The Fed

[legion]

Does anyone else think the Fed is doing exactly the opposite of what it should be doing?

I think it should be raising rates to keep the dollar strong, not cutting them to make life easier for those with negative-amortizing interest-only ARMS...

[Porsche-O-Phile]

As Jim Cramer would say, "THEY KNOW NOTHING!"

I agree.

Rewarding idiot pseudo-investors for their blatant recklessness and speculation is/was totally the wrong message to send - and it ultimately won't do anything other than delay the inevitable collapse of the RE sector.

[frogger]

What would be the impact to business?

[lendaddy]

The devaluation of our dollar does have many advantages. I'm not saying it should be a goal, but it's not all down side.

[legion]

Originally Posted by lendaddy

The devaluation of our dollar does have many advantages. I'm not saying it should be a goal, but it's not all down side.

I take it you do some export, Len?

It sure makes those German car parts expensive though...

[lendaddy]

NO, no export. Hell, we have a hard enough time selling anything in our own country

[Porsche-O-Phile]

The dollar will have to fall a LOT further in order to (1) stem the tide of imported Chinese crap and (2) stem the tide of illegal migrants coming here to steal American jobs. Those are about the only two real reasons I could see for wanting a weak dollar, especially with oil climbing over $100 a barrel probably by the end of the year. The more the dollar weakens, the more energy costs (since we import virtually all of it), and the more it stifles the economy.

Weakening the dollar to spark domestic manufacturing won't work - unless you weaken it to the point where factory workers are getting $20 a week like in China.

[jyl]

The Fed is not lowering rates to help upside-down subprime ARM borrowers stay in their houses. Those people are toast, fixed mortgage rates could go down 2 points and it wouldn't help them, housing prices could stop falling and stay flat and it wouldn't help them. That is simple math and the Fed knows it.

The Fed is lowering rates in an attempt to prevent the broader credit markets from freezing up, to soften the collapse of the broader housing market, and to stave off a significant recession in the US economy.

If the Fed raised rates, there is no convincing reason to bet it would raise the USD versus the EUR or other currencies. Currency exchange rates are extremely complicated and countries' relative interest rates are only one factor. Recall that the Fed was raising rates steadily during the last few years of Greenspan, yet the USD was declining.

[legion]

Good points John.

What are some of the other factors that influence exchange rates? I think a weak dollar will hurt us more than a strong dollar right now...

[GDSOB]

Originally Posted by jyl

The Fed is not lowering rates to help upside-down subprime ARM borrowers stay in their houses. Those people are toast, fixed mortgage rates could go down 2 points and it wouldn't help them, housing prices could stop falling and stay flat and it wouldn't help them. That is simple math and the Fed knows it.

The Fed is lowering rates in an attempt to prevent the broader credit markets from freezing up, to soften the collapse of the broader housing market, and to stave off a significant recession in the US economy.

If the Fed raised rates, there is no convincing reason to bet it would raise the USD versus the EUR or other currencies. Currency exchange rates are extremely complicated and countries' relative interest rates are only one factor. Recall that the Fed was raising rates steadily during the last few years of Greenspan, yet the USD was declining.

Well said, I would go further by stating it has nothing to do with housing, and everything with maintaining a liquid credit market. Bernanke is a student of the great depression and 1929 crash, he will do everything in his power to avoid that situation.

Here is a very good explanation of the rate cut:

http://suddendebt.blogspot.com/2007/09/real-reason-for-feds-50-bp-cut.html

[legion]

Originally Posted by GDSOB

I would go further by stating it has nothing to do with housing, and everything with maintaining a liquid credit market.

Is the liquidity crunch not caused by the housing market?

[GDSOB]

Originally Posted by legion

Is the liquidity crunch not caused by the housing market?

I would go further by stating it has nothing to do with helping those who could not afford the house in the first place, and everything with maintaining a liquid credit market.

Fixed.

You are correct. Although the politicians will try to take credit for it, the rate cut was not done to "fix" the housing market. There is no quick fix- it will take years to correct.

[on-ramp]

higher bank interest rates would encourage people to save more money..

so yes, the Fed is doing the opposite of what it should be doing. Again, they are catering to those on Wall St. instead of Main st.

[GDSOB]

So people are going to put money into a failed banking system? You would see a run on banks like your grandparents could tell you about.

[Rick Lee]

Jyl is correct. What the Fed does has no impact on people's ARM's, especially those with option ARM's or negative amortization. No effect whatsoever. Lowering rates now helps out folks with some consumer debt and who want more consumer credit. Doesn't do much for new mortgages and does nothing for currently-serviced mortgages.

[jyl]

legion, I'm not a FX trader so caveat emptor etc.

AFAIK, a currency moves based on demand to buy and sell things denominated in that currency. "Things" are everything that goes into balance of trade (commodities, manufactured goods and services) and securities (bonds and stocks). Currencies are also affected by speculative trading.

The US has a trade deficit, meaning there is less demand to buy things made in the US (denominated in USD) than to buy things made outside the US (almost all denominated in non-USD currencies, except for oil). That tends to drive the USD down.

As for securities, the US stock market has done well in recent years but international stock markets have done better, so more demand for non-US stocks than for US stocks. Buying of US bonds appears to have slowed significantly, both for Treasuries, corporate bonds, and mortgage-related bonds. Foreign central banks appear to be slowly diversifying away from US treasuries. Has been much less interest in CDOs, US commercial paper, and debt to fund private equity buyouts. True, higher US short-term interest rates would tend to make some US investments more attractive, but isn't that much global money in US bank CODs and the like. Overall, also a headwind for the USD.

I don't have info on speculative trading but generally traders have been betting against the USD. Another headwind.

Again, FX is complex and I think very hard to predict short-term. None of the equations one learns about exchange rates in macroeconomics and finance classes seem to actually work well, AFAIK. Being a currency trader must be damn hard. But on a longer-term basis, there have been several headwinds for the USD that explain why it has been going down for years now.

Finally, it is pretty obvious that the US government is not actually trying to support the USD. Govt officials haven't even been repeating the "strong dollar" slogan much lately.

Imagine if Fed were raising rates now. US economy would be breaking down even harder and US stock market would be plunging. Think about impact on global demand to buy US denominated things - seems to me headwinds to USD would be even worse.

I generally think Bernanke is doing what he has to, to try and avert a financial and economic crisis. He should have acted earlier to rein in stupid mortgage lending, as Greenspan should also have done, but his actions right now seem correct to me. I hope he succeeds. People in PPOT like to take morally righteous positions about what "should" happen to borrowers and housing and so on, but I think they'd sing a different tune if it actually happened. They'd be cashing unemployment checks and distress-selling their Porsches.