Fed Cuts Discount Rate

August 17th, 2007

Update 8:45 PST.? Some comments from JumboRateNews, another publication we subscribe to, as to why this isn’t like the S&L crisis in the 80s:

A spike in oil prices in 1979 pushed up inflation and coupled with interest rate deregulation to create a perfect storm of sorts in the 1980s. Short-term interest rates on deposit products got very expensive in relation to the income generated by long-term fixed-rate mortgage products. It doesn?t take long to become insolvent when you are paying 15% on deposits and only charging 4% on loans.

They?do go on to point out though, that this scenario is new and we will have to wait and see if the regulations put in place will be suffecient to stave off bank failures.? The difference between 15% and 4% is quite large, but the difference between 5.50% (current rates many banks are paying) and 0% (rate of return on a failed loan) is significant as well. My personal opinion is smaller banks will probably whether the storm better since they are more likely to not be as heavily involed in the subprime?and Alt-A mess.??But even large banks caught up in the mess?have a lot?options to help meet short-term funding needs.? I don’t think we are looking at a situation where we will see?a lot of bank?failures.? Probably just a time where the Fed needs to lower rates a bit.?

Morning comment. In a surprise move, the Fed cut the discount rate to 5.75%.? However, we aren’t out of the woods let.? This is only the rate that the banks can borrow directly from the Fed at for short-term needs.? This will help banks, but not everyone else.

At least it is an acknowledgement, that the economy is not in a stable state.? Many are now betting on a Fed Funds rate cut in September.? I’m sure the Fed wants to see how this move affects the economy over the next few weeks.

Here is a summary from Wescorp,

“Realistically, all this does is calm things down and buy some time.? The banks are the ones that can borrow, and they aren’t necessarily the ones that are troubled.? This isn’t going to suddenly free up mortgage lenders to start making home?loans again either.? This also doesn’t fund long-term that huge pipeline of big LBO?loans on the bank’s books. ??But, this was a much needed step.”

cd :O)

-- By +Chris Duncan

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