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Archive for FED chairman Ben Bernanke

What Does Wall Street Bailout Mean To Main Street?

With so many opinions about what is happening with the economy, what does this mean to you?

Wow, what a week.  There is no shortage of fireworks on Capitol Hill as the Senate Banking Committee continues to throw Fed Chairman Ben Bernanke and Secretary of Treasury Hank Paulson on the grenade.  The one constant that continues to be thrown around by members of the committee is that this unprecidented measure will “cost” tax payers $700 billion.  I am afraid that this term is being lost on the committee as it is also being lost by tax payers and citizens due largely to a misunderstanding of what this “bailout” actaully involves.

Let me qualify this by saying that I am a very large opponent of gevernment intervention at any level.  There is nothing that the government gets involved with that makes anything cheaper, more effective or more efficient.  That being said, we have reached a monumental point in the financial markets where intervention is necessary to avoid a total collapse of the financial markets that is nearly immeasurable by most people alive today.  Unless you are in your 80’s, it is unlikely you can truly appreciate what affect the depression had on this country (myself included).  The argument being made is that tax payers are being asked to foot the bill for mistakes made by people and organizations that they had nothing to do with, and to a limited extent that is true.

What is really going on is a total lack of faith in the system due to the unwillingness of financial institutions not only to lend money to consumers, but also to each other to keep the system fluid and capitalized.  When using the term bailout, you must see the bigger picture of what is actually going on.  The Fed and Treasury Department are proposing to the Senate Banking Committee that the government purchase certain mortgage backed securities from financial institutions that need help to liquidate these securities to continue in business.  If you own a pizza parlor, you can only remain in business if you sell pizzas for more than the cost to make them, use the proceeds to buy supplies, and repeat the process.  The same is true in the financial industry.  Banks can only lend money after taking certain securities, liqudating them in the open market, recovering the cash, and lending it again for a profit.  This is a highly simplified version of what is happening, but it has very complicated and wide reaching implications in all of our lives.

Some of these securities are owned by your pension fund, or your local municipality, or even your investment banker (as we have already seen with Bear Sterns and Lehman Brothers).  While it is pertrayed in the media and misunderstood by elected officials that this is a $700 billion line item expense to the tax payers, that in fact is not true.  It is actually the government purchasing assets with the intention of holding them and selling later.  The proposal is also suggesting that the securities be purchased in a reverse auction fashion where the banks most desperate will sell first at the lowest coupon rate, and as the value rises, the market will dictate what is reasonable to sell for each individual company.

In the end, the actual cost to the tax payer will be much less than $700 billion, in fact, it will more likely be a fraction of that.  The result of this action would be to open up a logjam in the system allowing institutions to become more liquid, be able to lend more money to consumers, and increase consumer confidence in the economy as a whole.

As you sit in Smallville, USA and wonder why you would go along with such a deal, be aware of the fact that farmers who need short term financing to get their crops to market are affected.  Car companies that employ thousands of people to build and sell cars are affected.  And, small businesses that need money to expand and grow and create more jobs are affected.  This may have originated on Wall Street, but there is a very real impact on Main Street that could create real problems if it is not done.

Inflationary Concerns Holding Back Mortgage Bonds

We had a lot of news out today, all of which was bad.  The Retail Sales report came out today at a 0.1% rise over last month.  This is considerably lower than the projected 0.4% increase, and the lowest increase since the February Retail Sales Report.

The Producer Price Index (which measures wholesale inflation) came in at 1.8% on a seasonally adjusted basis in June.  This is not good news for inflation, and as the biggest gain since November 2007, it will continue to chip away at investor confidence in the mortgage bond sector.

FED Chairman Ben Bernanke will be delivering his semi-annual monetary outlook to the Senate Banking Committee today.  The expectations for his prepared speach are already creating concerns with investors and causing a sell off in stocks based on the assumption that continued problems with growth and unemployment will not ease in the near future.

All of this leads to a less than stellar environment in mortgage bonds.  Normally, a stock sell off is good news for the bond market and mortgage rates in general.  But with continued uncertainty about inflation, it is having little or no affect on bonds.  My suggestion would be to lock your rate at current levels to protect against future loss on any active mortgage loan you have working.

Monday July 14, 2008

Fannie and Freddie push the market higher?

Friday’s news about the uncertainty of the future of Fannie Mae and Freddie Mac led to a huge sell off in stock for the 2 mortgage giants.  Was it warranted, or just a fearful market overreacting?  That question will probably not be answered today.  But, the Treasury department stepping up to help out lends a little more stability to an uncertain market.

Treasury Secretary Henry Paulson and FED Chairman Ben Bernanke have given the green light to Fannie Mae and Freddie Mac to borrow money directly from the Central Bank at the federal discount rate of 2.25%.  This is significant because it has never happened in the past.  The federal funds discount window has been historically limited to banks and credit unions, but this option being made available to Fannie and Freddie is giving a little boost to the mortgage bond market and mortgage rates this morning.

It is not likely that this is a long term rebound in bond prices, but it is worth mentioning.  In addition, the Producer Price Index (PPI) and the Retail Sales Report are due out tomorrow and will dictate the direction of the market when they come out.

If you have a mortgage currently working, you might want to go ahead and lock your rate.  But, if your mortgage is a little farther out, wait and see what happens tomorrow to make a decision to lock or not.

Thursday July 10, 2008

Weekly jobless claims fall, market reacts.

The Weekly Initial Jobless Claims report came out today much better than forecast.  With 58,000 fewer claims, the report sank to 346,000, the lowest level since April.  This news, which is good for the economy, would normally be seen as bad news for mortgage bonds.  But, mortgage bonds appear to be remaining relatively flat on the news.

Treasury Secretary Henry Paulson and FED chairman Ben Bernanke testified before the House Financial Services Committee today to suggest ways that Congress could “fix” the financial regulatory system to prevent future crises.  I managed to make it through about 30 minutes of the meeting before the barage of stupid questions followed by equally predictable answers gave me a head ache.  At least they do agree on one thing…we need more government intervention.  AWESOME!!  Nothing says efficiency and dependability like putting it in the hands of the government.

Back to the matter at hand; if you are currently working on a mortgage loan, I would suggest locking your rate now.  Bond prices are currently testing the topside support level of the 200 day moving average.  Given the difficulty of crossing that major threashold, combined with the fact that no other significant economic data is due out this week, mortgage bonds are probably about as good as they are going to get in the near term.