Will Fannie Mae and Freddie Mac Impact Australian Business Owners?
Wednesday, September 10th, 2008 Posted in Management, economy | No Comments »The big news is that the U.S. Fed took over Fannie Mae and Freddie Mac. These quasi-government agencies, publicly owned and actively traded, are market makers within the US housing sector, providing and guaranteeing mortgages. Both agencies made home ownership in America possible – the realization of the proverbial American Dream.
Unfortunately, the housing market in the U.S. is in the tank with existing home sales at their lowest levels in more than 20 years and property values in steep decline thanks to simple supply and demand. U.S. realtors like to see a two to three month inventory of properties, indicating an active market. Current inventories of existing homes are over 12 months in some portions of the U.S. – especially the high-priced east and west coasts.
Fannie Mae lost $14 billion in the past 12 months, leaving bondholders and shareholders wondering if their positions were secure. This seriously depressed world markets because Fannie Mae and Freddie Mac were always solid financials – until the U.S. housing bubble burst in 2005. Prices have dropped 30% in the Las Vegas area and across America’s expanding Sun Belt alone.
The Feds to the Rescue
Well, fear not shareholders and bond holders. Your paper is safe. This past weekend, the U.S. federal government took over the operation of these two lending giants, and thus guarantees all of that outstanding paper.
Read the rest of this article here.
Reserve Bank’s Minutes: More cheaper money to come
Saturday, September 6th, 2008 Posted in Management, economy | No Comments »
After working my way through the minutes of the Reserve Bank’s August get-together it became obvious that money was about to get cheaper in Australia - so the September rate cut was no surprise. That’s the good news for Australian borrowers.
But it also means the Australian dollar weakens against other world currencies – especially the U.S. dollar that’s been firming up in recent months. A weakening Australian dollar translates into lower revenues for businesses marketing goods and services overseas.
Central bank board members stated in their report that, “ Given there had been a significant change in borrowing behaviours, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted.” With the cash rate at its 12-year high of 7.25%, I think the Reserve is markedly understating the case.
Many of my clients have been forced to delay plans for expansion and upgrade due to the high cost of borrowing in Australia. Of course, we all function in a world economy that’s been decelerating for about a year now.
The American Federal Reserve Bank has indicated in the notes of its last meeting, that we shouldn’t expect further declines in rates on American dollars. With the U.S. dollar gaining strength against the Euro and other currencies, Fed Chair, Ben Bernanke sees no reason to lower the cost of borrowing in the States, despite the continued real estate meltdown across the U.S. where many homeowners live in homes worth less than the outstanding mortgage – if they can stay in their homes at all.
What does all this mean for small business owners?
Don’t borrow yet. Expect another rate cut in the next couple of months.
