Originally posted by: LegendKiller
Originally posted by: alkemyst
Originally posted by: 3cho
wow, legendkiller didnt comment on this thread? bleh, lacks credibility.
some of the comments have merit, but most sounds like you just read it off the finance blurb from AM NEWs.
the fed is not cutting rate because there is a downturn, the fed is cutting rate in anticipation of a downturn that could potentially be avoided.
all of you who bitch and moan about the equity markets tanking, i ask you, why? you should all know the hype associated with rate cuts, why take a long position?
I don't know what legendkiller's claim to fame is...but I work currently in a Fortune 500 builder/mortgage company and have been doing this about 25 years since I was just a kid.
Fed is cutting rates to try to get people using money again. Right now dollars aren't circulating.
Cutting prime though has a tendancy to further this cycle long term though as inflation increases and long term mortgage rates rise.
My claim to fame is that, when you speak of dollars circulating for mortgages, I am part of the machine that circulates them. While I don't specifically have anything to do with RMBS, I know how it works and I know who buys, who sells, and what the general market idea is in ABCP. When my market stops, *the* market stops, that is, unless corporates start lending directly on balance sheet again, which drastically reduces their ability to originate unless you want the old structures back, which have higher costs.
The Fed cut isn't really to increase liquidity. The liquidity is there, provided you have the right assets. Back a month or two ago, there wasn't liquidity. Almost all ABCP trades, moer than 1Tr of them, were done overnight at spreads of L+60 (traditionally ABCP trades at L flat). No ABS term deals were getting done. Basically, all the money that fueled the mortgage industry and all asset backed finance had gone.
This was because nobody wants to be holding the hot potato, that they don't know is hot, until it is too late. Over the last 6-8 weeks rationality returned to the market. ABCP spreads have been getting back to L-flat and trades have terms of everything from overnight to 30 days.
The Fed cut had literally nothing to do with this. It had everything to do with people figuring out what was going on, where they should spend their money, where they shouldn't, how performance was moving, how they should analyze going forward...etc.
From the perspective of trying to head off a housing led recession, the rate cuts are pissing into the wind. We blew our load over the last 5 years and now it's time to pay up. Really, all they are doing at this point is trying to head off a housing recession that would have lead to a larger broader recession. By cutting rates they are encouraging people to borrow more, hoping companies build up their companies..etc.
However, the whole premise of them building and keeping the economy going is contingent upon people having money to spend. Considering that credit card master trusts are at all-time highs, the biggy bank for equity cash-outs from mortgages are at 5-year lows, *and* inflation is gaining (non-core), you are leaving people with no avenue to buy stuff.
Thus, all they are essentially doing is trying to mitigate a massive recession in favor of a major downturn, with no negative growth, or with moderate negative growth. However, the biggest problem with that is that they are still going to run up inflation.
Effectively, all this cut and the one before it, did, was to get Wall St. addicted to crack. Look what happened when the Fed put out releases saying that they are loath to do another cut. Everybody panicked that the crack dealer was going away. Wall St. was happy after the 50bp cut because they thought that the good times would keep rolling through bonus season and things would be OK then. Look at Cramer, he was bitching like a crackwhore himself on his show and then said that his bitching was effective in getting Helicopter Ben to cut rates.
It was only effective because the final goal of the Fed was to try and head off a massive collapse of consumer confidence. Half of the population already thinks we are in a recession. The barometer is the stock market and that hasn't been going great until the cuts.
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