Cross-posted from The Horse You Rode In On
Can anyone help me find the Fed’s discount window?
They’re giving out loans at 5.75% there, but I’ve looked all over the place and the window is nowhere to be found. It’s not at the ATM, and if it’s inside my bank, it’s not marked.
I heard that the Fed had dropped the discount rate that it charges banks, so they can now borrow directly at the discount window and pay less. The Fed says it’s eager to lend, especially to encourage banks to issue home mortgages.
In a conference call Friday, Fed officials told major banks that discount window borrowing would be viewed as a sign of strength, not weakness. I think that means it will be viewed as a sign of weakness, not strength. They probably take your picture, too.
I don’t pretend to be a bank, but lending directly to homeowners would be cheaper and faster. I don’t know why they didn’t think of that.
Maybe I’ll try the Post Office.
On a serious note....
(because at root this is serious stuff), the dramatic move at the discount window looks like an admission by Bernanke & company that they were being much too nonchalant about the incipient liquidity crisis. It had started as a crisis in one sector – the sub-prime mortgage market, where the chickens were coming home to roost on all those gimmicky mortgages given to buyers who were planning to flip homes for a fast gain in a rising market, or pushed onto unsophisticated borrowers who have no real prospects of paying them back. Those mortgages are bundled into securities called CMOs (collateralized mortgage obligations) much loved by banks (who could blithely bundle up questionable loans and pass them off to others), hedge funds, investment banks, and other big players – until now. When the sub-prime market went sour, some of the big investors found they were in trouble, and the fear began to spread into a full-blown credit crunch, where nobody wants to lend because they’re not sure if the borrowers will be caught up in the panic.
Lowering the discount rate will free up funds for banks to make mortgage loans and corporate loans, at least to affluent borrowers (funny how the emergency help always goes to the well-off rather than the desperate: the financial industry version of Katrina). Whether that’s enough to stabilize the markets remains to be seen. Wall Street thought so as of Friday, with the Dow climbing 233 points. But the Fed may have to start cutting the Fed Funds Rate – their primary tool – and possibly more than once by the end of the year.
Most economists think the underlying economy still looks sound, although trouble in the housing market will slow its growth. If it slows it too much, we’ll have a recession. And the re-sets of adjustable rate mortgages – including a substantial percentage of very dubious ones – will continue at a $30 billion-a-month pace from now to October or November of 2008.
Since the economy is increasingly global – and since the rest of the global economy is both larger and stronger right now than the American economy – most economists are fairly confident that no domino effect is in the cards, as happened in 1929.
At the cheerful end of the spectrum, Jim Kramer, who founded TheStreet.com and whose record is outstanding, thinks the thousand-point drop in the Dow over the past week or so has left many attractive stocks undervalued. He thinks the Dow will move back above its recent highs by the end of the year.
I don’t, but then he’s smarter than I am.