Posted on 02/09/2008 5:31:32 PM PST by palmer
what would happen to us if we let the credit slip rather than bailing out thru the Fed?
I knew that the stock market boom did help a lot of people....but now we know WHY the market boomed....and now we know why its going in the toliet...
I’ve known how bad the economy is for the working “slob” for the past 15+ years. Real wage increases began declining shortly after NAFTA....that’s been true whether I’ve lived in CO or NY...
As water finds it's level, so will the value of goods and services. It's not good news - might be some lean years ahead.
Just my thoughts, but I believe the purpose of the rate cuts are to stimulate mortage refinancing in order to save as many homeowners from foreclosure as possible. Direct bailouts are impossible, and the "Hope Now" type re-setting of mortgages are too little, too slow. Not everyone can refinance, but if several hundred thousand can, or the interest rate can induce others to buy their houses, it will have a beneficial effect.
Maybe I don’t understand what a liquidity crisis is...
If rate cuts are need to stimulate business growth and investment, then the cost of money is too high. Businesses want capital but are not willing to borrow at the current rate, so the rate is dropped to equate to what businesses are willing to pay at the time.
Pure demand. The demand is not there until the cost of money becomes sufficiently low.
My understanding of the credit crisis is pure supply. Businesses and consumers want capital, but lenders can’t or won’t provide the money that businesses are willing to pay for, or the supply of money just isn’t as large as the amount demanded. Reducing rates gives lenders no incentive whatsoever to lend if they are afraid to or have raised their lending standards to loan to only the most credit-worthy. The demand from businesses and consumers goes higher in response to the lower rate of money resulting from the Fed rate cut, but the lenders still refuse, for one reason or another, to loan all of the money to meet the demand for it.
All of this is my way of saying, most of the people who most badly need to refinance their subprime loans and option ARMs have bad credit and low rates aren’t going to force the lenders to give them MORE money at LOWER rates, just to see them default in the long run anyway. Borrowers with good credit, yes, definitely. But most with good credit didn’t need to get ARMs. They mostly got conventional 30-year fixed loans or refinanced to them at reasonably low rates. At there worst, I don’t recall mortgage rates over 6.5% in the past 7 years.
If I am wrong about that, then somebody needs to explain to me in plain English what a liquidity crisis is, and weather Fed rate cuts make it so every Tom, Dick and Harry can refinance their Option ARM to a lower rate, even if they are upside-down on their loan. My understanding is banks are being far more selective today, and most of the people who really, really need to refinance are not getting approved.
I don’t remember which thread, but posted a link to one of these many business threads to the effect that 60-70% of applicants were being denied. Applications are WAY up — good news. But approval rate is WAY DOWN — bad news.
I think the banks would take a big hit which would result in too much credit contraction that legitimate credit suffers. Remember in a credit bubble, the bad money swamps the good. Some of the permabulls here would argue that all credit is good since loans are made by capitalists on the principle that they make money. But that is manifestly untrue as can be seen by the real estate bubble investment, the leverage buyouts last spring ( Debt risks grow in private equity boom) and the resultant lowering of credit spreads to 0.04% for fake AAA "investments" as mentioned in the article.
Once the bad money has swamped the good money, it's impossible to contract the excess credit without inflicting economic pain.
No you are right and in the business world there are lots of "upside down" nonsensical deals that aren't getting credit either. But as BB lowers rates, guess which gets funded first? The reflation of a deflating credit bubble is almost always worse than the initial inflation. But, it will eventually make the market go back up, particularly in bubble markets like China, and that's what everyone wants. You would be surprised how many ordinary looking mutual funds have holdings in Chinese bubble stocks.
A week ago, Moody's warned AMBAC and MBIA that they had one month to get backing, or be downgraded from AAA.
The downgrade will cause dominos to fall very quickly probably within a few days. Stock markets, pension funds, money market funds, banks.
There is a death watch over the big banks which are insolvent like BAC and Citigroup.
FDIC has been gearing up to handle tens of millions of depositors' claims.
Without a doubt, a simplified assessment of exactly WTF has happened.
Without manufacturing jobs that pay a decent wage and decent medical coverage from the private sector for the US worker, not much is going to be in demand from all the temp services supplied workers. Those folks are barely getting enough pay to eat, much less buy a home, LCD TV's, washing machines, cars, and a yearly 1 week vacation, etc.
Since the dot-com bust (which I knew was a sham to begin with), not much in real economic growth has occurred except in the banking, medical, food and energy sectors.
