely to unfreeze the credit markets, especially the mortgage one.
And as the Fed continues to use its conventional fire-fighting equipment,there’s a growing sense that extraordinary--and somewhat controversial--measures may be needed.
“The Fed by itself will not get us out of it," says John Irons, research director at the Economic Policy Institute. “We need to combine fiscal stimulus with monetary stimulus.”
Among the ideas now emerging are a new fiscal stimulus measures, specifically targeting the mortgage market, and the possibility that a bailout of both business and consumers may be inevitable.
“The bulls eye of this crisis is the mortgage market,” Sen. Charles Schumer, chairman of the Economic Policy Subcommittee, told CNBC Tuesday. “Everyone knows we need to do more to stabilize housing.”
“It doesn't matter how low rates go, if you are a financial institution, if you think the home is worth the less than the mortgage or if you're worried the homeowner is going to pay back the mortgage,” says Dan Mitchell, a senior fellow at the Cato Institute.
Look at Bear Stearns. It may be no coincidence that the biggest casualty on Wall Street thus far was suffocating under a blanket of mortgage-backed securities.
It may also be no coincidence that the Fed last week took the unusual step of creating its so-called Term Securities Lending Facility, allowing it to take up to $200 billion of non-Treasury securities, including federal agency backed mortgage securities and mortgages, as collateral for up to 28 days.
“It’s probably an admission that federal funds will not be enough," David Resler, chief economist at Nomura International, said at the time. Reseler considers the lending facility, the “most significant policy initiative since the credit crisis began last August.”
But it may be as far as the Fed can go. Federal law prevents the central bank from buying mortgages outright. Congress, of course, could change that, or otherwise, empower another arm of the federal government to do that.
“The most effective way is to create some way so the federal government can force a markdown in some of these mortgages and take them on itself -- say through some sort of bank -- such that the government becomes the holder of mortgages," says Irons.
The 1990-1991 recession was short and shallow. On top of the Fed’s action -- which included a stunning one percent cut in the discount rate -- regulators and legislators hatched a strikingly successful rescue plan for the savings and loan industry, which was suffering its own lending meltdown.
A newly created federal corporation in essence took responsibility of billions of dollars of bad loans and devalued real estate assets, which were then auctioned off to private buyers.
This time, the government’s efforts are arguably ill-conceived and misplaced, say economists. The $172 billion stimulus package is likely to provide little of a boost. It contains one-off tax cuts, which typically lead to consumers saving the money, and lacks traditional measures such as an extension of jobless benefits and infrastructure spending. Most importantly, it does not address the slumping mortgage market.
Bernanke himself has suggested some kind of markdown in mortgage principal--a signal, much like his hearty endorsement of a stimulus package--somewhat unusual for a Fed Chairman -- that he thinks the central bank needs help.
Last Friday, hours after moving to provide emergency funding to Bear Stearns, Bernanke was talking up tougher mortgage lending regulations and explaining how the Fed was “addressing the foreclosure crisis in capacities other than that of a regulator” in a speech to the National Community Reinvestment Coalition, which happens to be urging the government to buy mortgages at a discount through an auction.
On Capitol Hill, House Financial Services Committee Chairman Barney Frank is the latest to push the idea of federal intervention and support, through some sort of loan guarantees.
Other proposals include temporary foreclosure relief and the refinancing of subprime loans. Sen. Schumer Tuesday called for an easing of capital requirements for Freddie Mac and Fannie Mae and floated the idea of tax credits for homebuyers, while repeatedly referring to a “crisis of confidence.”
He is has plenty of comapny in saying that. Lending is all about confidence and trust.
“I think it is an issue of the financial system overwhelming the rest of our U.S. economy,” Vanguard founder John Bogle told CNBC.
Bogle, for one, seems to be worried about the Fed's own balance sheet and sees taxpayer money at stake. “They can't do everything,” he said.
Or as Resler puts it, the Fed “may have enough ammunition, but it’s arsenal may not be big enough.”
In a presidential election year, however, it may be more politically desirable -- as well as easier -- for the Fed than for the Congress to throw good money after bad.
And though bailout may be an usually dirty word at the moment, there were few howls Monday decrying the Fed’s intervention in the Bear Stearns case.
Much like the debate over the Fed’s role and the idea of moral hazard, an argument whose intensity has waned as fear of the credit crunch has heightened, hand wringing over an outright government bailout may turn into an open-hands expression of helpless inevitability.
