Wednesday, October 31, 2007

Keeping Big Bucks Afloat Takes More Than Rate Cuts by The Fed

If consumer spending (based on exuberance of the irrational sort) keeps going, will it buoy up the rest of the economy? Most opinions on the financial pages appear to be hoping that will do it. "Go shopping", as the occupied White House enjoins.

The quarter point rate cut just announced (Breaking News at just won't do it.)

It would probably be enough that pocketbooks kept being emptied over the mall stores - if deals were not being reneged on in the upper offices. When major purchases - investors in businesses - are blowing up everywhere, it isn't just a speck in a portfolio, it's money not being made. A reverse 'ka-ching', if you can imagine that.

In North Texas, a major builder backed out of a land purchase and the owner had already torn down the golf course he was operating there. That's playing out in court still. Outside Chicago, farmers looking to cash out their property are finding builders are reining in - in droves, and dollars. There are deals not being made, meaning those Sovereign Investor funds are not making the bucks they promise, and the backers are more than restless. They're panicky.

The interest rate cut Wall Street believes will buffer the economy from housing market woes is unlikely to boost hard-hit banks and homebuilders much in the near term, analysts say.

The Federal Reserve policymaking committee is expected to approve cutting a key short-term rate at least a quarter percentage point Wednesday to help the economy get through a deeper-than-expected housing slump and credit crunch that accelerated in August.

Investors are betting the central bank will reduce the federal funds rate, the rate banks charge each other for overnight loans, to 4.5 percent. Over the next 12 to 18 months, lower short-term rates will aid the overall economy because many equity credit lines and some credit card rates are pegged to short-term market rates.
Jefferson Harralson, a banking analyst with Keefe, Bruyette & Woods Inc. who follows banks such as Bank of America Corp. and Wachovia Corp., said an acceleration in losses from defaults "seems to be a given, whether or not a rate cut occurs."

He says home equity lines of credit will be less likely to default if rates are lower. But that's hardly a revenue cure for banks in an environment in which housing prices continue to fall and foreclosures continue to rise.

"The home equity business isn't going to be a growth business," Harralson said.

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