No way the illegals are going to be deported, their add to the economy is too import and the government will go against it own laws regardless.
Hold on to your dollars folks, hyperinflation is well on its way.
Almost every bit of life in the credit markets has been sucked up. The money has been spent on credit card purchases and materials and labor to produce an inventory of of close to 4 million homes setting empty with half of those being new.
I read recently that if not one more new home was built, it would take 2.5 years to actually move the empty properties and that would be in a slow growing economy.
It almost sounds like I would be better off in equities than my TIAA-CREF “guaranteed” or money market funds. As much as I have studied this train wreck, I don’t have a clue what to speculate in. Cash?
Exactly. Also, the FDIC cannot and will not handle all the claims. Nor are they obligated to do so. Only those claims beyond a certain dollar amount and then below that, by percentages. Also, I've read another in depth article concerning the FDIC, which Halgr provided me with (perhaps he recalls what that particular article is....I've read so many of these within the past two weeks, my head's spinning). Because not every depositor's monies are protected, even in FDIC institutions, there's going to be a lot of people who are losing their money if they kept it in the banks. To head that scenario off....the FED *could* bail out the FDIC....but this government is already in TRILLION DOLLAR DEBT....
Even if this government wouldn't and doesn't take on additional debt than it already has, debt continues to accumulate, daily, just on the interest (and principal) debt that currently exists. So, daily, this government's debt will grow....if it takes on a bailout scheme for depositors' monies, one scratches their head wondering how an already bankrupt federal government can do that. And if it does do that, there is no way that the stock market won't plummet....what sane person or country would invest in a government that is in debt way beyond bankruptcy levels?
“Go make something happen and stop whining.”
Amen to that.
Gold closed on Friday @: $923.20/oz.
Silver closed on Friday @: $17.18/oz.
Mama Like! :)
And yes, I have a mortgage on my farm, but an entirely affordable one that will be paid ahead of schedule. I’ve owned four homes now (my first at 25), always flipping them into something better after a few years. I have ONE CC that I’m paying down this year, and that credit was used to start yet another home-based business.
This “the sky is falling” stuff spurs me on to keep my own financial house in order so I’ll have the assets and won’t be left holding the bag should things really go into the dumper...which won’t hurt me either. All of this Gloom and Doom has helped my investments; I will admit to that. The more the Socialists and the MSM can convince my neighbors that they’re screwed (through NO fault of their own, of course!) the more I can amass. :)
I’ve lived/invested this way since the 1970’s when I started my first Mutual Fund at age 16, and played the Commodities Market on paper with my Dad. Once I had the hang of it, we used my allowance money to by gold, silver, cocoa and pork bellies, LOL!
Wish more women had a Dad like mine. He’s taught me to be self-sufficient, to invest wisely, to live BELOW my means, to not listen to the Talking Heads in the media and to read Thomas Sowell on Economics.
And he’s a total blue-collar kind of guy. No college, though he has many Trade certifications (electrician, plumber, machinist, steam fitter, etc.) under his belt. I’d trust his advice above some of the others out there.
If two ‘Midwestern Hicks’ can reap the amazing rewards out there for the pickin’ in America, anyone can, LOL!
Except for medical that is mostly the result of excessive credit. With credit deflation, those sectors will be toast. Like you said, honest work and a lot less imports are in our future. I don't believe we are headed into the Great Depression again, but rather the WWII period. It was then we had our first serious inflation ever, it was an unknown before. Inflation stopped with wartime price controls and rationing. After the war inflation zoomed again, but we were able to grow quickly because we were the only manufacturer left standing.
Today's situation is a little different, there really is a cyber economy to take up some slack. The dot com boom was excessive of course, but there is still life left in that horse. After the recent cable cuttings, are we going to be the last cyber economy left standing?
Now all you need to do is move someplace warm:
http://weather.unisys.com/surface/sfc_con_temp.html
I’m with you nicmarlo, I’ve read so many threads on so many forums of late that I don’t remember the one you mentioned.
Also, btw, according to reliable sources, FDIC-insured institutions have about $8.19 trillion of deposits overall.
This credit / liquidity / collateralization crisis (depending on who you talk to...) has one good side effect; maybe two.
1) A drastic curtailment in LBOs which only enrich corporate raiders.
2) A possible retreat from the mad rush to offshore everything : if Americans can no longer buy on credit, they will need *real jobs* again to support the world economy.
Cheers!
I’ll try to find it....it may take some time though.
Guess I’m going to have to start indexing my articles....for better later recall/access. There’s too many any longer to just remember where I read it.
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