Fed’s Solution to Market Meltdown: Buy Up More Short-Term Debt
The Federal Reserve announced today that they will be invoking Depression-era powers to buy “commercial paper”, which it hopes will provide struggling companies with money to pay their bills.
In this action, the Fed basically becomes a source of credit for nonfinancial business, in addition to the traditional (but increasingly squeamish) sources of credit like banks and financial institutions.
The move by the Fed had a modest impact on the market this morning, with the the Dow Jones industrials rising 45 points in morning trading, a day after a huge selloff put the Dow below 10,000 for the first time in four years.
However, many investors still remain nervous about the overall condition of the economy, especially in light of yesterday’s release of U.S. government data on the job market, which has been sliding.
While moves like this may provide stop-gap solutions to sooth investors and make more credit available to businesses, not everyone thinks these type of it short-term tactics will solve the crisis. From the New York Times:
But so far, the myriad efforts by government regulators to shore up confidence have seemed to yield little relief among investors, some of whom believed the actions have taken on a haphazard air.
“People are slowly but surely coming to the realization that playing ‘Whack-a-Mole’ with each of these issues as they arise, on an ad hoc basis, doesn’t get the job done,” said Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco.
Bublitz hit the nail (err … “The Mole”) on the head with his “Whack-a-Mole” analogy.
The latest move by the Fed still doesn’t address one of the critical underlying issues driving market uneasiness: the housing market.
The “Solution That Works” addresses and fixes the root-cause of much of the current turmoil in the market: concerns about mounting foreclosures, rising mortgage payments for homeowners in certain high-risk loans like Option Arms or loans with pre-payment penalties and falling property values. You can check out the plan here.
What do you think of the latest move by the Fed? Leave us a comment.
3 Comments
I really believe I have a good solution…simple, but then I am simple. I do not know if I can explain it clearly.
When you work in retail, the inventory comes in at say, $1.00.
We would then do a 3-400% mark up.
So the product will go on the shelf at say $4.00.
When it stays on the shelf too long, it is marked down.
Now, compare the mortgage on a house to a super markup when the builder or seller put the house out on the market.
Simply put: Part 1
Use a window of say 8 years or so
Roll back the current mortgage by say 33%on every house sold in that window or only the mortgages that are in trouble during the window of time.
Each Mortgage company will restructure that mortgage, or only the mortgages that are in trouble during the window of time, at the discount price (marked down so to speak)
Now, the owner gets a renegotiated mortagage and keeps the home
The Mortgage company is still getting paid, although at a lower profit, but is still solvent and not needing a bail out.
Part 2
Adjustable mortgages would be renegotiated as fixed mortgages
The steps in Part 1 applied
People could stay in their homes and the mortgage companies will still get paid and stay in business.
To futher assist the homeowners, tax base can be reduced. NOTE: This week I actually got a notice of reeval on my taxes and they were reduced by $1,000 plusSO, my mortgage has gone down…..Step 3
The cost would be considerably less than the bailout.
It would require clerical services and costs in paperwork to implement the plan.
[Reply]
What about “The Solution” with a 40 year fixed rate in the mix?
[Reply]
Dear Glenn:
Please help get the word out. It’s an easy solution.
If the Federal Reserve dropped the interest rates to 4 1/2 to 4 3/4 this whole crisis would have been and will be
diverted. If they drag their feet like they have in the past, this will be the worst depression anyone has ever seen. Donald Trump has talked numerous times in the past few years verifying the fact that interest rates must go down. People can then refinance their mortgage
loans, have more spending money, and have afforadable housing. Please get the word out, otherwise we are
all in trouble. Everyone knows a depression is on the horizon, if they don’t do it soon. Thank you
[Reply]
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