Mortgage Market Gets Encouraging News From The Feds

Sep 1st, 2007 @ 7:27 AM by Alden Smith

The chairman of the Federal Reserve Board, Ben S. Bernanke, gave a speech Friday Aug. 31 at Jackson Hole, WY.  In his speech, he said that the Federal Reserve “stands ready to take additional actions as needed”.  Certainly, this is good news for investors and mortgage lenders who are on the verge of going bankrupt.

The Feds have already dropped discount rates on Aug. 17th.  This provided some stability in the market, but was not enough to push things towards a more even keel.  Mr. Bernanke did not make any specific promises, but did acknowledge the harm to the economy caused by the turbulence in the housing and lending market.

What Bush Had to Say

This announcement was in tune with what President Bush had to say concerning the state of the market.  Bush made the thought provoking statement that it is not up to the Feds to bail out people who have made poor investments or have bought homes that they knew they could not afford.  This is as it should be.  It is obvious to even the least informed citizenry that greed has put the market in the position that it is currently in.  Poor lending choices, driven by the bottom line, has caused the huge fiasco that faces us now.  And it is not up to the government to bail them out.

The State of the Market

The stock market has been up and down, but overall is somewhat stable.  The Dow Jones industrial average ended the day up 119 points and the broader stock market indexes climbed by like amounts.  Mickey D. Levy, chief economist at Bank of America, said that “He ( Bernanke) made it clear the Fed is on top of the issue and very aware of the risks to the economy.”  The Feds announcement and the encouraging news from President Bush bolstered the market, allowing it to rally somewhat on Friday.  The Dow gained 119.01 points, to 13,357.74. Standard & Poor’s 500-stock index gained 1.12 percent, closing at 1,473.99, and the NASDAQ composite closed at 2,596.36, up 1.21 percent.

Looking Ahead

Mr. Bernanke made it very clear that it is not the Federal Reserve’s obligation to bail out investors and people who have made poor decision, echoing President Bush’s comments.  He does feel, however, that developments in financial markets can have broad economic effects felt by many outside the markets.  Bernanke feels that the Federal Reserve must take those effects into account when determining policy.

The Bottom Line

Mr. Bernanke acknowledges that troubles in the mortgage market could affect the overall economy.  Personal consumption expenditures have remained flat, with consumer spending doubling to 0.4 percent in July.  Unemployment stands at 4.6 percent. Fed officials, however, say that consumer spending was already slowing before the credit squeeze became acute recently and is likely to be further damaged by the increased difficulty and expense of obtaining credit.  It indicates trouble in the economy even before this latest fiasco.  Although the Feds are poised to make a quick move on these troubles, the American population must ride out these latest issues, and see where it affects the average citizen.  That will be the real test.