WORLD BANKS CUT INTEREST RATES TO STEM DEEPENING MONEY CRISIS
October 08, 2008
(NEW YORK, N.Y) -- With what one financial publication called “unprecedented global coordination”, six central banks including the U.S. Federal Reserve and European Central Bank cut interest rates sharply today in an emergency move designed to short circuit the economic damage from a deepening world wide financial shock precipitated by the sub prime mortgage meltdown in the U.S.
Wolrd banks cut interet rates to start money flowing again
The half-point rate cut from 2.0% to 1.5%, which includes action by central banks in the U.K., Canada, Sweden and Switzerland, came as stock markets around the globe tumbled in value and problems in the U.S. continued to infect foreign economies. The global rate cut comes amidst separate rate cuts by central banks in China, Hong Kong and Australia over the past 24 hours.
Lower world wide interest rates are seen by some financial sectors as not a cure but a general tactic that may offset to a degree the problematic tightening of credit caused by banks reluctance to lend even to each other. The tactic will also lower the rates the central banks themselves charge on the growing loans they are making to the financial system.
News of the coordinated rate cut comes amidst other news showing the relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very issue that touched off the credit crisis last year.
The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less well off and thus less inclined to spend money on consumer goods which in turns hurts the economy since almost two thirds of the American economy is built on consumer spending.
Having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, some 12 million U.S. households, or about 16%, owe more than their homes are worth, according to Moody's Economy.com.
In 2006 that number was roughly 4% under water and 6% last year.
Among people who purchased a home within the past five years, it's even worse: 29% are estimated by the real estate Web site Zillow.com to be under water on their mortgages. Many in the industry expect housing credit to remain tight and home prices to decline in much of the country for another year or so.
Home prices have slipped back to 2003 levels in the San Diego and Boston Metro areas and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis, according to First American CoreLogic, a data firm in Santa Ana, Calif.
On the heels of the news of today’s world wide rate cut The Dow Jones industrials, already down 875 points this week, fell another 150, and all the major indexes were down sharply in early trading.
Today’s action by the Federal Reserve will reduce borrowing costs for U.S. bank customers whose home equity and other floating-rate loans are tied to the prime interest rate. Bank of America, Wells Fargo and other banks cut their prime rate by half a point to 4.5 percent after the Fed’s announcement.