| THE MODEL OF THE FED WORKED, WHAT COULD BE NEXT? |
| Fed Chairman Ben Bernanke and his colleagues have been creating innovative financial instruments to bring solution to the reserve deficiency of financial institutions. The grand total of injection will reach $436 billion dollars: $100 billion dollars so-called Term Auction Facility (TAF); $200 billion dollars representing the Term Security Lending Facility (TSLF); $100 billion dollars named Term Repossession (roughly one-month) and $36 billion in Currency Swaps with foreign central banks. These loan instruments are available for Member banks, non-member banks and nonbanking financial houses. Usually it is expected to see that banks in need of funds obtain from the Federal Reserve, direct loans secured by collateral of government securities. With the creation of the new financial instruments by the Fed, we expect to see banks and other financial firms borrow Treasury Securities secured by collateral of their package of loans to Consumers, mortgage package specially. When a financial institution borrows from the Federal Reserve in exchange of collateral of securities, the proceeds of the loan are credited to its reserve account. Since the loan does not increase liabilities, the entire proceeds go to increase excess reserve or reduce a reserve deficiency or even avoid contraction in earnings assets. The Fed is innovating in a way that is going to push liquidity directly into the mortgage markets, and revive the housing market. Based on what Ben Bernanke suggested on March 4, 2008, if foreclosures and late payments on home mortgages are likely to rise "for a while longer," Capital Seeds Corporation forecasts that the Fed may reevaluate the packages of mortgage loan received in collateral and adjust down the principal by a certain percentage. By taking the doubtful mortgage-backed securities - for which the market has fewer incentive - through the Term Auction Facility, the Fed may get to the point of reevaluating or deleveraging the mortgage- backed securities and other credit derivatives in hand. In economic theory, an auction is a method for determining the value of a commodity that has an undetermined or variable price. Auction is a public sale. In absolute or no reserve auctions, the sale is guaranteed, with the best price left to be determined at the sale. Financial firms may be nearing the end of write-downs of subprime asset-backed securities. Instead of writing down the securities, the financial firms may have the possibility to exchange them against safe Treasury Securities more attractive to investors. These TAF (Term Auction Facility) may represent the innovation of the Fed that could stabilize the balance sheet of the financial firms. Standard & Poor's Ratings Services estimated that write-downs could reach $285 billion globally, up from a previous $265 projection. By allowing financial institutions to replace doubtful account receivables by safe securities that are in high demand, the Fed hopes to take pressure off financial companies and make them more inclined to lend to individuals and to businesses. Such a move from the Fed may bring price down to the level they were in January 2005 and prevent more distressed homeowners go to foreclosure. This will adjust the monthly payment and reduced the number of foreclosures and “promote economic stability for households, neighborhoods and the nation as a whole," as Bernanke said". At Capital Seeds Corporation, as we are believers in the free market capitalism, we do share the strategy of market correction instead of an interventionist or protectionist mortgage bail out program sponsored by the Federal Government. A reevaluation of the Mortgage-backed securities trough a Term Auction by the Federal Reserve could have a “deleverage” or deflation effect on housing prices. Banks and Mortgage companies will also reevaluate the mortgage for homeowners having a mortgage higher than the current market value of their houses. The deleverage in the price of houses -as much as 50 percent- could bring mortgage monthly payment close to the level of monthly rent payment. For current homeowners, the ratio cost of housing / disposable income will be reduced, living money to increase spending to personal consumption or purchase of durable goods, like a new car. At the same time, the renters who are paying about $1,200 a month for a two bedrooms apartment will be able to afford the purchase of a home, as soon as their credit is fair and they could bring 5-10% of deposit money for down payment and closing costs. As an incentive to create new homeowners, the Fed will continue the series of cuts in the discount rates to further encourage lending and also keep home loans rate down especially on those backed by Fannie Mae and Freddie Mac. Capital Seeds forecast that the Fed will continue cutting rate until the inventory of home for sale will reach an acceptable level close to 3-4 months of supply, from the current level of about ten months of supply. Consumer prices in the U.S. were unexpectedly unchanged in February, it could be easier for the Federal Reserve to cut rate on March 18, 2008 In his challenge to create new financial instruments to stabilize the financial market, domestically and globally, the Fed also expanded a practice to conduct foreign exchange market intervention transactions (credit or loan arrangements) with foreign governments or central banks so called “Currency Swap Lines”. These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the European Central Bank and the Swiss National Bank, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008. This move is part of the strong dollar policy of the Federal Reserve, which may not currently mean a strong dollar, as the low dollars in the short term boost exports, particularly exports of durable goods. Exports increase by 1% of the GDP, that could compensate the decrease of 0.6% of retail activity. Caterpillar predicted that fast-growing sales overseas would permit the company to meet its 2008 sales and earnings forecasts even if a recession does materialize. The Company expects 2008 earnings-per- share growth of 5% to 15% and revenue growth of 5% to 10%. The company also reiterated its long- term EPS growth target of 15% to 20%, and said it expects annual sales to reach $60 billion by 2010. China's factory and property spending grew 24.3 percent in January and February even as the worst snowstorms in half a century disrupted projects. Fixed-asset investment in urban areas rose to $115 billion from a year earlier, the statistics bureau said today. That was more than the 24 percent median estimate of 21 economists. |