Fed Interest Rate Cut- Only a Temporary Bandage?
“When an asset like real estate becomes overvalued, even if you drop interest rates to zero, you can’t force consumers to borrow more, because they’ve already borrowed too much. Nor can you force lenders to lend, because they’re already puking on ‘bad paper.’ It’s called a liquidity trap.” -Bob Campbell, San Diego Real Estate Timing
This quote is shown to be hitting a nerve as keep as seen by the article titled, Fed Interest-Rate Cuts Fail to Lower Borrowing Costs:
“The Federal Reserve’s interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank. Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines.”
This is a great post that I read on another blog that I wanted to share with you. This blog is showing that the factors of borrower sentiment combined with banks willingness to lend will the true factors that will pull us out of this housing downfall. The Fed can keep shotting the interest rate bullets to drop the rate but it is only when the borrower sentiment rises and when banks start lending out to a little looser guidelines can the affect of these bullets be truly felt in the housing and credit markets.
Your friend,
Sources:
bigpicture.typepad.com (The Big Picture Macro Prespective on Capital Markets)
Housing mess too big for a quick fix
Bill Fleckenstein
http://tinyurl.com/yqabfs
Fed Interest-Rate Cuts Fail to Lower Borrowing Costs
Scott Lanman
Bloomberg, Feb. 13, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_c9_tQiZOLo&
