The Federal Reserve today, in an attempt to improve conditions in the credit markets and, hopefully, help the economy avoid recession, opened its coffers and made $200 Billion (with a ‘B’) of highly-liquid U.S. Treasuries available to primary dealers, secured for 28 days. It also significantly expanded the types of securities that can be used as collateral for loans, allowing them to swap mortgage notes it can’t sell for government securities that can easily be sold to raise cash.
The hope from the Fed is that this action will bring some normalcy to a credit market that has all but dried up in recent months and that this cash infusion will allow banks to lend money to keep the economy moving.
The financial markets have responded well to this latest move, with the Dow, NASDAQ and S&P all up more than 3.5% today.
The other positive aspect of this move is that, unlike a broad interest rate cut, this strategic bump helps a specific portion of the market without stoking the fear of increased inflation.
Finally, to its credit, the Fed is being pro-active in addressing issues caused by the sub-prime meltdown and is using every tool in its arsenal to both (hopefully) contain and minimize the long-term impact.
Stay tuned to see how this plays out.
Money Management For Modern Life 
Rob,
How do you see the housing crisis playing out — it just seems to be that it is stuck in a downward spiral: more defaults = more foreclosures = more homes in a flooded market = prices falling farther = no end in sight. Would lenders even be able to renogotiate the loan value of a home with a current borrower based on a new, lower, appraisal and simply write off the difference? Although based on my knowledge of how short sells work, could that then result in the borrower getting 1099ed for the difference between the original loan and the new loan? I suppose I am theorizing something like a short sell, but as more of a “resale” to the existing borrower. Would this even be theoretically possible?
– Matt
Matt,
I joke with clients that if I knew what any given market will do in the short term, I wouldn’t be doing this for a living, I’d be on my 400 foot yacht, sipping rum drinks in the tropics!!
My best guess is that, on a nationwide basis, the real estate market won’t recover until the middle of 2009. Some areas, with huge numbers of foreclosures, will take much longer.
I’ve never seen the “resale” concept in action, only actual short sales. My guess is that many of these borrowers wouldn’t qualify for even the lower appraisal value under current lending conditions, making it a moot point.
– Rob