When To Wean and How Much, How Fast?

Like weaning a baby off the bottle or weaning a brand new puppy, there comes a time in life when total dependence on someone or something has to end.

That was the sound we were hearing from the Federal Reserve this week as Ben Bernanke
announced plans to dismantle the central bank’s
supports for the US economy.

Bernanke said the Fed will likely start
tightening credit by boosting the interest rate it pays banks on
deposits with the central bank.

But the Fed has a very tough balancing act if they move too quickly to raise rates. The entire economic implosion can be directly traced to the housing boom, bubble and bust and the housing market is just…beginning to slowly creep back…and only in some parts of the country…in many places, the bust is still …..a big bust.

Home prices, being somewhat held up by low rates, could suffer when rates go higher. Buyers who can now afford a $1,400 monthly payment on a
$250,000 mortgage when rates are 5.5 percent….. may not be willing to pay that much for a house if rates go to 7 percent, in which case the monthly
payment would be $1,660.

What about people with adjustable rate mortgages who may be upside down in their homes, owing more than they are worth, but continue to persevere, because the payment is still relatively affordable…?

What happens if rates start climbing and more people start walking away from those homes and their obligations?

Can you say, right back to square one?

It is, at best, a dicey period of transition and the government will no doubt try to back off of their involvement in the economy in one area, while trying to increase their involvement in another.

In Europe, serious debt issues have piled on to
a plethora of economic problems …add to that concerns about China’s plans to
curtail economic growth to avoid speculative bubbles….. and then President Obama’s
calls to restrict trading at large financial institutions and you can easily see why Wall Street has been behaving like a scared rabbit the last couple of weeks.

To wean or not to wean…that isn’t the question…the real question is when…and how fast and by how much?

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