The stock market was overjoyed -- the Fed is making an extra $200B available to banks and financial institutiosn, hoping that liquidity will make them more likely to invest in mortgage backed securities. The idea is that with more investors for the paper, the institutions will be more likely to make mortgages in the first place, and at lower rates.
BUT . . . what about homeowners who are facing foreclosure? It will take months for this new liquidity package to float through the economy. And during those months, the foreclosures will continue to mount! And the headlines will continue to remind other consumers that the economy is in precarious shape. That worry destroys confidence, and consumer spending!
The stock market liked the move, for sure! But stocks don't question why the liquidity is there to buy stocks; stocks just move higher because buyers are willing to be aggressive, pushing prices higher. In fact, for a time stocks should definitely benefit from the liquidity that creates inflation -- because while the value of the dollar declines in inflationary times, stock prices can rise -- thus becoming a hedge against inflation.
But just look at interest rates, gold, and oil!
Mortgage rates on 30 year fixed rate mortgages have risen from 5.5% in January to 6.03% last week -- because the banks weren't lending. Now banks will start lending again. But mortgage rates are set by long term Treasury rates, which are set at auction. And there will be a lot of worry about committing to buying long-term treasuries in the face of potential inflation.
The old mantra of the successful investor has always been: "Don't Fight the Fed!"
Now the Fed is doing everything possible to drive interest rates down and flood the market with liquidity. They'll likely cut short term rates at least 50 basis points, or more, next week.
But the U.S. is deeply in debt -- $9 TRILLION -- which we need to borrow to keep our government afloat. Who in the world will lend us that kind of money, at lower interest rates, in the face of massive Fed intervention to create "liquidity" (inflation)?
The gold market, and oil -- which is priced in dollars -- are telling you the world isn't so happy about the Fed's actions, even though the U.S. Stock market rallied.
And worried homeowners, who find themselves without equity to refinance as home prices drop, might not own those homes long enough to benefit from the inflation that will ultimately push prices of assets higher. That's the Savage Truth!
Terry Savage writes a syndicated personal finance column for the 
My husband, daughter and I are all in the mortgage industry. My husband has been laid off twice and I also have been laid off. We have been struggling trying to keep our health insurance going in all this turmoil. But I am tried of everyone blaming the banks, the brokers and everyone else but themselves. In the past years I have seen numerous people using the equity in the home to support their life style. They kept refinaning for new cars, fancy trips and cash to pay off credit cards. Also how about the realtors, they show people houses that they can't afford. We preapprove them for a certain loan amount and then they keep showing them homes they can't afford, then they tell the people you can do 80/20 with interest only, if your lender won't do it I know one who will. Of course because they get paid on the sale price. Now let's talk about young couples, they go and buy a house with no money down then they go out and buy new cars, then furniture with deffered paymnets, they set themselves up to fail.
They do not want to wait to get the things their parents have they want it now. Our society has gotten away from the important things in life, they only want to accumulate things which are not important. People wake up and take some responsibility for your actions.
SAVAGE SAYS: A very thoughtful, important, and much-needed perspective. Thank you for writing.
I'm sure the FED will bail out AIG just like they bailed out Fannie, Freddie and Bear Stearns. Now, I'm fully aware that the FED is stating they must bail out these companies because their to big and to important to fail. I ran a small mortgage brokerage for 5 years before the market caught up to me last year and the FED isn't helping me out! Yea, I still have a ton of business debt that I racked up in the last months of the businesses life and I'm still paying the debt that the IRS says I owe, yet people and companies like me get absolutely no relief. I'm probably going to loose my credit which has ALWAYS been perfect until now and I'll probably loose my house due to not having a career that I counted on for income for the last 10 years. There are many families out there just like mine, yet the government is deciding to help big corporate rather than we the people. Struggling Americans are bailing out the banks and wall street without even having a say in the matter. While many struggle to get by and try to find a new career just to stay afloat, the banks and government will be taking our money via taxes and homes via foreclosure to bail out the bigger more important companies. It's sickening that the true players in Wall Street and the government are all bailing out the huge companies and countries (Such as China who lended us a lot of the money in the first place) yet they're not going to do anything to help out the actual people who are struggling to survive this mess. Those of us in the trenches are on the verge of loosing everything while the government bails out multi-billion dollar companies and they make us pay for it. As if things arent hard enough for Americans already. What a freaking joke! If the corporations get a bailout while their CEO's walk away with millions, I want my bailout too!
