The Impotent Federal Reserve: Mortgage rates are going up

See the story here on Housing Wire. Conforming rates are averaging 6.37% and jumbos 7.55%. Not only are rates high, the requirements for getting a mortgage are also getting tighter, especially with higher down payment requirements, not just by the banks, but also by the mortgage insurance companies.

Corporate borrowing rates too, for both prime and non-prime corporate borrowers, have also refused to fall in response to the Fed’s rate cuts. Here is a graph that Princeton University economist and NY Times writer Paul Krugman put up on his blog:

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So what is happening is that the Fed is making cheap money available to the banks, but the banks are refusing to lend it out cheaply, to neither big businesses nor home buyers, and instead are hoarding it to cover the losses they know they are going to face over the next few years.

Given that banks aren’t lending and consumers aren’t spending (auto sales are down 16% so far this month), the best way to stimulate the economy and create jobs right now would be investment in public infrastructure, including schools, roads, bridges, sewers, and public transportation. This would provide jobs to many of the construction workers who are being laid off or having their hours cuts because of the housing crisis. We also need more public investment in clean energy and fuel-efficient vehicles. Unfortunately President Bush and his economic advisers seem to favor more tax cuts for the wealthy + government bailouts for the banks that got the economy into its current mess.

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