Congress continues to debate the government bailout package proposed by Treasury Secretary Henry Paulson, Fed chair Ben Bernanke and SEC chair Christopher Cox. In the meantime, the markets are spooked and the credit markets are on the brink of complete collapse. It seems, as always, that Congress just doesn’t get it.
The Congress may have forgotten (or most may not know) that the Great Depression not caused by the stock market crash of 1929, but by the failure of the Government to provide the liquidity banks needed at the time to keep their doors open and lend money to their customers. While I’m not saying that we’re on the brink of another Great Depression (I’m an optimist by nature), we’re in a similar credit crunch and failure to act could damage our already struggling economy and add years to the time it will take to recover.
Ron Paul was right in his CNNPolitics.com commentary that this mess was created by artificially low interest rates that magnified the real estate bubble, and while his solution of rolling back stifling laws and regulations, divorcing oursleves of Fannie Mae and Freddie Mac, reducing the Federal buget deficit and reducing regulation will work in the long term, in the immediate term, this bailout is the best alternative we have to stabilize not only the U.S. economy, but the world economy as well.
Congress needs to finally get a clue, quickly put together a proposal with the oversight and CEO restrictions they want and pass the damn bill so the financial markets can return to some form of normalcy.
With yesterday’s announcement that the government would be taking over both Fannie Mae and Freddie Mac, pundits and television talking heads began asking if the move signaled a bottom for both the housing market as well as the stock market.
Well, the market today responded with a resounding ‘NO’ and fell by almost the exact amount by which it rose yesterday.
The government’s move yesterday did have the effect of immediately dropping most mortgage rates by around 50 basis points. The problem, as I was discussing yesterady with two friends who are mortgage brokers, is that unless lenders are willing to again start lending, the interest rate on loans is largely irrelevant.
Any time there is a bubble in the market, in this case the exceedingly easy access to financing we’ve seen the past few years, and that bubble bursts, the pendulum usually overreacts in the opposite direction. Qualified borrowers, with high credit scores, low loan to value and adequate cash reserves are still finding it incredibly challenging to get real estate financing. Not until LENDERS feel that the real estate market has stabilized will they begin to loosen up their underwriting a little allowing the credit markets to return to some modicum of normalcy.
I hope and wish that those pundits from yesterday were right and that we are forming a bottom in the market as it would be nice to be able to give friends, family and clients some good news for a change, but I’m not holding my breath.