Tuesday, December 16, 2008
Fed Cuts Interest Rates
Haven't been that heavy with political talk here recently (I'm sure it bores 1/2 the people who even bother to read my hack blog posts) and I've been meaning to address this for a while, so today when the fed cut interest rates to a point between 0 and .25 percent, I figured it to be the perfect opportunity. The cut in the interest rate is going to do nothing for people who are already locked into fixed mortgage rates (i.e. your standard 25-30 year mortgage rate), but it will free up some cash for those with prime mortgage loans. This is really just an attempt to help infuse some cash into the sinking economy, by freeing up funds from people's mortgage payments. The problem, from what I can gather with my limited knowledge on the economy, is that people with prime rates are already broke or they would have taken on a fixed mortgage rate, which at the time most any economist would have advised. Am I right? As for those with the sub-prime rates, I hate to harp on this again, but hello, they should have never been given the loan in the first place. But, because lenders were banking (npi) on the fact that housing values would increase by 10% each year, they knew that they could use a borrowers home as a bargaining chip in case they defaulted on their loan. In other words, if someone doesn't pay back the loan, the lender can simply take their house from them, and use the raised value of the house as a form of interest payment upon re-selling the home. However, when the housing market crashed, people defaulted on their loans (as they tend to do when they have credit ratings so poor that they qualify for sub-prime loans in the first place), the borrowers had no way of re-paying the loans. I admire what the fed is doing doling out all this cash, and I was listening to an interview with Whitney Tilson(a leading economist, warning of a second housing crisis looming), who claims that we are only 1/3 of the way through the recession and the worst is still yet to be seen. I am wondering how we can infuse money into the economy by cutting interest rates, if you aren't in an adjustable interest rate loan and you can re-finance. The only way I see this being a possibility is if you can somehow cut the fixed rates, saving potential US consumers hundreds of dollars per month, which would inevitably be injected into the economy. I literally have no clue what I'm talking about and can only make very general statements about this, but hopefully someone can leave a comment and school me on what is happening and what ideas are being floated around to change things.