Saturday, August 18, 2007

Discount Rate Cut

Now there's a headline sure to attract readers. People just go nuts over financial news.

I couldn't pass this up, however, as my loyal readers (Hi Mom!) will note I told you earlier this week the market was "way, way oversold" and due for a bounce. (I know, I know. The Dow dropped 330 points immediately following my pronouncement, but that downdraft only lasted a few hours and I'm ignoring it. By the end of trading that day, the Dow was back on the plus side and Austin Carr was proven right.)

Since I'm a stockbroker and really don't give a rat's ass, I figured we'd contact The Famous Author and find out what the heck a discount rate is and why the Federal Reserve decided to cut it.

"Hey, Pops. Feeling better?"

"Much, " TFA said on the telephone. "Things are looking better for both of us."

"Excellent-tay. Now tell us about the discount rate. WTF is it?"

"It's the rate of interest the Fed charges financial institutions who need to borrow money from the central bank."

"And why did this spark a rally in stocks?"

"Because by cutting it, the Fed has acknowledged the current financial situation is getting a tad rough on some people."

"Say what?"

"Since you haven't tried to get a mortgage lately--and I'd know because I'd have to co-sign--you are perhaps unaware that the current climate for home financing is dark. It started with so-called sub-prime lenders--banks and mortgage companies that loan money to less-than-stellar credits. Then it spread to second-tier mortgage lenders and recently included just about everybody. If you don't have a very very high credit rating, getting a home mortgage was almost impossible."

"And that's going to change now?"

"It should. The Fed is saying, don't worry gang, we're in there helping out. We don't like what's happening."

"Okay. I think I get it. The Fed is sending a signal more than anything. They'll do whatever they have to in order to support the housing market?"

"Close enough," TFA said. "Now let me ask you a question. How the heck did you know the market was over-sold?"

"I'll never tell, boss. It's a proprietary system. Basically, it's finding out what the "little guy" believes is going to happen and then betting the other way. When the small investor gets excited about the market, and makes risky investments in support of his or her beliefs, the bozos are always wrong."

"Really?"

"Remember 2000...how every taxi cab driver and shoe salesman was giving us stock tips?"

"Yeah."

"Well, you know what happened. The bottom fell out, especially on those day-trader specials--the NASDAQ flyers."

"The little guy is always wrong?"

"Always, TFA. Always.

2 comments:

Anonymous said...

Damn good thing that those sub-prime lenders are getting whacked. I'd like to put some of the white color jerks that run them in the holding cell with me a while. Loaning all that money to people they KNOW will never be able to pay up. The trickle down affect is disasterous for all except those scofflaws that repo the house and do it all over again. Everyone loses as the people who couldn't afford it in the first place go belly-up and file bancruptcy so that everyone they owe money to losese out. Bad, bad business. Like I say, a few minutes in the holding cell with a white-collar bum would do me wonders.

-Detective Roger Stark
"There are limits to negotiation."

Austin Carr said...

While I understand your feelings, Rog, and many of the sub-prime lenders deserve a few years in jail for failing to explain to people what could happen, nobody lends money HOPING not to be repaid. It's a disaster for a lending institution. Foreclosed properties are not assets, but instead liabilities. The biggest sub-prime outfit we know of--American Home Mortgage--recently filed for bankrupcy because of too many foreclosures. No way that was their plan.