FED Bailout helps Banks, not Homeowners!
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!
Comments
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!
Posted by: Robert Parks | March 13, 2008 11:39 AM
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!
Posted by: Don Rush | March 14, 2008 12:18 PM
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.
Posted by: Mike | March 15, 2008 10:07 AM
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?
Posted by: DL Johnson | March 15, 2008 11:23 AM
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?
Posted by: Fred in Libertyville - prudent "Little Investor" | March 16, 2008 09:56 AM
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!
Posted by: Dan | March 18, 2008 11:56 AM
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! :)
Posted by: Christina | March 18, 2008 04:03 PM
"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
Posted by: Dan | March 19, 2008 03:08 PM
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.
Posted by: Patrick Murphy | March 31, 2008 04:05 PM