What would happen if the Fed increased interest rates?

[desdawg]

It's looking like they will leave it alone. Adjustable rate mortgages would ratchet up even higher, refinancing would become less of an option resulting in a new wave of foreclosures and the companies that work on borrowed funds cost of doing business would go up. Credit card rates would go up. Would savings rates go up as well? For me it hard to guess at all of the ramifications. Seems like I always miss something.

[ScottA]

The way things stand I don't think the low rates are helping the average amrican much right now. They maybe helping slow/ease the banks problems a bit though. A higher rate should slow down inflation a little which would be a good thing right now with inflation running pretty high. I don't see any real help for working people until this banking fiasco gets worked out. House prices won't level out till there are buyers again. The low rates don't seem to be creating anymore buyers so I say raise them. Also I'm seeing a real cash shortage in the economy right now. People are having a hard time keeping up with the higher prices and very little new money is flowing in. The Bush money give away earlier in the summer was a joke since most people spent it in a week or two and where quickly broke again. Bottom line is it's getting tough to sell anything.

[Mad Dog]

I think that all those "poor" people that overextended themselves, should lose their houses.  You made your bed, now lay in it.  Reason and accountability should have come into play, before you grabbed all the money the bank was so willing to give you.  The fact of the matter is the Freddie and Fannie bailout is helping out the big guys, not the little guy with the mortgage, and we're paying for it. 

I think it's about time Capitol Hill got an enema, because with every new policy they pass, it seems like another BOHICA situation every time.

[desdawg]

I agree that the people who grabbed up those mortgages were naive and uninformed for the most part although a lot of investors rode that pony too. Most of those guys have bitten the dust by now and will be waiting for the seven year bankruptcy thing to clear their credit reports. They were the undeserving of the lot. Because they did know better. They watched to many "no-money down" infomercials on late night TV. They jumped right from the dotcom bubble to the housing bubble and thought they saw some easy money. Some of them actually made some if they flipped quick enough. The others were young and dumb and they too will pay for their ignorance for a long time to come. I don't think a fresh wave of foreclosures from those who have hung on and worked through it this far would help anyone. At least that group has exhibited some perserverance. And even the hangers on will be punished by a lower value than what they paid or are paying. The real culprits here are the lenders and the people who would rate and buy those "securities". They are no doubt the real rip off artists in the group.

[muldoon]

des - A few things about the federal target rate. 

Mortgages are not tied to it.  The FFT is the rate at which banks lend to each other overnight, it's not a consumer debt rate.  After target there is the actual funds rate, then prime, then everything else for conumer debt.  The actual rate is defined by the credit market as a factor of supply and demand.  As the economy speeds up, money flows to stocks and away from treasuries causing the IRX (13 week treasury) to increase in cost as the mechanism to keep interest in because demand falls.  As that number goes up - the interest rate of target follows it thus providing a cooling affect as money begins to cost more and opportunity costs increase.  When things slow, demand for the safety of treasuries increases forcing the rates down.  Because they can offer less and attract more money.  The fed merely follows this again by dropping rates as the credit market flows which should increase the "velocity" of money.  As the cost of debt has not moved much lately its no surprise the rate did not change. 

If this interest you, take a gander at this chart:

As for the second half of what is key here in my opinion.  You would have to define whats wrong with the credit market and indeed what is this credit crunch.  If the target is what banks loan to each other then whats the problem?  Because banks are not lending to each other.  This should be an everyday thing, when one bank gets over subbed or falls under reserve balance it borrows short.  Theres only two reasons why this doesnt happen.  1 is trust, one bank doesnt trust the other bank to pay it back.  This is a factor of risk, and involves what credit lines the counterparty has available.  I think some of this is real even today, although I think was more the case last year than now.  I think at least the primary dealers all agree there in this together.  So the second thing.  They cannot loan what they don't have.  If they are under reserve requirements already, they dont have any to loan out. 

Heres the federal , reserve data on that

About all they can do right now is the bailouts.  They can sign up taxpayers to keep this turd floating the bowl and thats essentially where we are in my opinion.   There is nothing to solve today, the problems are manifestations of malfeasance and mis investments made years ago.  It's bubbling up now..  but doing anything to "fix" it really just prolongs the event and pushes the pain a little farther away.   I guess thats just good politics tho.  Especially in an election year.  In all honesty, if someone got up and said toss those people out on the streets, board up GM, tell the airlines they have to compete on a level field, let the banks know that were not going to float them, and tell china it was really dumb to invest in the US because there about to lose their pants, and tell those pharmaceuticals that government sponsored extortion are over.  He would be completely unelectable even it it was truthful.  So rewarding bad choices is the plan for now as I see it. 

[apaknad]

hi muldoon,

good insight. i agree that they are going to prolong the propping up of the house of cards but i would like to point out that this is the time to and gives us time to get our personal house in order while we can. so in that sense we are lucky. like i have said before... it is too late to fix the system so take advantage of the time we have left. i have made suggestions on what to do (as well as others) and this forum is condusive to that kind of people and thinking. pardon the spelling. be as independent as your wallet and time allows you to be.

