Friday, December 07, 2007

The Mortgage Crisis, Part 3 - Can you take advantage?

Because of all the bad loans, which have created ripple effects through the real estate, banking, and homebuilding/home improvement industries, the economy is undeniably slowing, and it could result in a recession in 2008. However, most of my sources say we will probably escape without one.

The reasons? I can think of a couple offhand: Vigorous exports, helped by the falling value of the U.S. dollar; and lower interest rates.

A lot of people ary saying "No bailouts" and "let the chips fall where they may -- let the stupid borrowers be foreclosed on, let the stupid lenders go out of business, and let the stupid investors lose their shirts." The problem with that is, it's affecting the entire economy, in a snowballing effect. The Federal Reserve took basically that approach in 1929-1930, refusing to lower interest rates or engineer massive bailouts, until the it was too late and the Great Depression was irreversible. Federal Reserve chairman Ben Bernanke has made a career-long study of this sad episode in American economic history, and is determined not to repeat it.

My sources indicate that this is affecting the economy enough that the Federal Reserve isn't finished cutting interest rates. By now, just about everyone expects they will cut at least .25% next week. And in fact, many are saying they could cut by .50% (although that's somewhat less likely after today's fairly decent employment report).

Next year it's likely we'll see additional rate cuts. For instance, see this article.

Lower interest rates will not only stimulate the general economy, but it will also help these adjustable-rate mortgages not to adjust quite so much, and help borrowers refinance at better rates. You've heard on the news that there are agreements for lenders to freeze some of these existing interest rates for a while. It appears more agreements are also coming. This will give the Federal Reserve some more breathing room and time to lower rates enough to make more of a difference.

How do you take advantage of this?
  • Consider moving some of your "safe money" out of money market accounts and into CDs that lock in your interest rate for a year or two, maybe more.

  • Consider postponing refinancing your mortgage for several months, anticipating lower rates.

  • As always, wait till June to decide whether or not to consolidate student loans (because you can only do it once, unless you have a new loan to include in the consolidation). Then you'll know what the new (lower) interest rate is, and you'll have a better idea whether or not they might continue even lower -- and then you can still wait till the following June to repeat the process.

  • Consider buying long-term Treasury bonds, whose price will rise as interest rates fall. Actually this would have been a lot better to do in June, because they've been rising ever since then. But if rates keep falling, you should still get some benefit.

  • Lower interest rates will also help the U.S. dollar continue its downward move. To take advantage of the declining dollar, invest in companies doing a lot of business overseas -- or invest in the overseas companies themselves.

  • Combining the prior two ideas, consider investing in foreign bonds (denominated in strong currencies such as the Euro).

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