When it comes to the direction the economy is heading, the week ending 11/21/08 did end with some hopeful news. Federal Reserve President Jeffrey Lacker said that an economic recovery could begin in 2009 as low interest rates, low energy prices, and less drag from the housing sector may shore up spending. Stocks bounced higher on Friday, with the rally being boosted by the anticipated appointment of incoming Treasury Secretary Timothy Geitner. There was surprising news from the Fed last week that the “Minutes” from their October meeting revealed.

After years of being concerned about inflation, the Fed is now concerned about deflation. So what exactly is deflation? Deflation is when prices drop, which generally is due to lack of demand, and therefore lack of pricing power. With the economy slowing down, we are hearing economists forecast that we may be in for a deflationary recession. In a deflationary environment, investors flee into fixed instruments like Bonds, because the fixed payment received would actually buy them more goods and services over time as prices decline.

GOOD NEWS: So what does this mean for home loan rates? Remember, home loan rates improve as Bond pricing moves higher – and more demand for Bonds would mean higher prices for Bonds. In the spring of 2003, when Alan Greenspan uttered the “D” word, deflation, Bonds rallied in just a few weeks, bringing a significant drop in home loan rates. Of course, the economy is different right now, but as more money may be headed towards Bonds in a deflationary environment, we could again see a significant improvement in home loan rates down the road. Stocks could pull money out of Bonds and cause some short term worsening of home loan rates…but if deflation starts grabbing more headlines, smart money will be headed towards Bonds, which will help home loan rates improve.

IMPACT ON ECONOMY: Again, deflation occurs when the general level of prices falls. In the extreme form, prices of everything fall: goods and services, shares, houses and labor. That is what happened in many countries in the 1930s. It is what happened in the 1990s in Japan. The result is that deflation will hit profits severely and unless it is extremely mild or short-lived, it is bound to bring on a wave of insolvencies. In this way the deflation of prices can easily lead to the depression of real output and employment.

Question: We all want less expensive living. What do you think the long term effects (good or bad) of deflation are?
• Less Debt due to less spending?
• Harder to get qualified for home loans/credit?
• More businesses failing?
• Better Customer Service?

Megan McDonald, Licensed Mortgage Planner
Excel Home Lending
383 Inverness Parkway, Suite 140
Englewood, CO 80112
Cell: 303-717-9995
Fax: 303-468-6133
http://www.excelhomelending.com
http://www.mcdonaldlendingservices.com

Book Club Interactive: Utilize Meg’s Blog to discuss the Federal Reserve – What do you know about our monetary system? How does this system impact you?

Book: “The Creature from Jekyll Island”, G. Edward Griffin (4th edition/2008)

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Market Discipline-WHAT?

November 13, 2008

There are many questions surrounding our country’s latest Bail Out. Is there market discipline if certain banks are being bailed out and others aren’t? What about a free market system whereby banks should be allowed to fail? – Would it really be catastrophic if this happened? Which banks should be bailed out and why? Are the banks using the money the way it was allocated to them, or are they using the money to buy up other banks?

Did you know that AMTRAK was created out of the Bailout of Penn Central (was our nation’s largest railroad). In 1970 Penn Central announced a need to declare bankruptcy. Here’s the catch – the biggest banks of that time owned a lot of Penn Central’s stocks AND the banks’ officers were Penn’s Board of Directors. By the time the public was informed of Penn’s status, CHASE happened to have sold 262,300 shares of stock. The Federal Reserve and Congress still came to the rescue. Out of this, came AMTRAK – 85% of its stock was owned by the government and, of course…we the taxpaying people. So, the banks were fine, the losses were passed on to the people. This surprises most people. Does this surprise you?

In Chapter 3 of “The Creature From Jekyll Island”, G. Edward Griffin outlines many past bailouts; Penn Central, Chrysler, New York City (yes, the actual City government of New York), and Lockheed Martin. One of the most interesting case studies in my opinion was the bailout of the Commonwealth Bank of Detroit. This bank was a relatively small community bank that served in minority neighborhoods. A bailout occurred under the guise that the interest of the communities this bank served would be drastically compromised, i.e. The banking community wouldn’t have as much choice and the balance of power would be tilted into the “hands of a few”.

So what really happened with this bailout? The FDIC guaranteed the bad debt, Commonwealth Bank of Detroit (CBD) was sold to a firm funded by Saudi princes, which is now Comerica, and CHASE walked away unscathed.

Do you think this bailout had anything to do with the concern that minorities might not be served? My opinion is that dealing with any issue as it relates to potential discrimination is at the very least, difficult. I go back to my question: Would it be better to have a bailed out bank serving a community, or better to allow institutions to fail and retain the free market system? To put it another way – In this case, if CBD wasn’t bailed out, and failed, would the community suffer, or would it correct itself? Keep in mind that 11 years later, CBD does not exist ­ the community does. I guess you know my opinion!

What’s YOUR opinion?

Megan McDonald, Licensed Mortgage Planner
Excel Home Lending
383 Inverness Parkway, Suite 140
Englewood, CO 80112
Cell: 303-717-9995
Fax: 303-468-6133
http://www.excelhomelending.com
http://www.mcdonaldlendingservices.com


IF THE FED CUTS THE RATE BY .50%, SHOULDN’T MORTGAGE RATES LOWER, TOO?
 
Not necessarily!  Over time, the long term mortgage rates will be impacted by what the FOMC (Federal Open Market Committee) does with the FED (Federal Funds Rate) rate The short term impact is seen more in how the stock market reacts.  Why?  The mortgage bond and stocks compete for the same dollar-typically speaking. So, if the stock market is up, rates are up (because the mortgage bond is down).  
 
THIS IS THE 9TH FED RATE CUT IN 13 MONTHS – Why did the FED cute the rate – AGAIN?
 
“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the Fed said in its policy statement. “Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.” Ben Bernanke, FOMC Chairman
 
ANOTHER BAIL OUT? STAY TUNED…
 
Commentary by Bernanke 10/29/08: “…with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.”

According to G. Edward Griffin, the author of “The Creature from Jekyll Island”,  “The final solution on behalf of the banking cartel is to have the federal government guarantee payment of a loan”….via Congress.  Mr. Griffin believes that the parties involved in the Federal Reserve have to convince Congress that without a bail out, the economy would be in danger.

DO YOU BELIEVE OUR ECONOMY WOULD FAIL IF THE GOVERNMENT DIDN’T SIGN OFF ON THE BAIL OUT?

Please post your comments – I look forward to what you have to say!

Links:
http://www.federalreserve.gov
http://www.econmodel.com/classic/terms

 

Megan McDonald, Licensed Mortgage Planner
Excel Home Lending
383 Inverness Parkway, Suite 140
Englewood, CO  80112
Cell: 303-717-9995
Fax: 303-468-6133
www.excelhomelending.com
www.mcdonaldlendingservices.com 

Financial Literacy Club Interactive:  Utilize Meg’s Blog to discuss the Federal Reserve – What do you know about our monetary system?  How does this system impact you?
 
Book (Optional):  “The Creature from Jekyll Island”, G. Edward Griffin (4th edition/2008)