America’s Teetering Banking System: “Where did all our deposits go?”

By Mike Whitney

31/01/08 “ICH” — – Somebody goofed. When Fed chairman Ben Bernanke cut interest rates to 3% yesterday, the price of a new mortgage went up. How does that help the flagging housing industry?

About an hour after Bernanke made the announcement that the Fed Funds rate would be cut by 50 basis points the yield on the 30-year Treasury nudged up a tenth of a percent to 4.42%. The same thing happened to the 10 year Treasury which surged from a low of 3.28% to 3.73% in less than a week. That means that mortgageswhich are priced off long-term government bonds—will be going up, too.

Is that what Bernanke had in mind; to stick another dagger into the already-moribund real estate market?

The Fed sets short-term interest rates (The Fed Funds rate) but long-term rates are market-driven. So, when investors see slow growth and inflationary pressures building up; long-term rates start to rise. That’s bad news for the housing market.

Now, here’s the shocker: Bernanke KNEW that the price of a mortgage would increase if he slashed rates, but went ahead anyway.

How did he know?

Because 8 days ago, when he cut rates by 75 basis points, the ten-year didn’t budge from its perch at 3.64%. It just shrugged it off the cuts as meaningless. But a couple days later, when Congress passed Bush’s $150 “Stimulus Giveaway”, the ten year spiked with a vengeance—up 20 basis points on the day. In other words, the bond market doesn’t like inflation-generating government handouts.

So, why did Bernanke cut rates when he knew it would just add to the housing woes?

Some critics say that he just wanted to throw a lifeline to his fat-cat investor buddies on Wall Street by providing more liquidity for the markets. But that’s not it, at all. The fact is, Bernanke had no choice. He’s facing a challenge so huge and potentially catastrophic; that cutting rates must have seemed like the only option he had. Just look at these graphs and you’ll see what Bernanke saw before he decided to cut interest rates. http://benbittrolff.blogspot.com/2008/01/really-scary-fed-charts-why-bernanke.html
 

NEGATIVE BANK RESERVES;

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