Let banks fail that loaned money on over-valued properties to people who bought mortgages they couldn't afford and didn't intend to pay...
There are other ways for the people to stay in their homes. The banks can convert the folks to renters and when the folks can manage a mortgage, the bank can sell them one, being careful this time to make sure all their Ps and Qs are in their right places.
In the meantime, let me search my conscience regarding whether I am at fault for this mess or the banks, who ought to have known better.
I don't remember any banks calling me asking if I minded if they abandoned their due-diligence, and I don't remember them sharing any of their gigangic profits with me.
No, I'm sure I'm not responsible.
Let them fail and teach them a valuable lesson.
Why should congress be allowed to bail out their friends? This is another S&L swindle only it's wearing a different set of clothes.
The banks now have a much lower Fed funds rate. I've read that banks can now borrow money from the Fed for rates that mortgage holders would think of as almost FREE. That's plenty of money and the banks don't need more, if they pay attention to their business.They can lay off staff, and their officers who caused this can answer phones and type. It isn't as ridiculous as bilking taxpayers so that all the folks who caused the problem can continue to ride waves of prosperity while the rest of us will be paralyzed with government debt. In fact we are already - we don't need more.
Freedom or Greedom. Take your pick.
Slam the door in their faces and they'll be more careful next time because they'll know that it's their profits, job, houses, cars, kids educations and their expensive toys at risk. How many taxpayers already have had to sacrifice those things though they did not contribute to the problem? When did the American philosophy become "Punish the innocent and reward the guilty?"
If banks get bailed out, this crap will happen again and again. We're two for two and counting, just in the two Bush administrations.Same lack of justice in both.
Banks are not sacrosanct. If they can't make good business decisions then they should be out of business, after which their debt is cancelled, they quickly reorganize and return under a different name, and probably soon will be off and running toward the next debacle.
SAVAGE SAYS: Interesting "rant" and I thought it wise to publish in full, without any edits, because your views reflect many others' views. BUT . . .
You fail to make an important distinction. There have been no "bank bailouts" -- only depositor guarantees, which have come into effect.
The shareholders of ALL these failed banks, from IndyMac to Freddie Mac to Bear Stearns have essentially lost their entire investment! They have not been bailed out in any way.
I agree that bank management -- paid in stock and stock options and on "profits" generated to boost stock prices -- got away with a lot. The shareholders lost -- but the managment KEPT THEIR BONUSES. That's the real insanity here!
Thanks for posting to my blog.
I do agree with you on the Fed just bailing out the banks here, but I think the Fed is caught between a rock and a hard place. Not bailing out the banks will result in larger "Bear Sterns" happening (as if that one wasn't alarming enough)
Here's the thing that bothers me the most: the last two economic downturns can be attibuted to just one thing: stupidity. We spent the late 90's pouring huge amounts of capital into dot-com companies that hadn't produced a single concrete item. It was all speculation. The people bailed out the economy for as long as they could, because we kept spending all the way until 9/11, then we circled the wagons. Although the people can't be blamed for the last recession (investors can), this time around the people have to take some responsibility for spending beyond their means to purchase a house and get suckered in by rates that HAVE to go up eventually. If a bank won't even TALK to you about a fixed-interest mortgage (as one person mentioned), the problem is either A) You want too much house or B) You picked the wrong bank. People should know EXACTLY what they make, how much they can put down, and REALLY do their homework to know exactly what they can afford to buy. Don't trust the mortage companies to have your best interest: they want your money.
"SAVAGE SAYS: Well, you have the honor of being the very first "rant" on my blog! Thanks, and do come back!"
LOL Thanks!!! I was in rare form that day. I had just returned from H and R block after having my taxes done. hahaha..I don't EVEN want to talk about it.
It was nice finding your blog. I'll check back often!
AND
Thank you to Christina
Terry,
Dan hit it on the head. Couldn't have said it any better myself - and VERY RARELY am I at a lost for words! :)
Didn't we bail out the savings and loans back in the 80's? We referring to the American Tax Payer?
Didn't we also bail out the "Mexican Stock Market"? We, again referring to the American Taxpayer.
Now we have this bank failure..
Basically I consider this "Financial Terrorism".
Not only will "The Good Faith and Backing of the American People" be required to underwrite the debt via our government but the but 14,000 people and the stock holders of this company basically were wiped out via "Financial Terrorism". You can bet the home owners who have house with this bank better not miss a payment. They will loose their house...but we will still have the bank.
