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Fed Cuts Interest Rates as Economic Downturn Looms

by Adam Price |
September 25, 2007
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San Jose, CA - On Sept. 18 the Federal Reserve cut two key short-term interest rates for bank loans by one-half a percentage point. These interest rate cuts followed on the heels of dismal economic data on jobs and the worsening housing and mortgage bust, as well as continued instability in financial markets. While stock markets around the world celebrated the larger-than-expected interest rate cuts with large increases, the Federal Reserve action reflects weakness, not strength, in the economy.

The August job market report that came out on Sept. 7 was a shocker. The Department of Labor reported that businesses reported a net loss of 4000 jobs, the first loss in four years. Even worse, a survey of households reported that 316,000 fewer people were working in August as compared to July. This report demolished the Bush administration and Federal Reserve’s reassurances that the housing bust was ‘contained.’

Reports on the housing and mortgage markets have gone from bad to worse. Both the number of permits for new housing and the start of new home construction fell again in August from July. New home construction, a major source of jobs, is now down 42% from its high in January of 2006. Late mortgage payments also rose again in August, to 3.56% of all mortgages. The rate of increase of borrowers behind on their mortgages is rising rapidly, as 2 million mortgages with low-interest ‘teaser’ rates and monthly payments made in 2005 and 2006 are resetting now to much higher interest rates and payments. The secretary for Housing and Urban Development reported to Congress that a half-million of these borrowers will end up in foreclosure.

Financial markets around the world have remained jittery. The latest sign of this came on Sept. 14 in England, where one of the largest British mortgage lenders, Northern Rock, had to get emergency loans from the Bank of England (Britain’s central bank, like the U.S. Federal Reserve Bank) and faced a run by depositors who lined up to withdraw their money.

While the U.S. corporate media trumpeted the interest cut as helping distressed home-buyers, the fact is that the interest rates on standard 30-year fixed rate mortgages actually rose slightly after the Federal Reserve rate cut. The biggest benefits of the rate cut will go to banks and other financial institutions who will be able to pay lower interest rates to their depositors while charging higher rates on the longer-term loans that they make. It was no surprise that the stocks of Wall Street firms rose as much as 10% in one day when the news of the interest rate cut broke.

Working families are now facing growing layoffs, declining home prices and higher interest rates on their mortgages. The Fed interest rate cut will further weaken the U.S. dollar, as foreign investors see less need to buy dollars to invest in the United States. This is likely to increase inflation, making it harder for workers to make ends meet. One sign of future price hikes can already be seen in record-high oil prices, which broke $80 a barrel after the interest rate cut.

Caught between a rock and hard place, working people will have to struggle even harder to maintain their standard of living and keep their homes - not mention the need to struggle to make the rich pay for the crisis that they have brought on the economy. The Bush administration has proposed to help about 80,000 mortgage borrowers. Much stronger action, beginning with a moratorium on all owner-occupied homes facing foreclosure, is needed. Ultimately we need an economic system where housing is a right, not just another market driven by greed and profit.

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