Fed cuts rate by 50 basis point. Now what next?

uasish · #21 3rd February 2008, 11:49 PM

1 of the PRIME reason of home loan fiasco in US was improper/due diligence & purposely deselving the disqualification bar of the prospective borrower by the Lender for getting more clients in a fierce competition.
(If we remember when Reliance Mobile set + connection was given with as low as Rs 500.00 only on production of a ration card & the failure/defalut case was humongous & the Smart Ambani got that money from National Insurance,who had to write off Crores from their balance sheet.)
The initial payment failure of these ,primarily otherwise unqualified, borrowers has snowballed into this mess.
In panic state of mind sometimes even an inoccous rope looks like a venemous snake.
If our housing finance companies start giving loans indiscrimently without much due diligence then & only then can there be a chance of bubble being built,otherwise this extra incentive may drive the economy further.

kaveri_034 · #22 4th February 2008, 12:21 AM

So What are the prospects for The Market tomorrow??????/

Venkat123 · #23 4th February 2008, 07:54 AM

The current US housing bubble is an extreme case and does not match any of it's previous housing bubbles. The 1989 US housing bubble has similarities with India's current housing bubble. In 1989 about 1000+ banks failed and the feds had to step in to protect depositors. The feds also put together RTC to buy distressed properties. Lending before the 89 bubble was prudent but the mistake banks did was issue loans based on bubble prices. When the bubble popped the prudent lending practice didn't help much as homes cost lot less than what was owed to the bank. Adjustable rate mortgage was not available to home buyers in 1989.

India has a great future but under the current circumstances, can it create an RTC and bail out failed banks? I think it will be tough for India to prioritize funding an RTC when it has several other pressing needs. It is therefore essential for banks to control their greed.

I think Indian banks are potential targets for FII shorting in the future.

uasish · #24 4th February 2008, 08:10 AM

You have a valid argument regarding Exuberent Asset Price Escalation,this has to be gauged in respect to certain parameters.What are GOI parameters (for fixing Tax rate on those Asset) or what are the internal evaluation criterion of the Bank's to value that Asset has to be considered before making a generalized statement.

My father was a bank employee 40 yrs ago,his responsibilities vis a vis remuneration does not match now with the similar ststus,now this 10 fold jump in remuneration can we term it as Exuberent Price the bank is paying for same type of responsibilities than earlier ,if not then how the valuation Perspective changed,basing on what priorities & criterions.

rakeshmalik · #25 4th February 2008, 09:53 AM

.25 cut more in near future.wait.........................?

Venkat123 · #26 4th February 2008, 10:55 AM

Asset price increase is OK as long as salary increase keeps up. Houses that i know of have appreciated more than 1000 times in the past 46 years. Most of these increases have happened in the last 10 years. There was perhaps a massive arbitrage (buying better than cost of renting) potential during the initial years that boosted home prices increase beyond salary increase. In my opinion that arbitrage potential has quickly died out and therefore we need to go back to guaging salary and asset prices together.
An optimum mortgage should not exceed 3 times annual salary.

Quote:

what are the internal evaluation criterion of the Bank's to value that Asset

I would be very interested in reading any evaluation criteria reports. Please let me know if you find any.

Do banks publish mortgage related statistics like average loan rate?

alpesh14 · #27 4th February 2008, 11:34 AM

with this rate cut rally started in market through out the world. Do you guys think that this rally will last long? I doubt that it will last. Here comes last week of feb and everything will be back to current or lower than current level.

Wallstreet is expecting another rate cut during meeting of mar 18th. Its stragnge how market reacts o ben's cut. if .25 basis point then too little and sell off starts. if 50 basis point then economy is really struggling so recession in near and starts sel loff.

Venkat i think housing in india is also a bubble which might explode but donno when. I would say it will defuse rather than explode. Everrytime i wantedd to buy house in last 3-4 years, it was out of my reach. If prices comes down then it will be nice to have smal lapt on my nae

Venkat123 · #28 4th February 2008, 04:49 PM

Quote:

I would say it will defuse rather than explode.

alpesh14,
That's what they say about every bubble. if there is a bubble there is no soft landing. At least none of the bubbles so far in history has had a soft landing. Maybe this one will but the probability is low based on past history.

Hope your wish comes true.

Venkat123 · #29 5th February 2008, 11:01 PM

US ISM at 44 - recession like contraction.

At the same time, fed's Lacker says economy slowing and inflation picking up.

alpesh14 · #30 5th February 2008, 11:25 PM

Fed is not worried about inflation. All they are worried about stock market.

stock market to ben : Jump
Ben : How high?

stock market says cut rate. Ben says how much?

For me, US is headed into recession. That might drag eveyone down.
I expected this rally to last for atleast 2 weeks. I mean Dow somewhere around 13000 before march 1st and then start going down. However its going down much faster than i expected.

Expect another global sell off in near future.