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dpdoor (< 20)

3.75 rate



October 20, 2007 – Comments (2)

When times are tough people don’t borrow money because they don’t want the extra burden. It was proven in the early 1930's people did not borrow because they felt it wouldn’t do them any good. A rate cut needs to be big enough to make it worth it and it needs to be done while there is still confidence in small businesses. 3.75 would work best. The banks are going to have higher spreads because of the chance of default and the chance the rates will go up later. The fed rate needs to be very low for the consumer to benefit.

Stocks will benefit by any rate cut because it will lower their debt but for the regular homeowner or small business the rate needs to be so attractive that we can't resist refinancing and taking a little out for ourselves. It is the regular people that drive the economy if we don’t spend even the biggest companies suffer. "If you want to eat with the kings you need to feed the masses".

It’s you, me, our neighbors, and our families that the big companies work for.

2 Comments – Post Your Own

#1) On October 20, 2007 at 7:48 PM, fransgeraedts (99.48) wrote:

dear DPDoor,


i will, if i may, come back at a later time to the questions you raise in your post. Its late here and i need to go to sleep. Let me very quickly just say that i think your post important. To even begin to answer what your post forces us to think about will probably take several long posts. But at the end of those i suspect one last question will summon it all up again: wouldnt it be much better if the "regular people" earned more, instead of borrowed more? 

my regards


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#2) On October 21, 2007 at 3:57 PM, rd80 (94.68) wrote:

I don't envy Ben Bernake's job.  The Fed is trying to strike a difficult balance between rates that are low enough to keep credit markets functioning in an orderly fashion and high enough to keep inflation in check and prevent rampant leveraged speculation like we've seen in housing the past few years. If there's no overlap between those two objectives, the Fed needs to pick the lesser of two evils.  Based on the latest cut, I assume they're more worried about keeping the credit markets functioning.

Much of the trouble we've seen is because homeowners couldn't resist refinancing and spending money on consumption and financial institutions couldn't resist making irresponsible loans.  Unfortunately, rates low enough to encourage people to invest in small businesses or other productive enterprises also encourage people to go deep in debt for the new car or plasma TV they can't really afford.  Those low rates also encourage financial firms to push riskier loans as they stretch for higher yields.

The yield curve has gone from inverted earlier this year to fairly flat.  As of Friday, there was only about a 1% differential between short and long treasury rates.  I believe that supports there being a little more room to cut rates, but not much.  A dramatic rate cut to 3.75 would bring the short end of the yield curve down, but would probably raise the long end of the curve as it would increase inflation worries.  Since fixed mortgage rates generally move with the 10-year yield, a big rate cut might help those with adjustable rate loans, but would make things worse for those who want to refinance or buy with a fixed rate.

Looking forward to Frans' comments.

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