After watching the world markets close with record losses for the day, the Fed in an unanticipated move lowered the prime rate .75% to 3.50%. It is a desperate move intended to soothe a wounded economy. President Bush and the Federal Reserve predictably performed like a one trick pony without addressing the problem.
The last economic stimulus package fell on its face until interest rates were lowered. The decision to lower the prime rate between 2001 and 2004 served multiple of purposes. It reduced traditional savings, fueled the market increase, promoted equity stripping from homes, and opened the doors for higher risk investors.
When higher rates were imposed new borrowing stalled. The final step was to develop loans with irrational terms and promote them to unsophisticated or unscrupulous borrowers. Enter the ARMS with teaser rates, negative amortization, prepayment penalties, stated income, simultaneous closing loans involving first and second mortgages and home equity lines of credit.
The last buyers to enter the market were the most vulnerable and targeted ruthlessly. Most think subprime is the problem. I beg to differ. The subprime default level is a symptom of the disease. The symptoms will not be masked as easily this time. Property values are dropping and the equity available to the individual consumer is not available. The dollar is down against nearly every foreign currency. Investors are casting a jaded eye on the stock market because it has been manipulated in the same manner as real estate prices.
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This article, Fed Rate Cut is a One Trick Pony, is just one of our articles from our Mortgage Crisis Daily
The Subprime Mortgage Crisis Before, During, and After
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