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You Can’t Close the Barn Door After the Barn Has Burned Down

Nevermind after the horses have run away. I posted last week that I thought the suggestion that Countrywide might weather the storm might be wishful thinking. It’s amazing how the “story” can change so much from one week to the next in this perfect storm. I italicize story because most of what you hear is a “story” – but eventually the truth comes out (you can’t pretend forever you are solvent when you are not).
The frantic cutting of the Fed discount rate is like using a fly swatter to stop a lion at this point. The mess is just too big and most of the lenders who were giving loans to anyone who could sign their name have either gone under already or have stopped writing junk loans they can no longer palm off on investors who were one giddy with glee over their “unbelievable” returns. (Unbelievable because they were based on fraud and blind greed.)

The only people this discount rate cut might help are banks lending to high-quality borrowers.

It’s important to note, it was the discount rate that was lowered, not the Federal Funs rate – so it might not impact mortgage interest rates at all. Also, the WSJ blog today noted that banks typically don’t like to go to the “discount window” as it could be a sign of weakness.

Even if the Fed lowered the long-term rates, it wouldn’t help many people who are struggling with adjustable rates. The teaser rates on many of the ARMS were SO low, that it likely wouln’t make a difference. Of course, many of the people in these loans were re-financing to keep up on payments. Sort of the equivalent of using one credit card to pay off another. With no more equity, that’s not going to happen. And if your credit isn’t prime, you will likely not get another loan.

Frankly, I don’t believe there is anything the Fed can do to stop the momentum of the housing crash. I still hear pundits reversing the result with the cause. They speak as if the housing bubble caused the credit problem. They don’t seem to want to admit that it was easy (and sleazy) credit that created the housing bubble. Houses did not rise in value because they were intrinsically more valuable. They rose in value because credit was so cheap and so easy to get, that a false demand was created – people bought houses who shouldn’t have bought houses, or they bought bigger houses than they should have. The mindless lending with no regard for risk created false values. As the credit crumbled, the values naturally started to crumble too.

Remember that a house is not worth 1 million dollars if no one is willing to pay 1 million dollars for it.
Some would say, well if someone is willing to pay 1 million dollars (as they did last year) it must have been worth 1 million dollars. However, the fundamentals were skewed by fraud and poor lending standards, so that value was really the top of the Ponzi pyramid. No one left to buy in. The Ponzi scheme collapses.
Anyone who still says, but they aren’t building any more land, hasn’t been looking at Japan’s 10-plus years of housing declines.

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