The Fed Lowers Interest Rates to Historical Lows
On December 16, 2008 the Federal Reserve announced another major rate cut to the prime interest rate that will significantly lower borrowing costs. The idea is to stimulate the housing market so that the economy will start to churn again. The major force driving our economy into this recession has been the decline in housing prices. Housing prices have not fallen like this since 1932. The most valuable asset that American consumers boast is their house. The decline in the housing industry has created one of the worst economic recessions since The Great Depression.
The deregulation of the mortgage industry created an over inflated housing market that started this recession. Mortgage companies marketed exotic interest only loans, adjustable rate loans and other similar offers to consumers who otherwise would not be able to afford the house they were buying. Home purchases began skyrocketing since mortgages were being almost given away. This created a bubble market and thus housing prices were perceived to be higher due to the increased demand. In addition, more and more people began borrowing against their home equity. The increased home values also loosened up other credit markets like auto loans and credit cards. Consumers began spending based on easy credit and over inflated home values.
The idea behind interest rate cuts is to stimulate the housing market once again. In order to stabilize credit it is going to be imperative to keep home prices from continuing to fall. However, before home prices start to stabilize, home purchases need to increase. The idea is to get consumers to start buying houses once again. First time home buyers can possibly purchase from home owners who are looking to upgrade their living space. This will start a cycle again of people buying homes. The increase in home purchases will stabilize prices and instill confidence in the economy once again.
The other idea behind the rate cut is to allow people to refinance their homes and save money on their monthly payments. A $250,000 mortgage financed at 7% for 30 years will cost approximately $1663 in monthly payments Financed at 4.5% that same $250,000 mortgage will now cost approximately $1266 in monthly payments. That is a savings of almost $400 per month. That is a significant amount, considering $400 a month can buy a new car. Even if you do not need a new car, the savings will give consumers additional disposable income. A more empowered consumer will definitely help improve the economy. The extra $400 a month can also be used to buy clothes, go to the movies, and even take badly needed vacations. As it is, consumers are not spending money and the economy is retracting. The continued retraction of the economy will only hurt the job market more than it already has. In turn, this additional disposable income will begin to start creating jobs again. Businesses will begin to hire again as sales start to increase again, thus causing the economy to recover.
In all, the Federal Reserve is trying to everything it can to stabilize the economy. I agree with CNBC’s Mad Money Jim Cramer that the Fed is finally taking action to help our economy recover. In order for credit markets to start to recoup again home prices need to stabilize. The most valuable asset the most Americans lay claim to is their home. The stabilization of the housing market will bring about confidence in the economy once again. Lastly, the United States has survived the Great Depression, two world wars, Vietnam and even the terrorist attacks of September 11, 2001. With that said, I am quite certain that we will survive the Credit Crisis of 2008.
On December 16, 2008 the Federal Reserve announced another major rate cut to the prime interest rate that will significantly lower borrowing costs. The idea is to stimulate the housing market so that the economy will start to churn again. The major force driving our economy into this recession has been the decline in housing prices. Housing prices have not fallen like this since 1932. The most valuable asset that American consumers boast is their house. The decline in the housing industry has created one of the worst economic recessions since The Great Depression.
The deregulation of the mortgage industry created an over inflated housing market that started this recession. Mortgage companies marketed exotic interest only loans, adjustable rate loans and other similar offers to consumers who otherwise would not be able to afford the house they were buying. Home purchases began skyrocketing since mortgages were being almost given away. This created a bubble market and thus housing prices were perceived to be higher due to the increased demand. In addition, more and more people began borrowing against their home equity. The increased home values also loosened up other credit markets like auto loans and credit cards. Consumers began spending based on easy credit and over inflated home values.
The idea behind interest rate cuts is to stimulate the housing market once again. In order to stabilize credit it is going to be imperative to keep home prices from continuing to fall. However, before home prices start to stabilize, home purchases need to increase. The idea is to get consumers to start buying houses once again. First time home buyers can possibly purchase from home owners who are looking to upgrade their living space. This will start a cycle again of people buying homes. The increase in home purchases will stabilize prices and instill confidence in the economy once again.
The other idea behind the rate cut is to allow people to refinance their homes and save money on their monthly payments. A $250,000 mortgage financed at 7% for 30 years will cost approximately $1663 in monthly payments Financed at 4.5% that same $250,000 mortgage will now cost approximately $1266 in monthly payments. That is a savings of almost $400 per month. That is a significant amount, considering $400 a month can buy a new car. Even if you do not need a new car, the savings will give consumers additional disposable income. A more empowered consumer will definitely help improve the economy. The extra $400 a month can also be used to buy clothes, go to the movies, and even take badly needed vacations. As it is, consumers are not spending money and the economy is retracting. The continued retraction of the economy will only hurt the job market more than it already has. In turn, this additional disposable income will begin to start creating jobs again. Businesses will begin to hire again as sales start to increase again, thus causing the economy to recover.
In all, the Federal Reserve is trying to everything it can to stabilize the economy. I agree with CNBC’s Mad Money Jim Cramer that the Fed is finally taking action to help our economy recover. In order for credit markets to start to recoup again home prices need to stabilize. The most valuable asset the most Americans lay claim to is their home. The stabilization of the housing market will bring about confidence in the economy once again. Lastly, the United States has survived the Great Depression, two world wars, Vietnam and even the terrorist attacks of September 11, 2001. With that said, I am quite certain that we will survive the Credit Crisis of 2008.
Labels: credit card, credit cards, economic recesion, interest rates, prime interst rate
Credit Card / Financial news blog post by Todd Holliday at 7:43 PM 