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RSS By: Mike Walsten, Pro Farmer

Mike Walsten has covered major business trends in agriculture for more than 40 years.

Economist Calls For "Significant" Cut In Interest Rates

Sep 23, 2008

Mike Walsten

LandOwner subscribers are familiar with Dr. Vincent Malanga, president, LaSalle Economics, Inc., and long-time LandOwner economic consultant. He's been calling for the Federal Reserve to cut interest rates for quite some time, warning of major problems in the mortage-backed securities markets and voicing concerns over potential deflation. In the fallout of the federal government's move to shore up financial institutions, Malanga tells us he expects the Fed will act soon to cut interest rates.

"Financial markets are again in panic mode," he writes, "and the Fed has made several adjustments to its lending facilities. Moreover, a Resolution Trust-like facility seems to be under serious discussion, something we urged nearly one year ago. The central issue is the value of mortgage-backed securities, which of course would be easy to determine were housing activity and prices to stabilize. Some tentative signs of stabilty have been cropping up, but stability will likely be threatened by a deterioration of real economic activity.

"The facts are that the credit system is broken, households are overloaded with debt, household savings are depleted, and labor markets are clearly weakening. Moreover, economic activity around the world is weakening, raising the specter of a slowing of U.S. exports," he states.

"A significant rate cut by the Fed in coordination with other Central Banks would be an effective supplement to actions being taken by the Fed and Treasury," he continues. "It would signal that economic growth is the main focus of policy. A rate cut would get mortgage rates down further, making housing more affordable. By shoveling money into the banking system, a rate cut would enhance profits, it would hopefully encourage risk taking and thus narrow credit spreads. We think the economy requires quantitative easing to the tune of at least one hundred basis points and the sooner we get there the better. In reality, we'll settle for fifty basis points by year end," he concludes.

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COMMENTS (1 Comments)

The FOMC has no control over the mortgage rates. Dropping the key short term interest rate has done nothing to lower mortgage rates. The problem is credit crunch due to the falling property values, which has been exacerbated by the sub-prime lending practices. The problem will not cease until the housing market bottoms and the housing inventory begins to clear out. Paulson's plan to purchased toxic mortgage debt from banks is the right solution to get the markets moving, not lowering an already low key rate. Finally, the insurgence of cash into our banking system will cause inflation not deflation.
9:18 PM Sep 23rd

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