Banks would fail under that scenario. The whole purpose of low rates is to recapitalize banks. They take the spread off 2% Fed Funds and loan a 30-year @ 8%. If the FED gave loans direct to consumers, banks will lose the vig and go under. Also, theres auto-loans, home appliance/renovation loans, business/commercial loans to consider. The Fed would have to provide facility for all that and go in direct competition to banks (who own the Fed Reserve system) and undercut their shareholders. Unlikely. Also, theres risk premium to consider. Economies can't stay awash with money and grow forever. Even if the credit crisis didn't exist, pouring more money onto red hot inflation will spur little excess growth. Risk premium tied to future outlook should be commensurate with actual lending rates. 2% or whatever is totally artificial. What I mean by that, real risk implicit in future lending is much higher than 2%, given current outlook. Low rates direct to consumers wouldn't save this economy. Its a maxed out fiat boom and we'd just see more price/wage inflation than actual growth, that, over time, would worsen in severity towards inflation. What the FED really needs to do is crank rates and flush everyone out. Now that'd be fun to watch.
but that means the banks win and individuals lose except the very wealthy-law of nature strong eat the weak-folks like jp morgan caused 1928 fiasco by doing a countrywide margin call-seems familiar-if europe can handle low rates to get the euro going why cant we? banks really need a 4% spread to stay afloat-borrow at two and lend at six? seems there are too many open hands involved asking for their slice of cake-first time homebuyers should get a break end of story!!!!
and if a bank makes six-6- % -percent off of 200k ...that is 12,000 a year! of interest payments for the first ten years-bank makes 120k in ten years!-you telling me it costs the bank 12k to service a 200k loan??? its all computer run-costs them pennies on the dollar to service a loan that is not in trouble!!! pure greed-banks are cherry picking the best properties -giant shakeout-homeownership should not be gamed like the markets -homes are to live in,raise a family in-not to trade like equities-complete crookedness!!!!!!!!!!!!!!!!
banks take that profit and reloan it ,keeps the economy rollin,i just think it would be smarter to bail out the 5% of mortgage holders,homeowners in foreclosure,not builders,for a 3 yr interim,than to bail out the banks and let the taxpayer pay for all there enron type accounting practices. Ten percent of homeowners are in trouble right now,unemployment is 5.7%,that means 4.3 % of those in trouble are still working and struggling to make they're mortgage payment,make a short term low interest loan to those homeowners that can make a payment,let em keep there homes,banks write off the debt,start over and we move on.
Thats Right. Who Owns the Federal Reserve System?? The very same banks that voted 2% Fed Funds, endless bailouts and no-recourse junk paper loans..... Law of the Jungle. They save their own ass courtesy of work-a-day commoners who get stuck with the Bill: Inflation. Thats the System.
Most loans banks write is paper money created by the borrowers promise to pay.... IOW, the money is created, not from the banks reserves, but from the borrower, walking into a branch and signing the mortgage... The money never existed. The promise to pay becomes a negotiable bond, that under banking law, empowers the lender to create the offsetting amount to be borrowed. So that 250K, or whatever is created out of thin air, then "loaned" to the borrower, whom, upon non-payment, will be held over the barrel and liquidated to pay back money the bank never had.... Interesting system. The cost of such a system is inflation. Paid by Commoners through the loss of purchasing power that never keeps pace with inflation.... So banks profit tens of billions from counterfeit loans every year, that if unpaid, are punishable by the liquidation of all personal assets to pay back money never owned by the bank to begin with.... Its a parasitic system designed and built by Predators.
Banks do not generally borrow at overnight rates and lend for 30 yrs. That's how the S&L's got into trouble. If they are in that position they will do some interest rate swaps (or something similar) to synthetically lengthen their liabilities. So their effective borrowing costs are much higher than short term rates when the yield curve is normal, unless they are risking a blowup. To make things more complicated most mortgages are prepayable so the bank doesn't know if it made a 1 yr loan or a 30 yr loan ahead of time. There is prepayment risk if they make the liabilities to long - basically they lock in debt at a high rate, interest rates drop, borrowers refinance and new mortages the bank can make pay lower interest rates. Some bigger institutions use interest rate options to deal with this, others just hope the spread is big enough to cover it. I am not saying they are not making a big spread, I don't know what they are making, but I am saying it is not that simple to estimate. Running a leveraged mortgage portfolio is complicated, which is one reason why a lot of small banks and credit unions sell a lot of their loans to bigger players.
i tell you this though-the diiference between 4% and 5% is not one point it is more like 64% increase in yield-the difference between 2% and 6% is a 300% increase in yield-how many areas can you make that big a spread???
i don't think this mess has a whole lot to do with ten percent of the mortgage business,that's why that simple solution i threw out there wouldn't work,i think these unregulated off shore hedgers resold the same loan packages more than a few times and couldn't bury it in the books anymore when people decided to cash in there portfolios,we'll never know because the fannies and freddies are regulated by a bunch of people on permanent vacation on some ostrich farm in australia