How can I, as a working American trust a system that is stacked against me. I hear.. Save! Save! but how can I put money in a CD at 3-4% and make any kind of return while inflation is higher. AND on top of that I pay taxes on earned interest. Pay Uncle Sam but what in the h*ll has Uncle Sam done for me. What has he done for us??
I pay for this and I pay for that, but yet have no say in where I want my dollars spent.
We take care of every country in the world, but when it comes to an average American, we are looked over and treated as serf's/slaves under some monstrous organization that keeps taking and growing, and squandering our current currency and demands that we pay into the system regardless of its ineffectiveness. [Social Security ring a bell?] Where's that money?? Show me the beef!!
Dark clouds on the horizon for us and we had no say so about it. Welcome to the "United Corporations of America".
Resistance is futile. You will be assimilated.
Sorry for the rant.
SAVAGE SAYS: Well, you have the honor of being the very first "rant" on my blog! Thanks, and do come back!
Terry, nice blog/column, always enjoy hearing your thinking - heard you this AM on WLS. Which is why I'm here now. So a couple comments:
1) US debt is high, but so is the GDP, so a long-term debt of 9 trillion with a yearly GDP of 10+ trillion does not look so large?
2) Although mortgage defaults are large and getting larger, the individual home-owners must bear the ultimate responsibility - even if a house on the block goes empty. People who CHOOSE to live so close to edge are always likely to fall over during rocky times. Obviously the culture of "consume" is a problem, but people get the government (spendthrift government) they deserve by voting for them.
3) Isn't the appropriate federal role to instead heavily regulate the mortgage brokers and set clear standards for mortgage loan transactions?
4) Your point on the intentional - ongoing - devaluation of the dollar (on the radio) is the only practical solution to republican and democrat over-spending in congress. Fortunately, the prudent investor can work quickly to move their assets out of US currencies - or if remaining in the US - can invest in companies positioned to benefit from natural resources or exports. So it seems like globalization and the movement of capital will ultimately fix the governmental spending problem?
Overall I agree, however I must say: perhaps wholesale buyers should be blamed, but not ordinary homeowners. Homebuying is not a familiar process to most of them. They buy the mortgage they're sold.
We had plenty of equity after paying for eight years. We mainly wanted to refi to get rid of our PMI. Our credit score was 750. When we called our lender (Countrywide), we were met with an aggressive sales force that wouldn't even discuss a fixed rate. Our potential business probably went to a higher-risk borrower.
The prequel to our story is we financed with a local mortgage company who promised they would carry our paper. Within months of closing, they had sold our note to Countrywide.
With bigger and bigger fish snapping up mortgages for short-term profits, the whole situation is unstable. What say does the homeowner/consumer have in the matter?
Only now that I have the downpayment money and prices have come down am I looking to purchase a home- where is my bailout. Right now capitalism/the market is doing exactly what needs to be done- it is purging the excesses in the system- unfortunately that means some people will be hurt- but in the long run- the system will correct itself. Frankly, this whole problem started with Greenspan's overreaction to the stock market bubble burst which flooded the system with excess liquidity which poured into real estate- now that money fleeing into commodities- but with demand down due to the recession- commoditiy investors will get their day of reckoning soon.
Historically the Fed always bails out the big banks, why should this time be different?
The big push is so some of these toxic MBS can be unloaded on the Fed since they don't have to add capital if the values keep going south.
Wall Street and the Fed are not friends of the little investor.
SAVAGE SAYS: It's certainly easy to believe that these days. Of course, the "little guys" are not necessarily blameless. They were the ones who took out those 100% mortgages at adjustable rates!
Hello Ms. Savage,
I am right there with you on your commentary. And as for the stock market rise, I find it amusing how people conclude that by its short-lived jump, it has judged the Fed move a good thing for the markets and economy, as if the markets could be so easily and lastingly affected. This is not a wise parent manipulating a naive kid. Maybe the markets aren't so dumb, maybe they are efficient, and maybe, just maybe, we are starting to get their opinion on this fiscally irresponsible behavior.
Regards,
Bob Parks
SAVAGE SAYS: I think the market is reacting (on the upside) to liquidity creation by the Fed. That money has to go somewhere -- and if the banks aren't going to start making mortgages, it may just go into the stock market.
You're right - -the markets are never dumb -- they're always smarter than each of us -- because the market is ALL of us!