The Fed cut interest rate for the fifth time. How much is enough? US has been in recession for few months now (even though the Govt says it is trying everything to avoid one, except admit it) and for some reason they feel cutting interest rate will help them get over it. In fact this behavior of Fed known as Greenspan's put actually instills confidence in the lenders to be even more careless.
The US mortgage industry is governed by acts like HMDA, RESPA, and FCRA. These acts are supposed to keep a check on the lenders, protect the borrower’s and to ensure that no one community is favored or neglected. In spite of these, the US is now neck deep in Subprime quicksand which is dragging the whole economy back to what it was a century ago. Sadly this is being viewed as an unforeseen natural calamity by the US Govt and is trying hard to sanction economic relief package to aid the ‘victims’.
The truth is, it is a conspiracy and every one is guilty as charged (Surprisingly no one has been charged yet); The lawmakers for not enforcing the already established rules, lenders for luring otherwise unqualified borrower’s with bizarre products like Interest only loans, NegAm, balloon loans, jumbo loans (credit should be given to those who designed such products) and the famous ARM loans with teaser rates at the time of signing but would reset to high interest rate with exorbitant monthly payments in few years, Credit rating agencies who rated these mortgage backed securities as A’s and A+’s and AAA+’s without properly analyzing the underlying portfolios and finally the consumer who just got greedy.
The million $ question is, didn’t anyone foresee this? Simple answer is yes, warning bell(s) were sounded but they were ignored. No one wanted to be the party pooper.
I feel that an extensive investigation needs to be conducted and all those found guilty should be punished. Guess what, FBI has just woken up from deep slumber and is planning to investigate 14 Financial Institutions for alleged involvement is improper trade practice. I hope this marks the beginning of a long over due clean up of the US economy.
In the domestic scenario, when the Fed interest rate cut happened, there was speculation that our own RBI will reduce the repo rate...Why? For many reasons (none in particular which is why it is called speculation). But unlike the fed chairman, Dr. Reddy did not reduce any interest rate stating such a move would accelerate the inflation. Kudos to Dr. Reddy.
For those who would like to get an over view of the Sub-prime here’s the latest.
Resources
Summary of the 2007 Sub-prime melt down
Part 1 , 2 and 3 of What 'could' have been done to prevent the Sub-prime crisis? updated Feb 17, 2008
What the US Tax rebates mean? updated Feb 14, 2008
