Connecting the Dots

Yeah, it’s over. The Federal Reserve Bank with their .5% rate cut, 50 basis points to insiders, fixed everything.

With this one bold move “the Fed” solved the liquidity and credit crisis, restored real estate appreciation, eliminated the growing foreclosure problems, prevented recession, stopped global warming, solved the conflict in Iraq, and put us on a path to peace and prosperity for 1,000 years. Boy, if it were that simple.

While I think it was a very well considered and extraordinary move to cut rates this much in one meeting, it is far from a cure to the real estate economy’s problems. The fact is “the Fed” has very little short term power to do this. By reducing short term rates “the Fed” provides needed stimulus to the overall economy, sends an important signal to the markets that it is paying attention, and moves toward establishing an economic environment to facilitate a healthier credit market. Now, that all sounds good, but it is really only a short term elixir to the financial markets, which if you have paid attention, are jumping with joy. Unfortunately, I’m afraid it won’t last.

The markets tend to over-exaggerate the importance and omniscience of the Federal Reserve. And, because the markets are so fixated on “the Fed” and because the masses now have great access to the obsessions of the financial markets on television and the internet, we all become obsessed with “the Fed”. The truth is “the Fed” is not all knowing and all responsible. In fact, “the Fed” is reacting to data that is stale and retroactive and less viable than your data or mine. If you recall, 30 days ago “the Fed” comments indicated they were more worried about inflation and overheated growth than recession.

That is why I think the blame that is being laid on Alan Greenspan’s doorstep is laughable. Greenspan, who presided over the Federal Reserve in one of the most economically rewarding and expansive periods in this nation’s history, had nothing to do with creating this real estate recession. Sure, “the Fed” kept interest rates artificially low which helped heat up the real estate economy. Remember, most of us benefited from that. The board of governors, who are deathly afraid of inflation, tried to move rates up to cool down the markets, but did not see the appropriate response from the bond markets and the result was a harmful flat rate environment.

The truth is the responsible parties for this significant real estate downturn are those who threw underwriting standards out the window, those who bought their products, and the rating agencies that didn’t do their jobs.

The culture of no money, no credit, no income, no problem created a speculative bubble in the real estate markets. When the dust settles and the financial autopsies are completed, I believe the way mortgages are originated in this country will be substantially changed.

I also believe that Chairman Greenspan will still be considered as one of the great custodians of the Federal Reserve Board of Governors. The real estate market will come back. It won’t necessarily come back as a result of these cuts, but it will return when fear dissolves, greed is restored, and again there is an absence of common sense.