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February 18, 2008
A quick fix to the mortgage mess? Don't think so...
Many see the Federal Reserve's interest rate cuts as a Band-Aid for the ailing mortgage and real estate markets. Trouble is, it's going to take a tourniquet to stop the bleeding.

I've mentioned my December skiing accident in prior blogs. I'm happy to say that I'm probably 90% recovered at this point. Unfortunately, whenever I feel like I'm all the way back, I do something to aggravate the injury and I'm reminded that no matter what I do, I can't rush the healing.

Yesterday we took our kids sledding. I've been rehabbing my injured leg, and I felt like climbing the sledding hill several times wouldn't be a big deal. Problem was, we had several days of above-average temperatures last week, so the top few inches of snow had begun to melt, then froze again. This left a crust of about four inches thick, with another 18 inches of snow below that.

My kids had no problem - they all weigh less than 100 pounds and walked on top of the snow, never breaking through the crust. My wife and I, however, repeatedly broke through, burying our weight-bearing legs in approximately two feet of snow. The sheer effort of post-holing through the snow was exhausting. In the process, my leg injury started acting up to the point I was forced to literally crawl back up to the house.

Sitting in front of my computer today with my leg propped up and iced, I discovered the correlation between physical healing and market healing. Right now our markets are sick, suffering from prolonged exposure to poor common sense and infected by greed and stupidity. This illness threatens our entire economy and recession becomes the buzzword of the times. Healing can't start until the trauma stops and the patient is stabilized.

The Fed has tried to step in by cutting interest rates. This is meant to spur lending activity, most specifically refinancing, which benefits borrowers by lowering their rate of interest, and lenders who benefit from the spreads. However, like my leg injury, there's a whole lot more going on that a simple Band-Aid can't fix. Until we diagnose the problem(s) (massive lay-offs, all-time high mortgage delinquency, plunging real estate prices), and how to reverse those trends, there's no way to formulate the plan for healing.

According to most economists, real estate prices will continue to fall. The credit crunch will continue to reject many potential homebuyers. Losses from the subprime fallout will continue to batter the balance sheets of all who gambled and lost. Rate cuts can't fix these problems...only time can. So like I learned yesterday, there will likely be many more reminders that healing takes its own sweet time, but it will happen...eventually.

Clint





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