The Fed’s Unprecedented Move

Over the past 25 years, the Federal Reserve has used basically a single tool to impart their desired effect on the economy.  Short term interest rates.  When the economy slowed, they dropped rates effectively increasing the money supply.  When the economy got too hot, they raised rates.  For the most part, it worked.

Ben Bernanke has shown that he is not afraid to venture into uncharted territory when what was working, no longer works.  Yesterday, the Fed set up the Term Securities Lending Facility.  The simple explanation of this is that banks can now use mortgage backed securities as collateral - which should help open up credit markets somewhat.

How does this affect American home owners?
We all know about the subprime meltdown and the coinciding decline in housing prices.  A result of all of this has been that money for lending to both businesses and consumers has become very hard to come by.  Up until the past few weeks, this has been limited to so-called Jumbo, Alt-A, and sub-prime loans.  That is, non-conforming loans.  If we continue to see tightening in the credit markets, there will continue to be fewer and fewer borrowers qualified for a mortgage, and this will worsen what is an already ugly housing market.  Let’s hope Mr. Bernanke’s bold move pays off.