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September 12, 2007

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Reggie

Cutting the Fed Funds rate is not as straightforward a solution as many think it is. First, as many realize, there is the inflation threat and the further damage to the dollar. Then there is the fact that it will probably do very little to help the housing situation.

a) 25 -50 basis points makes a very small difference in mortgage payments, if it is actually filtered through to mortgage rates
b) LIBOR has detached from its close tracking of the Fed Funds rate
c) Rates are already very low for real estate
d) Those low rates are why we are in this real estate situation in the first place!!!
e) Rates, Subprime loans, etc. are not the current problem. The problem was and is bad business practices in loan underwriting that fueled the rampant speculation to create bad debts, overbuilding, and excessive pricing of real assets. No matter how low rates are cut, the debts will still be bad, the pricing will still be excessive (and if the rates are cut, the pricing could get worse since that is what ignited them in the first place), and the oversupply is still there, and will be there until pricing comes down to the point where those who have not bought can afford to do so in the then current mortgage environment under the current terms (which will be more stringent then the recent past).

Therein is the conundrum, where if you cut rates you will raise prices, and if you raise prices you will have a problem eliminating excess supply. There will still be oversupply in housing. I would like those who don't agree to listen carefully, if there is brown @%#$&! in the bottled water of your local supermarket, it doesn't matter how low the supermarket discounts the water, that brown !$@#$# is still in it. It doesn't get any less brown, or any less stinky because the water is cheaper. Now, some may be tempted to buy that @#$@%@ at a certain price, but...

newport coast homes for sale

I show that the relationship between the 10-year Treasury yield and the federal funds rate changed dramatically in the late 1980s, well in advance of Greenspan’s observation.

quail hill

I show that the relationship between the 10-year Treasury yield and the federal funds rate changed dramatically in the late 1980s, well in advance of Greenspan’s observation.

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