"Now What?" -- be Afraid....

.....be very, very, afraid... :)

Today, the Fed dropped the short term rates by 1/2 a percent.

Hooray!!! housing will be saved!!!

er, not so fast. As I remember, my home equity line (back when I had a house) was based off of LIBOR. LIBOR is some fancy acroynm for interbanking lending rate.

The reason the lenders insist on this is so that the Fed or some other NON-MARKET BASED price fixer doesn't set rates artificially too low and screw the mortgage holder.

Well, the people holding mortgages are screwed for a million other reasons, but in most cases, I believe those with resetting adjustable rate mortgages will have their rates tied to LIBOR....not the Fed funds rate.

But but but....won't this make it easier/cheaper for new buyers???

yes and no.....The "problem" is that the fed doesn't directly control long lending rates nor does it control what the market demands in the way of a risk premium over and above a Treasury to back Joe/Juan Six-Pack's Half-million dollar mcstucco crap-box dream.

in addition, cutting the short term rates is killing the dollar right now, and that is goin to force foreign buyers of dollar paper to seek a higher rate of return to offset the currency risk......oops.

on the positive side of the ledger, although residential housing sucks right now because the utility as a shelter is WAY WAY overpriced to buy (and by extension to buy as an investment to rent out) there will eventually be some other property perhaps that becomes attractive to foreigners if the dollar tanks relative to their currencies.

"luckily" for the dollar, the EU is trying to liquify away their mess, Japan has political problems right now, and even the formerly tough Bank of England finally had to blink ( a little ) and agree to lend Northern Rock some funds to head off complete insolvency in the face of an old fashioned bank run (exascerbated by the fact that people could go online and withdraw AFTER normal banking hours)

so, "now what?" is answered with those tired old lines....look to diversify your holdings out of just dollars and out of just paper priced in dollars....especially if your salary, retirement, savings (everything) is in that one dollar.

but, beware of other paper assets as well....look for a little bit of precious metals, some grains perhaps, and maybe some energy assets as well.

if you want to make a paper bet, bet on long term interest rates going up -- even in the face of the Fed easing today -- I know, "crazy", huh?

ciao,
fuBarrio

p.s. I couldn't believe how lucid and clear Greenspan was on sixty minutes now that he's out of the Federal Reserve chairmanship....Funny, he wouldn't make any comments on what he's investing in other than to say he's diversified....Then, he goes on to say, expect inflation and long term rates to come back after a 25 year hiatus. :) uh....

p.p.s. my friend wants google to find her new personal blog so.... odeliza jacoba