Correct Move By The Fed

Before the stock market opened this morning, the Federal Reserve announced they plan to lend up to $200 billion of Treasury securities in exchange for debt including private mortgage-backed securities.  Basically, this is another behind the scenes move by the Fed to grease the wheels.  There is a credit and lending crunch going on and these types of moves make sense.

Remember that higher interest rates didn’t cause the situation we’re in now.  It was a real estate bubble by money being too loose to begin with.  So, lowering interest rates will help in some areas.  However, we don’t have a borrowing problem.  It’s a lending problem.  So, the Fed needs to continue to do things that encourage lenders to lend. 

Lenders and other institutions have a big portfolio of bonds.  They borrow on those bonds.  But, when the bonds drop from a $1 to $.70, it prevents them from functioning normally.  The Fed’s move should up prop the value of mortgage bonds and thus add liquidity to the system.  This is a good move.  The question is, is it too late?

I don’t think it’s too late.  The economy is slowing but we have to continue to remember the economy moves in a circle not a straight line.  So, the recovery may take longer because the Fed acted too slowly.  But, it will recover with all the stimulus we’re seeing over the past couple of weeks.

Even if you aren’t dropping with this stock market and you’re sitting on the sidelines like I am, you have to continue to be on the lookout for deals, whether they are in stocks or bonds.  Because, there are some deals out there.  I’ll continue to post what I believe are the best deals so we can all take advantage of them.


1 Response to “Correct Move By The Fed”

  1. 1 Eric Hundin March 11, 2008 at 8:16 am

    I found your blog on MSN Search. Nice writing. I will check back to read more.

    Eric Hundin

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