By Kitty J. Lin, Attorney at Law
On Friday, August 5, 2011, Standard & Poor’s downgraded the U.S. Treasury Debt from an AAA rating to an AA+ rating. S&P indicated that one of the major reasons why they decreased the rating was due to Congress’ plan to reduce the country’s debt did not satisfy S&P’s standards for stabilizing our country’s economic situation. S&P’s explanation seems hypocritical given that S&P was one of the reasons we are in this financial crisis. S&P had given high credit ratings to companies that did not deserve it and that was a factor that sank our economy. A lot of companies that were issuing subprime mortgages were enjoying the effects of being in S&P’s favor until the bottom dropped out from underneath them when the real estate bubble burst. This led to millions of Americans seeking protection from the bankruptcy court.
One of the biggest effects of the downgrade was stock volatility. Once news of the debt downgrade hit, stocks tumbled drastically on Monday following the debt downgrade. Consumers were panicked, and a lot of them flocked to U.S. Bonds, which is the safe haven in the world of investments. On Tuesday, August 9, 2011, the Federal Reserve expressed their doubts about the economic recovery and promised that they were going to keep the federal funds rates at 0 to 1/4% until mid-2013. This is the longest commitment period the Federal Reserve has ever made to keep the rates low. The federal funds rates are what banks pay to borrow money. Thus, theoretically, the lower rates the banks have to pay to borrow money the lower the rates consumers would have to pay to borrow money from the banks. This is good news for consumers facing a credit crunch. Hopefully consumers will be able to obtain better rates or refinance their existing debts to prevent bankruptcy.
One of the silver linings from this crisis is that mortgage rates will decrease or remain low. Now is the perfect time to buy a home or refinance your loan. Home values are still low, and now mortgage rates are also low. If your financial situation allows you, now is the time to take advantage of the crisis and put yourself in a better position for the future.
Unfortunately, consumers that wish to just keep their money in their savings account with their bank will not see much increase. In fact, the savings rate is practically non-existent. Currently many people are trying to keep their money safe in banks. Demand for loans still remains low, even with attractive low rates. Most consumers currently do not have the ability to capitalize on the low rates; most of America is trying to survive on a daily basis and are living from paycheck to paycheck, never knowing if they will still have a job the next month. Consumers in this group are essentially bankrupt and are in danger each month of defaulting on their debt payments. Consumers that are in this group would not be affected much by the debt downgrade, as they normally do not have the credit to take advantage of the low mortgage rates or the available equity in their homes to refinance their loans.
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