The Fed eased by 75 basis points today, much to the chagrin of major Wall Street firms. However, the Fed's decision not to give into the Street tells us two things.
1) The Fed is concerned about inflation (as indicated by the Fed's text and two dissenting presidents.
2) It believes that cuts to the Fed Funds and Discount rates will be only marginally effective in easing the credit crunch.
Most outside observers are puzzled about why low short-term borrowing rates have not resulted in an improved housing market and economy. The answer is that banks need all the capital they can get for themselves. They need more capital to offset billions of dollars of writedowns, fund operations and to build reserves should the crunch deepen. The do not have the excess capital to lend to home buyers.
This is evidenced by the fact that 30-year mortgage rates are higher than before the credit crunch began last August. Banks are only using capital to write high-quality loans which can be securitized. Even then, investors what to be compensated with high yields. This is why we see 30-year fixed rate mortgages above 6.00%
What is going to free the financial sectors from its current death spiral? When Wall Street firms and banks announce that the writedowns are over and can ensure investors and counterparties that worst is over and the danger has passed the crunch will end.
Will a bailout of troubled mortgages be required to facilitate this? Maybe, but the morale hazard it creates is almost too much to bear. Why in the world should we bail out home buyers who bought too much home? Are people really dumb enough not to realize that adjustable-rate mortgages have rates that can rise? If so, these people deserve to lose their homes.
Alas, many will not lose their homes. The bail out is underway. The taxpayer will once again ride to the rescue and bailout poorly managed banks and stupid home buyers. Of course, only "rich" people (those making more than $70,000) will really be affected. Gotta love class warfare.
No comments:
Post a Comment