[desdawg]

I may never get it all straight in my mind. Too many factors for a simpleminded country boy. It is tempting just to go bury my head in the sand again. Of course that may explain why I know so little. Guess I better keep learning even if I never figure it all out. I see oil and mining stocks are going up again today and I will be darned if I know why. The Dow is going down and the NASDAQ is climbing slightly.    Tomorrow it will probably all change again.

[Mad Dog]

I may never get it all straight in my mind. Too many factors for a simpleminded country boy. It is tempting just to go bury my head in the sand again. Of course that may explain why I know so little. Guess I better keep learning even if I never figure it all out. I see oil and mining stocks are going up again today and I will be darned if I know why. The Dow is going down and the NASDAQ is climbing slightly.    Tomorrow it will probably all change again.

I hear what you're saying there, it's like a big dog and pony show.  A lot of times it's just a bunch of numbers moving around on computers, with half of them having no viable liquidity.  The real problem is the devaluation of the dollar, and the fact that it's not backed by anything. 

[desdawg]

The price of oil is going down and the price of the stocks was creeping up today. That is the first time I have seen that. Makes me wonder what tomorrow will bring. I am still doing this 

[muldoon]

I agree that were seeing money flow from oil back into stocks.  Some may say that the the central banks have set a firm position of ensuring there will not be a crash, but a controlled unwinding.  This perceived "safety net" eases some fears.  Another possibility is that more people are seeing that the US may be screwed, but the rest of world is likely just as screwed if not more and their recent gains in currencies is somewhat unwarranted and coming back down.  In any event, the dollar has been gaining, were up in the 74 range on the DX, off the 72 lows. 

However, I think the story is oil.  I claimed earlier that I did not think speculators were driving the cost of oil as much as it was oil becoming a currency and being considered a safe place to keep big money.  Last month the CTFC was given the directive to tighten up the margin limits in oil trading in hopes it would shake some speculation.  What came out in reuters last night pretty much floored me. 
http://www.reuters.com/article/governmentFilingsNews/idUSN0535661120080805

"The big shift is all the more surprising, oil traders and analysts said, since the CFTC apparently reclassified only one unidentified oil trader at the same time as the data revision."

"There may have been multiple 'positions' which were reclassified ... but they all appear to have been held by just one trader, and this was a very special trader, with an enormous concentration of positions in crude oil amounting to perhaps 460 million barrels, and not much interest in anything else,"

Wait, one trader sitting on 460 million barrels of nymex positions? !!  That's close to 60 billion in oil.  Looking at the open interest its damn near 50% of the entire nymex market contracts open.  Yes, that's huge.  A position that size is like blood in the water.  If we head into a commodity selloff we might get to see huge volatility with massive deflationary pressure. 

[desdawg]

Wow, you get the rope and I will pick out the tree. That is a tremendous amount of power and money. Obama will take care of that in a hurry given the opportunity. Sorry I have been listening to Sean Hannity bash Obama all day. I will be interested to hear some names if they ever come out. I wonder if any names will be familiar to me since I don't hang out in the oilpatch. Obama knows that if we all just added 5# of pressure to every tire the situation would right itself. Sean's having a ball with that. Gotta go home.

[muldoon]

http://www.agriculture.com/ag/story.jhtml?storyid=/templatedata/ag/story/data/1193064604927.xml

"It turns out the fund that was forced to liquidate 38,000 November beans was also forced to sell 40,000 December corn. Apparently, the fund was reclassified from a hedger to a speculator, meaning they had to put up more money and had to reduce their position since spec. accounts have higher margin requirements and also have position limits, something hedgers don't have."

looks like the same in grains today too.  This is looking like direct government involvement to force funds out of commodities.   I know many families will welcome decreased oil and decreased food costs, however, I would also question if the government should be defining where money goes to find perceived safety?  How is that a free market?  While the motivation may be sincere it's a slippery slope indeed, at what point do they just step in and define the prices for us? 

In June, corn hit a high of 7.70 (after the flood).  It's down to 5.08 now. 

As money leaves a sector it always goes somewhere else.  Well, if its money it can go to cash and sit.  But none of the funds or even institutions operate that way, its all debt.  Margined or leveraged funds must go somewhere in order to generate more of a return then the cost to service the debt.   They must chase dollars. 

I don't think Obama nor McCain has the peoples best interest at heart.  None of the above for me.  I also am not sure either of them even understands the nature of the problems were seeing.  Inflating tire pressure?  Drill now?  Neither of those in any way address underlying problems affecting americans today. 

[desdawg]

It looks like the price of crude is going back up this AM elsewhere in the world.
http://money.cnn.com/2008/08/07/markets/oil.ap/index.htm
It all keeps moving. Everyday is new.