So Henry Paulson is going to freeze the interest rates on home loans and Ben Bernanke is going to lower the Fed discount rate a whole point. It’s kind of like fishing with a shotgun in a glass bottom boat. You get a swimming lesson after you pull the trigger.
What happens when you freeze the interest rates? Go out and try to buy any house with financing, its just isn’t going to be there. What businessman will loan money under fixed assumptions only to be paid under a changing set of rules. Georgia a while back passed a law to protect homeowners and effectively shut down the loan industry in the state. This is the old “Pull the rug out from under the lender routine.”
Then we have Bernanke lowering the Fed funds rate. It doesn't take much thinking to figure out that the exchange rate on the dollar will fall. In this case, smart money will refuse to renew their Treasury Bills. Since it’s competitive bidding, less bidders, means higher prices. There is a couple of trillion dollars that could vote with feet. Foreigners will sell the dollar now and wait. Then buy when it hits bottom. If things don’t go right, this could be like catching a bag of cement dropped from a second floor window (messy to say the least). Treasury bill rates could surge up as soon as tomorrow.
The neat thing about lowering the Fed funds rate, is that any money it does create (ie loans to market makers), won’t be heading for real estate or SIVs, it will be going into the stock market. Google could hit $1000 by Christmas (just a joke, I don’t give investment advice).
So what do we have? A shut down of future real estate financing or the prospect of absurd interest rate financing for home ownership. Flight of foreign capital will raise Treasury rates.
What is really happening at the Bernanke and Paulson level? The banking system could collapse. Unless they can keep the homeowner making payments the game is over. In order to keep the banks from dropping dead, the really bad stuff cannot be allowed to be marked to market.
Step back and think about what has happened in the last two years with Real Estate Bubble Bloggs. Many of them have stopped posting. What they were warning about has happened. It was very obvious even back then. Now, all of a sudden, the Government is concerned about the homeowner? I think not. The banks have a pretty good idea of what’s going to happen three months from now. Citygroup has no equity if you subtract its mistakes from its book value. What’s that mean? The government could be called on to take over an organization that is just about half as big as itself.
Ben and Henry are in that Christmas giving mood, so don’t bend over if you need to refi, just walk away, give yourself and your family some real peace of mind.