By Mike Colpitts
Stopping Bear Stearns from a total meltdown and throwing lifelines to other financial institutions, the Federal Reserve has come to the aid of financial institutions more than since the Great Depression.
The only time actions taken close to this came at the peak of the U.S. Savings and Loan Fraud Crisis in 1990.
The actions underscore the Fed’s concern over worsening overall economic conditions and a national real estate recession, which is beginning to make inroads into markets that until now have been only slightly affected. Tighter lending practices and mortgage rates that have barely budged, considering the Fed’s series of interest rate cuts attribute to the souring market conditions.
The Emergency action by the Fed occurred the same day Housing Predictor published an editorial calling on the Fed to take emergency action to save the U.S. economy. In taking the step, the Fed bypassed its own lending regulations, which required securities firms to borrow at the same interest rates as commercial banks.
The move is seen as a major step to get the U.S. economy under control before worsening recessionary conditions develop. Whether the Fed’s action will weigh heavily to improve the nation’s economy is a question economists will argue, but even critics of the Fed’s slow academic responsiveness realize the nation’s most powerful economic body is attempting to improve U.S. financial health.
After riding up and down like a roller coaster since summer, Wall Street ended the shortened holiday week with mixed reaction, closing the week upward amid talk of a stock market bottoming. But the financial crisis appears far from over in light of a series of mortgage companies and banks that are dealing with all-time record foreclosures.
Lenders have no way to determine the extent of the foreclosure crisis since their risk-management models do not take unprecedented events like the nation is experiencing into account. Hundreds of thousands of more investors than lenders had ever felt would flee their properties are allowing homes and condos to be lost in foreclosure.
As a consequence, the banks have not only been unprepared for such a major crisis, but have been amazed at the level of foreclosures.
Foreclosure departments at Countrywide, Washington Mutual and Wells Fargo, the nation’s three largest home lenders are working over-time in an attempt to keep up with the crisis. Foreclosures have already topped 2-million since the foreclosure epidemic started, and are forecast to top 5.6-million units through 2011.
Actively navigating through the troubled U.S. economy is an effort that the Fed has long been working on, but produced slowly in response to the real estate meltdown. More steps are certain to be taken in order to aid the nation’s real estate markets and the U.S. economy as a whole.