Thursday, February 18, 2010

Fed raises "emergency" bank rate

The Federal Reserve did something we haven’t seen in a long time; they raised the “emergency” loan rate by a quarter point to .75%. They said this will have no impact on consumer interest rates but Treasury Bonds are already moving up and this does affect mortgage rates. Their explanation for doing so seems a bit lame as they are claiming it is only intended to encourage banks to use conventional capital sources instead of taking “emergency” loans from the Fed. Is there an emergency or not? More importantly they are making their “overnight” loans to banks just overnight instead of 30 days as they have been since August 2007 (a year before the crash).

The Fed is definitely cooling the credit market but the question is why? Unemployment is up again and by Fed policy this means no inflation even though wholesale price inflation is heating up. China has been restricting their banks’ lending. You also have the unfolding scandal in Europe that could leave Wall Street banks open for billions in liability as well as criminal charges.

The other shoe to drop according to the Congressional Oversight Panel ( is quote “Commercial real estate (CRE) loans made over the last decade - including retail properties, office space, industrial facilities, hotels and apartments - totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present "underwater," meaning the borrower owes more on the loan than the underlying property is worth.” end quote.

These loans are made for only five years or eight years and must be refinanced. This is the sort of thing that produces an economic death spiral as otherwise successful businesses are forced to sell in dead market and it creates its own “weather” like a forest fire then the whole area is destroyed.
This is what is driving the weekly bank seizures and the pace is going to really pick up speed as business that aren‘t underwater are dragged under by the failure of companies they do business with.

This of course will drive service sector job losses and there are fewer factory jobs as out sourcing continues. The failed businesses won’t be paying local taxes or collecting sales tax further contributing to the 900,000 local government jobs that will be lost when the stimulus money runs out. We need a real jobs bill but more importantly we need our factory jobs back. It’s already to the point where that will be extremely painful even if China is very gracious to their client state (that’s us).