(snip)"September 20, 2007, 3:45 pm
Not What the Doctor Ordered
Now that the Federal Reserve has cut interest rates by half a percentage point, mortgage interest rates are . . . rising.
Rising? That may not have been what Dr. Ben Bernanke had in mind, but it is what is happening.
The current coupon on Fannie Mae debt — the closest thing to a market rate on mortgages — is now above 6 percent — 6.005 percent to be exact. That is well above the 5.882 percent level of Monday, before the Fed moved. The rate dipped in Tuesday’s euphoria, then rose yesterday and today.
“Alan Greenspan’s conundrum is becoming Ben Bernanke’s calamity,” says Robert Barbera, the chief economist of ITG, recalling that when the Fed raised short-term rates under Mr. Greenspan, long-term rates did not follow.
The dollar is, however, acting as would be expected when short-term rates fall. It is falling with it, and for the first time ever a euro is worth $1.40.
All this is good news for American exporters, and for tourist sites that are getting ever cheaper to Europeans — not to mention Canadians and Australians. But it won’t do much to end the credit crunch. Homebuilding stocks, which leaped Tuesday, are falling back today.
Sometimes markets do not cooperate with Washington. That is what happened when credit markets froze despite the Fed’s reassuring comments in August, and it appears to be happening again."(snip)
again, the same problem persists that the source of the capital behind US mortgage / consumer loans is not US savers and investors ... instead the money Americans are borrowing is being supplied by Europeans / Chinese / Arabs. Thus when the FED cut US dollar interest rates this week, at the same time the FED also depressed the US dollar exchange rate, which in turn made foreign investors even more reluctant to take on added currency risk along with the default risk of US loans by continuing to loan more money to Americans. This meant that, in order for Fannie Mae to continue selling packaged mortgage bonds to these foreign investors, to counteract the falling US dollar exchange rate Fannie Mae had to also raise interest rates paid on those packaged mortgaged bonds. This in turn will raise interest rates being charged for newly written mortgages US banks intend to sell to Fannie Mae immediately after they are written.
The other alternative for Fannie Mae, which really isn't a realistic alternative, is to find lower interest rate packaged mortgage bonds to be unsellable to foreign investors. This would lead to either A. a call to Washington for a few extra hundred million dollars in tax money to allow Fannie Mae to 'hold' these mortgages themselves and still continue to buy new mortgage loans, or B. stop buying more mortgages from US retail mortgage lenders due to exhaustion of Fannie Mae's 'cash' (which would in turn stop US retail mortgage lenders from writing new mortgages since they would have to tie up their own 'cash' to do so).
IMHO at least, the handwriting on the wall is pretty clear ... US gov't / FED policy intended to help keep existing US mortgage borrowers and US retail mortgage lenders out of bankruptcy is going to make it extremely difficult for would-be US mortgage borrowers to become homeowners at all in the future.
also IMHO at least, the US gov't / FED policy is going to reduce the interest / dividend rate paid to US savers and investors at the same time that US bank interest rates charged on borrowed money i.e. mortgages / credit cards / car loans will continue to increase. Additionally, the prices of world market commodities like energy and food and the raw materials in cars / appliances will appear to continue increasing in US dollar terms as well.
Relative to stagnant US paychecks / continued outsourcing and downsizing, and relative to rising US state and local taxes, an increase in the US saver vs borrower interest rate spread is one more contributing factor to a coming major recession. Despite the recent injection of something like 1 trillion dollars worth of central bank funds to 'stabilize' the financial system, it is absolutely clear that the continued availability of credit to US consumers is now totally dependent on the continued willingness of Europeans / Chinese / Arabs to keep plowing money back into US dollar denominated investments rather than investing their money in other parts of the world.
The US Fed's interest rate cut thus did nothing but make interest rates available to US borrowers go up, make US dollar denominated prices of energy / food / consumer goods go up, and make returns for US savers and investors go down. The US Fed's interest rate cut also arguably 'kick-started' a vicious circle of future additional interest rate cuts being expected, which will only further exacerbate these issues !
However, a certain number of US companies do stand to benefit greatly from this interest rate cut and resulting US dollar exchange rate devaluation ... a few that immediately come to mind are Boeing, Caterpillar, Proctor & Gamble, Coca Cola, Disney - as well as all of the major investment banks i.e. Lehman, Citi, JPMorgan ...
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