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• Reasons for a Fed rate cut?

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  Amarendra Dhiraj    Group moderator

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  Reasons for a Fed rate cut?

  The global credit system still needs help. A rate cut, the argument goes, would help ensure the credit system has enough cash to keep functioning. The system nearly froze up in August when many lenders balked at buying short-term debt like commercial paper, because lenders didn't trust what was being offered as security on the debt. The credit crunch quickly spread around the world.
  
  Problems in the housing and real-estate industries are spreading into the broader economy. Cutting rates would allow more people to buy homes at prices close to what sellers want. That would shore up lenders' finances and demand for new and existing homes. Housing starts are off about 30% from two years ago, while sales of existing homes are projected to be down about 8.6%. A slipping economy means fewer trips to Home Depot (HD, news, msgs), Lowe's (LOW, news, msgs) and other hardware stores, fewer furniture and appliance sales, and damage to state and local fees and tax revenues. The Wall Street Journal noted that the city of Sultan, Wash., had to lay off its janitor because building permit fees collapsed.
  
  The broader economy is slowing down. The domestic automobile industry is reeling from the combination of Japanese competition and the automakers' over-reliance on gas-guzzling vehicles for profit. Consumers increasingly are strapped amid higher prices and only limited gains in wages.
  
  Lenders need time to understand how bad their problems are. Wall Street investment houses made billions selling securities backed by pools of mortgages to investors around the world. The big unknown is whether the mortgages backing the pools are any good. Do Wall Street firms need to buy back the securities if the loans go bad?
  
  • 19 Sep 2007, 12:16 pm
  Amarendra Dhiraj wrote: > The global credit system still needs help. A rate cut, the argument > goes, would help ensure the credit system has enough cash to keep > functioning. The system nearly froze up in August when many lenders > balked at buying short-term debt like commercial paper, because > lenders didn't trust what was being offered as security on the debt. > The credit crunch quickly spread around the world. > > Problems in the housing and real-estate industries are spreading into > the broader economy. Cutting rates would allow more people to buy > homes at prices close to what sellers want. That would shore up > lenders' finances and demand for new and existing homes. Housing > starts are off about 30% from two years ago, while sales of existing > homes are projected to be down about 8.6%. A slipping economy means > fewer trips to Home Depot (HD, news, msgs), Lowe's (LOW, news, msgs) > and other hardware stores, fewer furniture and appliance sales, and > damage to state and local fees and tax revenues. The Wall Street > Journal noted that the city of Sultan, Wash., had to lay off its > janitor because building permit fees collapsed. > > The broader economy is slowing down. The domestic automobile industry > is reeling from the combination of Japanese competition and the > automakers' over-reliance on gas-guzzling vehicles for profit. > Consumers increasingly are strapped amid higher prices and only > limited gains in wages. > > Lenders need time to understand how bad their problems are. Wall > Street investment houses made billions selling securities backed by > pools of mortgages to investors around the world. The big unknown is > whether the mortgages backing the pools are any good. Do Wall Street > firms need to buy back the securities if the loans go bad?