The Federal Reserve just fired the last bullet with regards to interest rates. Cutting the Federal Funds Rate to a “range from 0% to 0.25%“
If this fails to sufficiently motivate the markets, what’s next? Here’s a hint:
As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
“Agency Debt” refers to securities issued from government agencies like Fannie Mae, Freddie Mac, Sally Mae, etc.
Long story short, the plan is to buy as much crap as they feel they need to to try and jump start the credit markets and re-inflate the economy. The last sentence refers, I believe, to some reports that the Fed was looking at issuing it’s own debt to compete with Treasury bonds. Many pundits agree that it’s a bad idea, but you never know. The government hasn’t been acting rationally for a while now in this mess.
I have been considering refinancing my home to take advantage of lower interest rates but have held off. With the funds rate approaching zero, I think that we may very well see the 4.5% mortgages for everyone that some people are reporting the Obama administration is working on. My house has lost a lot of the equity I put into it when I bought it a few years back (bad timing on my part, I know), and I’m hardly alone in that. I read rumors about slashed interest rates and adjusted loan balances to reflect lost equity. Will it happen? Possibly, though the cost would be astronomical.
We have loaned a crapload of money to banks, and all they have done with it is pay executive bonuses, buy up other troubled banks, and for the most part, simply stick the funds in the vault and sit on them. Both the Fed and the incoming Obama administration have signalled that they are going to hose everyone down with fiat currency in some form of Keynesian fantasy to jumpstart the economy. We are supporting bad business models, bad decisions, and greed by socializing financial losses for many (but not all) big corporations. We are attempting to climb out from under a huge pile of debt by adding even more debt on top of that.
When will it end? How will we EVER be able to pay this debt off?