The Fed’s decision to cut interest rates by ¼ point has raised numerous discussions as to whether more reductions are a possibility or if that was it for the near term.
Michael Shedlock’s article “Rate Cuts: Is It Two and Done?” examines the effects of the rate cut on the economy, and he offers his thoughts on why he believes that more cuts are to come, but not for the generally accepted reasons.
Mortgage rates have not helped borrowers one bit, and he quotes Professor Linden as saying that it is now easier to arrange a golf outing with Tiger Woods than to get a mortgage. Don’t believe it?
Read this latest article in MarketWatch titled “Unprecedented tightening in lending standards.” Since the pendulum always swings from one extreme to another, I was not surprised to learn that even borrowers with the best credit have to jump through hoops to get approved.
If that trend continues, real estate sales will slow down to a crawl, prices will further decline and the economy and job growth will be affected very negatively. As always, Michael’s article provides good insight and is a must read.
Comments 1
My $0.02.
Mish may very well be right that there will be further rate cuts just not for the advertised reasons.
But I’m not having any problem finding possible reasons that could be advertised after all, especially considering the gratuitous cheerleading that has been going on around Washington concerning the economy the past few years.
I believe much of the real story lies in the chart appearing in the Marketwatch article. The last row, “Commercial & Industrial Loans”, is where the Fed, or anyone else interested in applying lipstick to this potential pig will point. It tells me that, while the speculative RE investors and imprudent borrowers are going through some real pain, commerce and industry are not slowing down, at least not yet. Sure, lending standards for these large and important borrowers are being tightened just like the others, but tightening standards for healthy corporate entities isn’t going to stop them. Like Mish said, the fed does not care about borrowers in trouble. But what that means is that the fed doesn’t care about the retail guy. Bernanke does have an interest in commercial and industrial expansion, and that is why he, in conjuction with Treas.Sec Paulson, will do whatever it takes to keep the source of business borrowing expansion, big lending institutions, in the black. Note how fewer banks see weaker demand for these types of loans in Oct. as did in July, the opposite trend of the other types. This is the focus of monetary policy, IMO, not those who can’t afford their McMansions.
It’s all about the food chain here, and those at the top are still well served by the fed. No reason to fear a dramatic downturn at the moment, but if we see a change in the demand for the comm & industrial loans to the down side then it’s a new game.
G.H.