The U.S. Economy: Can Rate Cuts Save the Day?
A series of interest rate cuts, usually a good method of lowering the cost of borrowing, is probably not going to be as effective in the impending (or current, depending on who you ask) recession. Lenders are scared to death to loan money in the current economic climate. Subprime loans have proved to be a fiasco, and even loans once thought to be the securest of the secure are being called in to question. Lenders are requiring down payments once again. And even when loans with favorable terms are available, interest rate cuts aren't going to provide a lot of relief to consumers who can't refinance their homes in the first place because they have no equity.
Credit card companies like Capital One and Washington Mutual are also suffering, as they are well known for catering to the financially challenged. But even bedrock companies like American Express are showing signs of consumer fatigue. As such, lenders aren't lending...or when they are, they aren't passing on interest rate cuts to consumers. Many credit card companies, particularly the ones that still serve the subprime market,are jacking up the interest rates on those who are still current, but carry a balance, claiming that the increased likelihood of these debts going bad justifies the higher interest rate. This seems to be a self-fulfilling prophesy, as the end of result of non-penalty 29.99% interest rates is often charge-offs and bankruptcy.
About the only people who are going to see any near-term benefits of rate cuts are people with adjustable rate mortgages whose loans are going to reset in the first part of this year. This is at the expense, however, of people who are largely invested in liquid assets like cd's and savings, who will see their returns fall as interest rate cuts are made.
Credit card companies like Capital One and Washington Mutual are also suffering, as they are well known for catering to the financially challenged. But even bedrock companies like American Express are showing signs of consumer fatigue. As such, lenders aren't lending...or when they are, they aren't passing on interest rate cuts to consumers. Many credit card companies, particularly the ones that still serve the subprime market,are jacking up the interest rates on those who are still current, but carry a balance, claiming that the increased likelihood of these debts going bad justifies the higher interest rate. This seems to be a self-fulfilling prophesy, as the end of result of non-penalty 29.99% interest rates is often charge-offs and bankruptcy.
About the only people who are going to see any near-term benefits of rate cuts are people with adjustable rate mortgages whose loans are going to reset in the first part of this year. This is at the expense, however, of people who are largely invested in liquid assets like cd's and savings, who will see their returns fall as interest rate cuts are made.
Cool Blog.
Sunday, December 28, 2008 18:02:41