The last few months have been discouraging, to say the least, in the way that the economy and our government has responded to the sub-prime mortgage issue, and the spreading instability in other areas of credit and financing.
At first blush, the concept of preventing the re-setting of mortgage rates for a period of time could have the effect of reassuring financial markets and the consumer that the worst is over. I’ve felt for quite awhile that the main problem — at least in our market in Baltimore — is that the consumer was scared to jump in. Consumer confidence numbers have sagged to very low figures, even as rates stayed reasonable and the employment data remained strong.
But preventing these financial instruments from re-setting on schedule might also just kick the can down the road until the end of the freeze. (Might that be long enough to prevent the current Administration from bearing the political brunt of the resulting damage to the economy? I hate to be so much of a skeptic… and yet, nothing in Washington in the last 7 years have given me any reason to be charitable.)
The other result could very well be that the investment funds and institutions who bought into these financial vehicles because of the out-year prospect of increasing return on their investments might also be destabilized by the freeze of rates at their introductory levels. This could have the opposite of the intended effect, further increasing the uncertainty and moving the country into a full-fledged recession.
How nice it would have been if there had been some regulation of these investment practices at the start. Wall Street will always find a way around current regulation, it seems, to create some new product that blows up in people’s faces (after the traders have made their commissions, of course!).
It should be an interesting winter.
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