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Why Aren't Consumer Rates Going Down?



February 29, 2008 – Comments (12)

I was reading a story about the disconnect between the fed lowering rates and how it simply isn't being passed on to consumers. 

In Canada we've never had long term mortgage rates, but the current rates are amortized over 25 years and the rate resets at the end of term, which is generally between one and five years.  There was usually about a 2% premium you'd pay on the 5 year rate, which was the cost of knowing your payments would not go up for 5 years.  That spread hardly exists anymore.  Indeed, in a couple cases 5 year rates are cheaper than one year rates.

When I look at I see 5.88% for a 30 year term and 5.18% for 15 years, a mere 0.6% premium for an extra 15 years, again, not much of a spread, yet a whole lot longer to not have money available for investors.

The spread between short and long term rates is coming back.

It seems to me that it is an exceptionally good idea to long in rates when they are low.  I found a link for prime lending rates in Canada going back to 1974.(pdf)  Looking at the history, an investor is taking huge risks with their capital to under perform, a grossly under perform, by making it available for long term mortgages.  In June of 78 the rates were at a low for the period, 8.25% and just three years later, in August of 81, they peaked at 22.75%.  This is the environment I worked in banking and that I saw people losing their homes.  But consider that rates almost tripled in the space of three years.  If you have debt and it is adjustable rate debt it is fool hardy to gamble like this when rates are at record lows.

Think through the losses, like from this kind of thing...  Are you going to loan your money without demanding a premium and tighter lending standards?  I would suspect that Ben could lower rates another percent and still very little would be passed onto consumers.  It isn't about real interest rates versus nominal rates, but whether investors think 6% over 30 years is a fair return for the risk.  I think the rate is low for the risk at this point and lowering rates doesn't lower the risk.

I could be wrong, but I think lending rates will go higher, in the range of historical rates, and money will leave equities for safe deposits

12 Comments – Post Your Own

#1) On February 29, 2008 at 10:23 PM, dwot (28.84) wrote:

 This would be a story as a result of risk not being priced into mortgages...

Financial Firms Face $600 Billion of Losses, UBS Says

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#2) On February 29, 2008 at 10:31 PM, DemonDoug (31.45) wrote:

consumer rates aren't going down because the long bond prices and yields are set by investors who aren't buying anymore.  Thus, Greenspan's conundrum (where he raises Fed rates and long term rates stay steady or drop) has been flipped on it's head and become Bernanke's conundrum (Fed drops rates but mortgage rates go up).

Way to go Benny boy.

DemonDoug's stock advice: buy shares in canadian oil sands companies. 

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#3) On February 29, 2008 at 11:03 PM, dwot (28.84) wrote:

I am still not crazy about google as an investment, however, they do have some amazing product.

Here's my share list. 

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#4) On February 29, 2008 at 11:04 PM, AnomaLee (28.89) wrote:

I think what's going on in the forex is terrible --- well, if you're holding dollars ---- but it correlates very far into the bond market. More muni-bonds are going to go junk. The FED just couldn't possibly print money fast enough to cope with the losses in the credit markets unless we slash Fed Rates to 1% or even ZERO tomorrow.

If people can't safely invest in America and when we drop rates to 2% and if Japan keeps rates at .5% continuing to disrupt the carry-trade you're going to see global economic turmoil unlike and greater than what happened in 1997 in Asia-ex and what happened to Russia. A few ifs, but it's probably going to happen in the next 12-24 months as more economies really feel the slowdown.

 "You ain't seen nothing yet
Baby you just ain't seen nothing yet"

--- Backham-Turner Overdrive

The train hasn't really hit yet....


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#5) On February 29, 2008 at 11:13 PM, rd80 (94.83) wrote:

Nice post, as usual. 

The Bloomberg article only touches on part of the story of why fed rate cuts aren't having much impact on consumer loans.  I'm surprised they don't talk about how inflation risk factors into interest rates.

