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Fed money goes to banks not consumers

Wednesday, September 19 09:27:30

The Point of last weeks Fed intervention in the housing market was to kick start activity in the sector and thereby assist the domestic economy to return to more sustainable growth however it appears that the easing of the Home Loans market has simply led to higher margins for the banks rather than more home loans for consumers. The emerging scenario highlights the limitations of the Fed's ability to jump-start the housing market on demand: Rather than intervene directly with consumers, the Fed must rely on banks, brokers and other industry actors to offer borrowers better terms.

Banks say they are keeping rates high right now because lowering them any further would overwhelm them with customers. They say that over time, as volume thins out, rates could come down to attract new borrowers. "Bank of America, Wells, Chase, whomever, have fixed capacity. You can't take in more loans than you can handle," said Matt Vernon, a senior mortgage executive at Bank of America. Critics argue that banks are simply maximising profits at the expense of consumers. Mortgage bankers are recording higher gains from home loans as the gap widens between the interest rate they charge consumers and the rate they must pay investors who finance the loans by buying mortgage securities.

The Fed sought to break the connection between home loan rates and deposit/investor rates paid by the banks with the resultant high loan rates charged by the banks. By providing ultra cheap money to the banks the expectation was that this would kick start the mortgage market and consequently the domestic economy. The fact that this is not happening, at least not yet, is a real worry to economis planners and the Fed. Will direct instructions to the banks to lend "X" amount in home loans be the next move or will the banks take action before they are forced to do so.

Europe is experiencing the same problem with much less liquidity than the US banks enjoy and every effort to get them lending seems to fall flat. The only alternative approach would seem to be to incentivise consumers with a subsidy however there are serious political and financial constraints on the introduction of any subsidy to consumers as memories of boom-bust are still alive and well in both Europe and the US.