Tuesday, September 18, 2007

CNN Gets it Half-Right

Irrationally held truths may be more harmful than reasoned errors.
--Thomas H. Huxley

Dick Uliano on CNN this morning, first rattle out of the box, said the Fed lowering interest rates would lower credit card rates. Sounds like Dick had a brain uliano.

Overnight rates will NOT adjust credit card payments…and it’s not going to lower mortgage rates, either. This whole scenario is so bizarre…the news media just blathers nonsense, and no one catches it.

To be fair, Dick ran a re-write later in the morning, noting that credit card rates might come down as the banks which issue those credit cards generally follow the Fed's lead, and drop their rates when the Fed does. Then he said mortgage rates would fall when the Fed cut rates...Wrong-o.

Very few mortages are tied to the Prime rate. It's the LIBOR that really is the one to watch for those rates, and the Fed has nothing to do with LIBOR--the London Interbank Offering Rate, which is a filtered average of inter-bank deposit rates offered by contributor banks. LIBOR loans have maturities ranging from overnight to one year. The 6-monnth LIBOR, for example, is used as an index for some US mortgages, especially those with less-than-stellar credit.

Here’s an AP story that ran just moments ago on the wires:
"Oil prices climbed to a new high, above $81 a barrel, on expectations that the U.S. Federal Reserve will cut a key interest rate later today, a measure that has the potential to bolster the economy and strengthen petroleum demand in the world’s largest energy consumer."

That’s really just a shade of grey.
Does lowering the overnight funds rate have the potential to bolster the economy? I don’t think so, Tim. Even if the Fed drops interest a half-percent, to 4.75%, what’s it going to do to your life? Nothing. Nada. Zero. Zilch.

The Fed lowering rates is only going to pander to the weak in spirit and fragile of faith on Wall Street, where the greed factor has been dialed up to 11 for the past several years, and the quest for higher earnings obliterated the common sense issues.

Things like not lending money to people who can’t pay it back...
Not giving a mortgage to someone who cannot verify income...
Lending 100% on a house, when it’s value continues to diminish...
Lending money to someone with zero down—no skin in the game, and no incentive to stick when the going gets a little rocky...

All the Fed is going to do today—if it decides to lower interest rates—is salve the nerves of bankers who knew they were making skanky loans when they cut the deals, and now they’re in trouble. There is a degree of irony here that the same banks that forced through tougher bankruptcy laws last year, making it more difficult for debtors to discharge their debts, now have their banks against the wall (due to an unprecedented level of stupidity in their underwriting) and are squirming for relief.

As my friend Randy Tumlinson likes to tell his high school classes, "Irony, irony, better than macaroni."

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