Rescue now targets loans, mortgages
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Let’s review for a minute before we really get rolling here. Because to understand why the Federal Reserve did what it did today you need to remember what they’ve done so far. On interest rates, in particular. The federal funds rate, the short term interest rate that the Fed controls, sits at 1 percent as we speak. That means there’s not too much room left to cut to get the economy going again. So what else can they do? Give money away is the short answer. Which gets us to today.
The latest installment of the bailout comes with an $800 billion price tag. For the first time the powers that be are really going to target consumer loans and mortgage-related debt.
The problem is that financial institutions haven’t been able to bundle up those loans and resell them in what’s called the secondary market. So there’s not enough money to make more loans.
Marketplace’s Janet Babin reports from North Carolina Public Radio that what the Fed’s trying to do is get that secondary market working again.
When you get a loan for a house, or a car, it’s usually bundled up with other loans. Those asset or mortgage backed securities are sold to investors all over the world. Your bank then uses the money from the sale to make even more loans.
But Wachovia economist Mark Vitner says this consumer loan market has pretty much shut down.
Mark Vitner: And if no one’s will to buy those consumer loans, then the people that are originating them simply do not have the capital to continue to originate them.
The Federal Reserve’s new plan aims to get the banks lending again. It will loan up to $200 billion to support consumer and small business loans. And it will buy $600 billion worth of mortgage backed securities.
Duke University professor Steven Schwarcz says the Fed’s moves should make more loans available.
Steven Schwarcz: We’re gonna provide the funding and we’re gonna stabilize market prices.
So now the government will become a new buyer of consumer debt, like student loans and credit card loans. These aren’t the toxic assets that no one wants. They’re highly rated loans that should be attracting buyers.
But even if they do, more liquidity doesn’t guarantee that banks will make more consumer loans.
Or that consumers will spend more and revive the economy.
Len Blum at investment bank Westwood Capital says it’s like the old adage, you can’t push on a string.
Len Blum: Which means you can’t make a bank lend, you can make them put the money out there but if a bank is concerned about credit risk, they just won’t lend.
Blum is also concerned that the Fed’s plan to buy mortgages is too general.
Blum: It isn’t specifically targeting fist time buyers, home purchases rather than refinancing, or the purchase of existing home stock or foreclosures.
But the plan’s already had the desired effect. Mortgage rates posted a record one day drop today, presumably in response to the Fed’s actions.
I’m Janet Babin for Marketplace.