The fed's rate directly impacts short term borrowing, like prime rate linked loans, credit cards, etc. since the short term of those loans, or ability to adjust rates, means very little interest rate risk.

Longer term money needs to price in both the cost of money and inflation risk. A fed rate cut lowers the cost of money, but increases inflation risk.  When that balance tips, rate cuts will increase the longer term rates because of the inflation risk.

Combine that with banks tightening lending standards and the fed is left pushing on a rope. 

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#6) On February 29, 2008 at 11:24 PM, devoish (63.51) wrote:

So BB's lower interest rates allow the banks to recapitilize more quickly on higher spreads. House flippers not helped. Last homebuyers in on the Ponzi scheme not helped. Last banks in on the Ponzi scheme not helped enough. First bank out (GS) sitting pretty. And five years ago the states were stopped from preventing what was previously considered predatory lending practices. Between us paying to steal Iraqi oil and the pillaging of the financials.. Cheney and Paulson and Rove. These guys are so far ahead of us. I think we have misunderestimated them. And now we are thanking them for buying out our banks with the profit from $100.00 oil that was $30 before we invaded Iraq.

Escrooge... How am I doing?

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#7) On February 29, 2008 at 11:42 PM, dwot (28.84) wrote:

In Calculated Risk a quote from Poole:

"the Federal Reserve can deal with liquidity pressures but cannot deal with solvency issues."

 This means that bank insurance is questionable...

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#8) On March 01, 2008 at 12:00 AM, EScroogeJr (< 20) wrote:

dwot, I disagree with your assessment that the benefits are not being passed on to consumers. The higher the mortgage rates, the cheaper the prices. They are inversly proportional. So the buyers are benefiting, but of course this is not what Bernanke had in mind. This means that some solution will be found, let's not underestimate these guys, as devoish says. As the banking system gets recapitalized, the amount of money available for mortgage lending will increase very quickly, and when the first dollars ready to accept a lower return show up on the market, we'll see 4% mortgages and 3% mortgages, with 2% mortgages soon to follow.

devoish, you're doing great so far, but let's not forget that 1000-point swings are very common in Caps, and what the. market giveth, it taketh back.  

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#9) On March 01, 2008 at 3:02 AM, DemonDoug (31.45) wrote:


as bearish as i am, i'm bullish on google.

I can't tell you how many times i've posted and emailed and basically told anyone out there that has an ear, advertising dollars spent online are growing at something like a 9% clip a year.  Google is basically your dictionary, your newspaper, your magazine, your encyclopedia, your library, your map - there is a reason people advertise on google, and it's because it's the best.

I put the green thumb up on google the other day when it dipped below 450 (got my call in around 460).  Read my bull pitch for more.  There's no doubt they'll be taken down with a global slowdown, but they are the best, and the old argument of "low barrier to entry" is completely false at this point.  There are less barriers to entry in airline transportation and auto manufacturing than there is in search. 

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#10) On March 01, 2008 at 9:22 AM, floridabuilder2 (97.55) wrote:

sometimes I read dwots posts and demondougs comments and I think....  man I'm not that smart, this stuff gives me a headache....  that is why i like the building industry, even a chimp can understand the concepts

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#11) On March 01, 2008 at 10:00 AM, xthecritic (83.47) wrote:

rd80 hit the nail on the head here.

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#12) On March 01, 2008 at 11:02 AM, abitare (29.54) wrote:





Good post again.


Like every educated, internet user / investor on the planet I like Google. I agree with the barrier to entry they have.
But in the current market with the de-leveraging hedge funds (there are at least 3000 hedge funds) how many Hedge funds are LONG Google for the same reasons you mentioned? Half ? As the carry trade unwinds, I believe some of the Best stocks of 05-06 are going to get sold off harder. These LTCM clones will have to sell winners to cover losers and withdrawals, as many investors are learning many of these Hedge funds are dangerous, underperforming garbage.


Funny - 

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