Trying To Instill Confidence

Bernanke tried to pacify investors last Friday when he said the Fed stands ready to take additional actions as needed to provide liquidity. Central bankers next meet to set rates on Sept. 18. There is a greater acknowledgement by the authorities of the real issues behind the subprime mess, plus a better grip on the consequences on the average American. This will swing the pendulum back to the bulls. Interest-rate futures show traders bet there's a 100% chance the Fed will cut borrowing costs to at least 25 basis points next month. The odds were 26% a month ago. Bernanke basically suggested that the Fed is prepared to cut the discount rate further or use additional tools to ease the strains in markets.

The political PR machinery recognises a dire situation that needed more than just the Fed, here's Bush! Bush said he will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers, thus allowing them to avoid foreclosure and refinance at more favorable rates. Administration officials said that the goal would be to change its federal mortgage insurance program in a way that would let an additional 80,000 homeowners with sloppy credit records sign up, beyond the 160,000 likely to use it this year and next.

“It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford,” Mr. Bush said. “Yet there are many American homeowners who can get through this difficult time with a little flexibility from their lenders or little help from their government.” Other elements of the plan would need legislative action, requiring Bush to win over the Democratic leadership in Congress. He called for Congress to act quickly. Bush and his advisors have stepped up to the plate amidst growing criticism from Democrats that the government are folding their arms in light of hundreds of thousands of Americans losing their homes.

The main objective of the package is not to affect the stock markets but to help low-income homeowners, many of them concentrated in certain neighborhoods in several distressed areas of the country, such as Ohio and Michigan.

By helping homeowners keep their homes and refinance or renegotiate the terms of the mortgages, this could have a stabilizing effect on the financial institutions that have these mortgages in their portfolios, and help them write down the value of the mortgages or sell them off at a loss. To be able to mark them to market, bite the bullets, and move on is crucial for some many affected financial institutions. Many want to move on but can't trade their portfolios, now its getting a lot better.

Methinks that the timing of Bush speech and Bernanke's address were NOT a coincidence. It looks too good and mesh together well. Obviously all have consulted with financial institutions, some members of Congress, housing counseling groups, academic specialists, and also with Bernanke. Bernanke, on behalf of the Fed, cannot say those things that Bush has said because that's not the role of the Federal Reserve.

Several other steps the administration plans to announce involve seeking legislative changes. Bush is expected to endorse proposals backed by Democrats in Congress that would raise the ceiling on the amount of a mortgage that can be refinanced with federal insurance. The rain clouds have dissipated with a little ray of sunshine poking through.