Remember when this whole bailout business started months ago, as a result of the subprime mortgage crisis? There was rampant panic, people liquidating their assets, buying up gold bars, etc, and then the fed announced they would buy $700B in toxic mortgage paper to free up capital. How'd that work out for ya? Not so good!
Now, I'm no economist, not by a long shot, but I remember thinking to myself at the time that all they needed to do was lower interest rates to the consumer to re-ignite the very market that was the cause of the economic meltdown we are still fighting today. Offer consumers a 4% 30-year fixed product (like we had in 2003-2004) and voila, people will start buying again. Seemed so simple at the time, but I figured I must be missing some major economic principal that was the reason they didn't do that.
Then, lo' and behold, this week I look at the news and discover that the Fed (after flailing about like a fish on a hook with a myriad of failed corporate bailouts and cash infusions) HAD LOWERED INTEREST RATES. I concluded that the "major economic principal" I hadn't considered was GREED!
Yes, good ol' fashioned GREED had to be what prevented banks and the fed from limiting their year-over-year gains with lower interest rates to the consumer. They would rather give AIG & Citigroup and any other mismanaged financial giant our hard-earned tax dollars than to give it to the home-buying consumer and let the money work its way back up the chain.
There's no way to know for sure whether the lower interest rates will boost the housing market, or if the damage is done, but my theory is that if they can sustain 4-5% interest rates (for truly qualified buyers) through the end of summer 2009, we could see a significant reversal of the mess we are in. The key is to keep every other aspect of the lending process (proper qualification, un-influenced appraisals) clean so that the chances of default and negative equity are low.
Hopefully this time they'll get it right!