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Bernanke's Bullet Misses the Mark


While the Fed can attempt to provide liquidity, the Fed cannot dictate where that liquidity goes, if indeed it goes anywhere at all.


Inquiring minds might be wondering what's changed since the 50 basis point cut by the Fed.

List of What's Changed

  • Perception has changed.
  • Any perception of the Fed as being concerned about inflation went out the window.
  • Any perception of the Fed as being concerned about the dollar went out the window.
  • Bulls are the happiest they have been in months.
  • The stock market is higher.
  • Gold is higher.
  • Oil is higher.
  • The Prime Rate dropped 50 basis points.

That's really about it. But what was the reason for the panic cut? Asset backed securities received no bids, the commercial paper market was in the dumps, and this all started with a mess in subprime mortgages that spread to mortgages in general, and foreclosures are now soaring. The jobs market is also very weak with huge mass layoffs by financial organizations.

List of What Hasn't Changed

  • Mortgage Rates. (Actually mortgage rates rose since last week as the chart below shows).
  • Auto Loan Rates. Nearly identical to last week.
  • Home Equity Loan Rates. Nearly identical to last week.
  • The outlook for jobs. (If anything the outlook is weaker judging from the Fed's panic.)
  • Credit Card Interest Rates.
  • The foreclosures outlook did not change. It is still bleak.

The above chart is from September 19, 2007, with thanks to Bankrate.Com.

Bernanke's Bullet Misses The Mark

So did that 50 basis point cut help anyone? Yes, it helped (temporarily) those in the stock market. It helped (again temporarily) bail out Bernanke's banking buddies by providing more short term liquidity. It helped those short the dollar and long gold.

But did it do anything to address cash strapped consumers in way over their heads in houses they cannot afford? The answer to that is no.

Borrowers Lose Homes At Record Pace

Bloomberg is reporting Subprime Borrowers to Lose Homes at Record Pace as Rates Rise.

As many as half of the 450,000 subprime borrowers whose mortgage payments increase in the next three months may lose their homes because they can't sell, refinance or qualify for help from the U.S. government.

The number of borrowers whose mortgage payments jump in the next three months will be the second-highest ever for a quarter, according to Credit Suisse Group, Switzerland's second-biggest bank. Twenty-seven percent have already missed a payment, said First American LoanPerformance, which owns the largest database of U.S. mortgages. That makes them ineligible for the Federal Housing Administration bailout proposed last month by President George W. Bush.

The article also mentioned the plight of a homeowner who admitted he "didn't pay enough attention" when he took out a five-year adjustable-rate mortgage in 2002. Noting that the Fed pumped $62 bln pumped into the banking system on Aug. 9 and Aug. 10 the homeowner asked the Fed to do the same for him. "If they gave us that money, we'd be able to be out of this predicament".

Everyone wants "free money" from the Fed because they weren't thinking. And so far Bernanke seems willing (not to provide money but rather to provide liquidity) regardless of the moral hazards of doing so.

For a nice summation of who's to blame, Minyanville professor Vitaliy Katsenelson hits the bull's-eye with his missive: Pointing the Housing Blame at a New Target, the Homeowner.

The Fundamentals Have Not Changed

But Bernanke has pulled out his pistol and is firing bullets praying that one will hit a target. It's a misguided effort and the wrong medicine as well.

While the Fed can attempt to provide liquidity, the Fed cannot dictate where that liquidity goes, if indeed it goes anywhere at all. And if liquidity does go anywhere this time around, I suspect gold is as likely as anything be the beneficiary. If so, that will bring little comfort to cash-strapped consumers out of a home and out of a job.

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