The High Cost of Cheap money

[BornagainDUer]

This is a very well written article on the *&^ set to come down in 08'.


....The story doesn't end here. Thus far, most mortgage defaults have been caused by sub-prime loans--the small part of the market comprised of people with poor credit histories. The bulk of folks who took out risky ARMs in 2005 and 2006 have yet to see their loan rates increase, a problem set to hit the market sometime in 2008. Nobody really knows how big this issue will be, though estimates range from $325 billion to $550 billion worth of loans that may default in the next year or two.

Of course all of this could have been averted if there was a regulating body keeping an eye on the mortgage industry, or making sure the credit rating agencies were doing their job properly. But the current fashion among US economists is to push for deregulation. Let the markets decide. Beware of government intervention, which stifles capitalism and profit. When the chaff is shaken out of the system, we'll all be better off, etc. Unfortunately, the chaff is comprised of people losing their homes, declaring bankruptcy, and becoming saddled with exorbitant debt. It's made up of people losing their jobs because of a housing slump and economic meltdown. It's made up of elderly people who've watched the value of their pensions and investments implode. To Wall Street, we're all chaff, and we ought to be pretty damn angry.

So what are the Bush administration and the Federal Reserve doing? When the crisis hit a couple of weeks ago, the Federal Reserve immediately poured billions of dollars into the banking system as more cheap money in a largely unsuccessful effort to keep credit flowing. Next the Fed cut the discount rate--the interest rate it charges on loans it gives to banks--by half a percentage point. Then the Fed opened its discount window to provide billions more to banks struggling to avoid declaring bankruptcy. Few banks and finance companies want to admit they have a problem by withdrawing money from the discount window. The negative publicity would drive down their stock prices, causing more financial woes. Last week four major banks, including Bank of America and Citigroup--none of whom are in any immediate financial trouble, by the way--lined up to withdraw a total of $2 billion from the Feds' discount window in a show of "good faith", as if to say, "See, there's no shame in dipping into the public trough when times are tough. Bailouts are a good thing."....



http://www.eatthestate.org/11-25/CheapMoneyHas.htm

[Quantess]

1. K & R!

[Quantess]

2. The mortgage crisis is a good argument for regulation.

Republicans don't want that. They say the market will decide. Well clearly, though, the lending industries got themselves in big trouble when the market decided. But the Feds bailed them out, so there were no real consequences for the irresponsible lending policies.

[BornagainDUer]

3. Excellent point. Thanks for weighing in.

[BornagainDUer]

4. One kick

[The Straight Story]

5. In depth information here from the BIS (press seems oblivious though)

http://www.bis.org/publ/qtrpdf/r_qt0709.htm

Just reading the short overview from the above link is enlightening.

Text by chapter:

International banking and financial market developments
1. Overview: credit retrenchment triggers liquidity squeeze
Full text (PDF, 16 pages, 218 kb)