The Fed Takes Action To Avoid A Recession or Depression?
The Federal Reserve today lowered the federal funds rate by .75%, going down to 2.25%. This is a significant rate cut, however, many market participants markets expected a full percentage point drop. The Stock market has responded to the news with a big gain (over 400 points at this writing).
The FED made several dramatic moves in the last few days to assist in avoiding/overcoming a growing, worldwide financial crisis.
First, on SUNDAY, yes SUNDAY, the Fed lowered its lending rate to banks by a quarter percent, going from 3.50% to 3.25%.
Second, also on SUNDAY, the FED setup a new lending facility – described as a cousin to the Fed’s emergency lending “discount window” for banks – is geared to give investment houses a source of short-term cash on a regular basis – if they need it. This new lending facility is for big investment banks to secure short-term loans and will be available to big Wall Street firms on Monday. It will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25% and a range of collateral – including investment-grade mortgage backed securities – will be accepted to back the overnight loans.
Third, on SUNDAY, yes SUNDAY, the investment broker company Bear Stearns, the 80+ year-old multi-billion dollar investment firm, collapsed and was bailed out by the FED with a small portion of the assets being sold in a quickly approved deal to JP Morgan for $2 per share. This deal that represents a stunning collapse for one of the world’s largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns whose stock was trading at $160 last January and was at about $30 on Friday.
I my entire lifetime the FED has never taken such action.
The Good News and The Really, Really Bad News:
Until this financial crisis and associated remedies by the FED filters through the economy, look for more stringent requirements for getting a loan, nationally and locally.
The good news, however, is that rates will probably go lower to attract borrowers/buyers to our market.
The bad news, in my opinon, and this is REALLY, REALLY BAD NEWS, is that the FED is taking these steps to avoid a full-fledged economic collapse much like the Depression of the 1930’s instead of just trying to support the economy in an election year, as some have claimed…..Until now, given that Hawaii has been somewhat spared from much of the sub-prime crisis with relatively few foreclosures (see other entries in this blog), I have not expected the likelihood of a Depression, figuring that we would just be in for a long recession that would lead to a 5 to 7 year period of plateuing home prices and then normal appreciation after that for another few years………Now I am not so sure, and I pray to the Lord above that the FED is successful in its financial market management attempts. May God provide these decison-makers with wisdom as we journey through these perilous times.
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