Credit Moves from “Easy” to “Hard” Pretty Quick…
By: Matthew Blevins, August 7th, 2007
I was reading a recent article in the Wall Street Journal about credit markets being “too loose” in the recent past and how tight they’ve become in the present. It was interesting to read that the recent credit crunch is the result of events that unfolded as long ago as the 1980s (the dreaded S&L collapse) and continued with the late-1990s reaction to the Asian financial crisis and the more recent (2000 - 2001) tech stock bubble bursting.
When the Fed cut interest rates to the lowest level in a generation to avoid a severe downturn, then-Chairman Alan Greenspan anticipated that making short-term credit so cheap would have unintended consequences. “I don’t know what it is, but we’re doing some damage because this is not the way credit markets should operate,” he and a colleague recall him saying at the time.
This is pretty obvious, really, when we consider that the housing boom was fueled almost entirely by low rates set by the Fed (though in select markets, Baltimore/DC included, massive and sustained job growth also led to supply shortages). Basically, in worrying that the fallout from the severe stock market downturn would adversely affect the economy, rates were lowered to spur growth. It took a while, but ultimately it appears to have worked. Along the way, of course, people bought houses in record numbers, at record prices and with increasingly sophisticated (or complicated) loan instruments. Now that rates are higher and credit is tigher, things are a little ugly.
Robert Eisenbeis, retired research director at the Federal Reserve Bank of Atlanta, says the Fed overreacted to the threat of deflation and kept rates low for too long. As a result, it “overstimulated the housing market, and now we’re dealing with the consequences.”
Fair enough, but the “dismal science” is inexact at best and the only petry dish economists have to work with is the real, live economy that they’re observing.
Tags: credit crunch, fed funds rate, savings and loan, wall street journal
Posted in Economics, Federal Reserve, Federal Funds Rate |
2 Comments »
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August 9th, 2007 at 10:56 am
The bigger question to me as an average consumer and home owner is:
What would be the impact to me if MY mortgage company goes bankrupt? What are the scenarios? Government takes over the mortgages?
BN
August 9th, 2007 at 12:38 pm
BN - without knowing the details of your home financing, I would guess that your “mortgage company” is a brokerage. What’s that mean, exactly? Well, it means that they’re the middle men in your transaction, i.e. - they attain a loan for you and make sure there’s a company/investor on the other side of the transaction that will “hold” the note.
Mortgages are typically held by banks or other financial institutions, and in many instances bundled with many other home mortgages to form investment vehicles known as “mortgage backed securities.” If your mortgage company is indeed a brokerage, they can go bankrupt and it won’t affect you at all. The only thing they actually did for you was to find someone who was willing to lend you money (and, of course, charge a nice fee to do so).