Market miscellany

A few notes on the troubles in financial markets:

  • I’m not sure why the Fed can’t handle this. They get member banks together to buy these problem securities in an auction format, then accept the securities at the auction prices as collateral at the discount window. To supercharge it, they could drop the discount rate to the 0 to 1% range for six months or so – a step they probably ought to take immediately anyway. The authority is already there. Remember the AIG deal based on the rule allowing the Fed to “discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are endorsed or otherwise secured to the satisfaction of the Federal Reserve bank.”
  • The Fed is also one of the top banking regulators. For two years it’s been using that muscle to encourage banks to tighten lending standards. Now it could use that muscle to tell member banks to make more loans to qualified borrowers. The language Helicopter Ben ought to be using is along the lines of “If you won’t make loans to qualified US customers, especially businesses with standing lines of credit, the discount window will not be available to you if you need it – you’ll have to talk to the FDIC.”
  • I’m a little tired of politicians saying that people won’t be able to get loans to buy homes, send their kids to college or buy cars. I just heard Barack Obama say it, but to be fair I think I heard John Boehner or Roy Blunt say it, too. The FHA, USDA RD program, VA, now Fannie Mae and Freddie Mac and a few minor programs are already backed by the full faith and credit of the United States. So much for “you won’t be able to borrow to buy a home.” What difference is the government buying a bunch of loans that aren’t guaranteed going to make to a market that is already guaranteed?

    Student loans? Same thing. Ever heard of Sallie Mae? Again, backed by the full faith and credit of the United States. Federally guaranteed. Almost as safe as Treasury securities for the lender. No problem with borrowing for college. Well, no problem created by this mess anyway.

    Cars? There could be a potential problem here, but I doubt it. The car loan market has always been much more freewheeling than home loans, much riskier. There might be a period of adjustment, but car loans have never needed federal guarantees, even for credit impaired borrowers even in times of economic crisis. Ford Credit, GMAC and others will solve that problem, if there is one and they can always use the $25 billion they already got. If all else fails, there’s the buy-here-pay-here lots.
    Maybe these fear mongering politicians need to remember the words of Franklin Roosevelt’s famous 1929 TV speech, “We have nothing to fear but fear itself.”

  • A lot of the blame has been placed on the idea that people are getting home loans with “less than 20% down” or that people of low to moderate income are just inherently unqualified to own their own homes. People have been getting FHA loans with 3% down for 70 years. FHA foreclosure rates have always been a little higher, but for 70 years the program made money. Low to moderate income people have been getting FmHA/Rural Development loans with zero down for 70 years. In the FmHA program, foreclosures were few and far between until very recently, despite nontraditional credit qualifying, low incomes and zero downs because buyers and the properties themselves were qualified in other ways. The real problem is twofold: problem borrowers that should have been weeded out with good qualifying and problematic loan terms that were designed for a housing market rising at 5% or more per year. Properly qualified low down, low income borrowers buying homes they can afford are not a problem.
  • Does the constant refrain last night of “Congress will be off for the Jewish holiday” bother anybody else? Does it seem like some people are a bit gleeful at the possibility that things might go south while the Jews in Congress are busy praying? Don’t we at least deserve a couple of years of hyperinflation before we start planning a new Kristallnacht? Is it really latent anti-semitism showing its ugly or is it just that the ignorati in the media and political elites thought Hanukkah was the important Jewish holiday?
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