Although the Federal Reserve can seek to provide a more stable economic background that will benefit both investors and non-investors, the truth is that it can hardly insulate investors from risk, even if it wished to do so. Developments over the past few months reinforce this point. Those who made bad investment decisions lost money. In particular, investors in subprime mortgages have sustained significant losses, and many of the mortgage companies that made those loans have failed. Moreover, market participants are learning and adjusting--for example, by insisting on better mortgage underwriting and by performing better due diligence on structured credit products. Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before.
That sound like tough love, doesn't it? Bernanke certainly seems to be sympathetic to the plight of average people and said the Fed will take action "as needed." There may not been a need for the Fed to do anything at its upcoming meeting. September retail sales were pretty strong and data indicates that consumers are weathering the economic uncertainty.
Bernanke doesn't mince words. He said "further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year." But does that mean that more interest rate cuts are coming? I am not sure.
People shouldn't expect Bernanke to deliver them a rose garden of continued interest rate cuts which he clearly has no interest in promising.
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Reader Comments (Page 1 of 1)
10-16-2007 @ 12:19PM
AmericasWatchdog said...
We have the Homeowners Consumer Center & the National Mortgage Complaint Center the the Fed's idea that the real estate train wreck will be over next year, or that real estate is a "significant drag on the economy is perhaps the all time greatest understatement. In reality if homebuilders stopped building new homes today. It would take 15 months to go through existing inventory. With 1.5+ million adjustable rate mortgage re-sets next year coupled with millions of homeowners who actually owe more on their home than its worth...............we are talking more than a "significant drag". We are talking about the perfect economic storm.
Clearly Wall Street does not get it, nor does the Fed. A rate cut will not fix the real estate equity inbalance or the major real estate valuation issues associated with this train wreck. This is the S & L disaster of the 1980's on steroids.
The housing boom was great for politics, for Wall Street, the banks and mortgage lenders. Even the consumers thought it was great. The problem as we see it is its time to pay up. Wall Street, with its six minute outlook, does not get it. Washington, DC does not get it, but they are starting to sound like they do (but its an election year and they need the donations from banks and homebuilders so its not possible for an honest discussion of the crisis).
Whatever you do, don't buy into the Wall Street "mumble" "things will be better next year". The economy & consumers are about to turn off the music & there may not be chairs for Wall Street, the "leaders" in DC or investors who thought everything was going to be ok.