Friday, August 10, 2007

Well, the mortgage meltdown has started, and it has the potential for widespread effects.

The Federal Reserve is buying securities backed by high-risk mortgages. To my understanding, this is very unusual. Someone in the government thinks that the situation is dire enough and volatile enough that the U.S. government needs to go in and start propping up private businesses in the form of mortgage lenders.

From emptywheel at the Next Hurrah.

Aug. 10 (Bloomberg) -- The Federal Reserve added $19 billion in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash amid a rout in bonds backed by home loans to riskier borrowers.

The Fed accepted only mortgage-backed debt as collateral for this morning's weekend repurchase agreement. Losses in U.S. subprime mortgage investments have been rippling through global credit markets, driving interest rates higher and sinking share prices. The Fed also added $24 billion yesterday, the most since April, as demand for cash increased.

The New York Fed's additions lowered the Federal funds rate to 5.375 percent, according to ICAP Plc, after it began trading at 6 percent, the highest opening rate since January 2001. The Fed's benchmark overnight rate is currently 5.25 percent.

Yes, the approach of allowing American business to do anything they want to make a quick, and quite risky, buck is fine with the Bush administration. But it seems to be the government’s business to bail them out when their get rich quick schemes fall apart, which many people could see coming from a mile away. We might just see what the fiscal upheaval the 1980’s looks like when combined with a huge federal deficit from unchecked spending from two simultaneous wars and tax cuts for the rich.

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