Although the Fed's recent key interest rate cut has only a marginal effect on mortgage interest rates, it does signal the financial community that the government is now carefully monitoring the worrisome housing developments. It provides more liquidity to the overall system for one and also assures the banks that Washington seems to be willing to step in if really needed. It's clear that the marketplace is unable to alone navigate these hurricane-force winds.
The Assistant Secretary of the Housing and Urban Development, or HUD, spoke in the same supportive tone the other day. She is part of an obviously broader effort to spread the message that the credit markets are being observed with a keen eye. And sometimes that is what is necessary to calm everybody down. Let the players in the field know that despite their past indiscretions the big brother won't allow the system to fall to pieces.
The HUD Assistant also gave her full support to the subprime mortgage. It's very true that it plays an important role in the housing industry by boosting home ownership. "Subprime mortgages democratize credit," she said and will keep its place in the program mix. That'll be just fine.
Another point she made was that the government will do more to advance financial literacy. That would of course help everyone, including home buyers, but the core problem with the subprime fiasco appears to be lack of personal responsibility. How do you teach that?