At this point, the moral hazard issue may be solely “theoretical,” as Irons puts it, because we are “stuck” with the credit crunch and a bailout. “This is a once in a generation thing,”
I keep hearing from others asking who is benefiting from all these interest rate cuts...Clearly it's not the American middle class. I can only assume it's the large banks, corporations etc.
Eery idiot that signed one of those mortgages shoule lose their temporary housing and every company/bank that wrote them should go under!
I have been saying for months that the Fed’s actions are not helping the credit crunch. You can lower rates and add liquidity to the banking system all you want, but if the banks won’t lend out the money it will never reach the economy.
I understand the need to make sure banks have ample liquidity for deposit operations, but the idea that recent Fed actions will stimulate the economy is simply wrong right now. Lowering rates only works if the reduced borrowing is because borrowers are unwilling to pay the prevailing rates. Lots of borrowers with strong financials are willing to borrow, but the lending window is just not open.
They throw that out there, but don't say how that is supposed to happen. Obviously the small businesses that can't get loans at 5% will be even less likely to get loans at 4% or 3%. Anybody investing or loaning money for the long term with inflation in the pipe is nuts. More speculation is the only lasting result of the rate cuts. And eventually, as Mises said, complete destruction of the currency.
If the government keeps intervening in new and increasingly aggressive ways every time the market sneezes then yes, we’re all gonna die. No economy can survive this much socialism as a permanent solution.
The only fix for the problem is capitalism, but I don’t see that option being offered at the official channels.
I may refi with a five to seven year balloon, because I figure on moving in two or three years, and my 1100 s.f home is of a price that didn’t get hammered too bad, if I can find one under 5% without the hateful PMI.
I will be much tougher on purchase price next time, and don’t expect to make a killing at resale, nor will I use my house as piggy bank.
Mostly commodities traders (oil, wheat, gold) and to a lesser extent stock holders. It also benefits politicians because they can spend more without raising taxes. Some people will say exporters will benefit, but that is just silly. Would you rather sell 10 747s for 10M Euro, or have to sell 12 747s for 10M Euro? Yay..exports went up..but we only get paid the same.
The only difference is that purchasing 12 looks more attractive to the buyer than 10. So they may be more likely to purchase. In other words, you may not have had the order for 10, but get the order for 12.
Sure, because its a great discount for the buyer. The exporter could accomplish the same thing by cutting prices on their own, but a falling dollar puts additional pressure on input costs (commodities) and workers’ wages.
Mostly commodities traders... stock holders... politicians because they can spend more without raising taxes....exporters
OK. If it's benefiting some...Who are the ones that are being harmed?
I’ve got a 30 year 5.5%, and get about four letters a month trying to get me to go to an ARM.
Well it comes out of everyone who measures their financial value in dollar-based assets. Over the last three months the dollar value has dropped about 9% - gas and food prices keep in step and follow that trend in the exact opposite direction.
The main goal of low interest rates is to keep businesses investing (borrowing) with the hopes that it will create jobs and increase consumer spending.
So, its good for borrowers, bad for savers (unless the savers move into commodities/equities). Of course the problem is, the Fed will save some companies and not others so how do you know who to invest in if the government-entities decide who profits and who liquidates?
Government guaranteed asset appreciation is just insane.
I disagree because the crisis is too large and may overwhelm the US economy. I suggest providing liquidity to the credit system as Feds are doing. HOWEVER, I THINK THE ORIGINATORS AND BUYERS WHO SCAMED THE SYSTEM SHOULD BE INVESTIGATED AND TRIED. UPON GUILT, EXECUTED IN PUBLIC TO WARN FUTURE ORIGINATORS, BROKERS AND APPLICANTS NOT TO PULL THIS SH#T AGAIN. Old ancient saying - merchant class is needed, because they have the knack to produce wealth for the realm, however the merchant class is capable of being wicked and greedy, a ruler must find a way to punish them without destroying their ability to make money. The business men hasn’t changed much since ancient time. My saying - merchant class love life, money and are basicly cowards, so killing one of them to warn 10,000 of them is not hard to do, thus a nation’s ruler must take advantage of this historical fact to restore law and order, and prevent future scams (and definitely increase his chance of being re elected in a landslide).
So it seems those with the least amount of money, or income see their dollars buying less..So it would seem those with least money or income will be harmed most due to these bailouts?
>> OK. If it’s benefiting some...Who are the ones that are being harmed?
Believe it or not, some people actually SAVE money.
They are being squeezed by low interest rates.
The inflation that lower rates are bringing is a double whammy.
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