Tuesday, November 25, 2008

More Credit!

As if to mock my claim yesterday that you can't solve a problem of excessive credit with MORE credit, the Federal Reserve today announced some new programs which aim to free up more credit!
The Fed said they'd buy up to $500B (that's BILLION) in mortgage backed securities, and $100B in direct debt from Fannie and Freddie. They also said they'd spend $200B on asset backed securities to ease credit to small businesses, student loans, auto loans and credit card loans.
As I've said many times, the housing bubble was caused by an over-availability of cheap credit, yet the Fed's solution to the problem is more of the same. In their own words:

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

Good luck with that. Hey, mortgage rates had their biggest drop ever today - I guess that means the Fed is brilliant (sarcasm). In the words of a commenter on the NY Times' article on the Fed program: "I guess I'm having a little bit of a problem understanding how more credit is going to help people who don't have jobs and owe $250,000 on a house that isn't even worth $150,000. Can someone kick me down some knowledge?"
I sent Bones this video today, with the subject line "insta-fav"

But he replied with this video, which is a tremendous take on the classic iconic 1980's A-Ha video: Take On Me. This is great stuff: The Take On Me Literal Video Version



bill c said...

KD, been reading your blog for a few years now via the good doctor. used to enjoy the poker stuff but gotta say i love your material about this financial mess even more. great insight. as a finance major graduating in 2 weeks (depressing in itself) you definitely help clarify alot of this into more understandable, hilarious terms. to me this situation with the overleveraging seems eerily similar to what happened in the 20's with credit from what i remember. any truth to that in your opinion?

Kid Dynamite said...

bill c -
thanks for the comment. to be honest, i'm very much NOT a student of economic history - and i think a mistake a lot of economists make is thinking they can apply past theories to present times. When traders do this, and it blows up (like Long Term Capital) - everyone says "duh - of course you can't rely on past data" - but no one questions when economists do the same.

i think this period we're in now is especially different because i think our debt levels are much much greater than they ever were, so the old paradigm is essentially useless...