Lowering Interest Rates is Different This Time
January 22, 2008
– Comments (4)
Many investors have been trained that rates drop, the economy booms as does the market, but I think there is little thought into why.
1) People can refinance debt at a lower rate and free-up cash flow. Right now a lot of people already have debt at reasonably low rates. As the interest rates were stepped down, there were a lot of people able to benefit from this along the way. Rate have been lower and many people are already maxed out at low rates.
2) Credit has tightened up. People were borrowing up to 100%. That isn't happening any more. The losses have been felt and lending standards that price risk into them are being re-established. You want to buy a half million dollar home? Now you need at least $100k down. People who could afford their homes with nothing down have been walking away because it is in their interest to do so. You want to buy a house, you need a stake in it now.
3) People are afraid to over pay for a home. Demand will be down for years.
4) People are grossly over extended. Lowering rates might help them keep up with costs if they can refinance, but it won't help them get ahead. Costs are going up faster than wages.
On my reading today "I have a lot of Problems with You People!" The graphs all show how bad of shape households are in and no lowering of rates is going to change that. What changes it is actually working to pay back the debt and reduce the debt servicing burden.
Banks are not going to be making as much money has they have. They will not be making such drunken loans and will not be able to package it up and sell it on the markets like did. This is an enormous loss of revenue that isn't going to come back. Banks have had to raise equity so they are diluted. Less income to be spread between more shares is what happen after the losses have worked their way through the market. I don't see how income levels come back. Banks were priced to have huge earnings on junk, sold off mortgages. This chunk of earnings isn't coming back. And now that they've sold to foreign investors, less of those dividends will make it home to be spent locallys.
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