Fed Rate Cut Fallout
The Federal Reserve Board decided to cut interest rates again by an aggressive .5% only eight days after an aggressive .75% cut. While a lot of activity took place in the stock market, the Dow ended up only slightly better than it had been before the announcement - a 37 point loss. The key 10 year bond edged down two basis points in yield.
Housing and the credit markets are clearly a concern, but I believe the Fed is doing what it thinks is the best to restore confidence to the economy. Some complain the restored confidence comes at the cost of the value of the dollar. They’re right to a certain extent, but a lower dollar presents opportunities in itself like higher foreign investment, lower trade deficits and increased exports for the United States. At the end of the day, what we need is confidence.
There are people in this country who are willing to blight their neighborhoods and get a foreclosure on their credit report, not because they don’t have the money, but because they don’t have the confidence to pay. There are people sitting on the sidelines who could qualify for a mortgage and afford the payments waiting for the housing market to bottom. Fear is an economic reality.
What the Fed has done since it boldly cut rates .5% in September is attempt to restore confidence to the markets. The potential for the downside of this credit crisis to be disastrous is unbelievably enormous. It is government’s job to prevent disaster.
I remember during the recession of ‘01, it didn’t really show itself in Utah until the following year, the State had a huge “rainy day fund” comprised of excess revenue it had taxed us during the boom. As things kept getting worse and worse, I kept wondering to myself, at what point will the Governor realize it’s raining. To my knowledge, that fund was never utilized.
This time government appears willing to step in and stave off a crisis. Lowering short term rates to this level should prevent foreclosures and facilitate business spending. Further, the broader reaching portions of the proposed stimulus package should further reinstate confidence. For a while the situation looked bleak. I’m beginning to feel hope again.
It will take time, probably the rest of this year, but I think hope and faith is being restored. Along with hope, true reform needs to take place as well. A federally mandated licensing system needs to be enacted by every state to restore faith at the retail end. Lenders must review loan packages more carefully for fraud. Lenders should package mortgage backed securities with the same care as if they were holding on to them. The different components of the real estate transaction should protect the consumer, not defraud them. The affiliated business model in real estate, regardless of disclosure, is unfair and dangerous for the consumer.
If we can learn from this failure, the entire country, economy and real estate industry will be better off.