What the Fed can’t do
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As expected, the Federal Reserve lowered interest rates again today, which in a normal recession-fighting cycle is a simple story: ‘The Federal Reserve today lowered interest rates, hoping to spur new borrowing by businesses and consumers.’
That’s not the story this time around. While the Fed is cutting rates, banks in many cases are making it harder to borrow. They have no choice — they’ve made so many bad loans that they can’t afford any more boneheaded moves. The Fed isn’t trying to help consumers; it’s trying to save the banks.
Lou Barnes, my favorite Fed-watcher: ‘... the financial system is still too busted to function properly, credit is extremely scarce and expensive, the system is terribly vulnerable to recession-cycle credit loss ahead. ... How can loans be scarce with the Fed hosing loans into banks? Because system capital is impaired. There isn’t enough capital to support current loans outstanding, let alone new ones.’
Cutting rates may be the Fed’s best option, but that doesn’t mean it’s working. There is a cost, too, to the rate-cutting: a weaker dollar, rising import prices (oil and gas), the threat of more inflation, the kick in the pants to savers.
If you don’t think credit is getting tighter, ask someone with a home equity line of credit. I continue to hear from homeowners who have had their HELOCs frozen or reduced.
This today from a recent L.A. home buyer whose credit line was frozen two days ago: ‘We bought our house last February right in downtown Culver City, got a good price and went for one of the fixer-uppers on the street (due to the state of the house aesthetically we were able to get a good house on the low end of the spectrum of prices for houses in our neighborhood). We put 20% down too which you would think would have prevented any of this from happening in the first place. We were planning on having that HELOC liquid there in case we needed it with the renovation we are planning for our kitchen this year...which will of course only ADD equity to the house. According to their ‘reduced’ value of the house we still actually have over $80,000 in equity (calculated by taking their low-ball estimate and subtracting from that the outstanding principal on the mortgage). ... I tried talking to the bank over several conversations over the phone and basically they do not look at, nor care to hear about, the actual equity on the house.’
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.