Last week was a big one for brand rebuilding.
Both Toyota (Stock Quote: TM) and Tiger Woods engaged in major damage control, with both bowing so low that, in Japanese Samurai tradition, the back of the neck is so exposed that it might be cut off (or at least swiped at with a nine-iron).
While Toyota faces a product recall and Tiger promises an image recall, you won’t catch the banking industry apologizing for much these days. And its neck won’t be on the chopping block anytime soon, either.
After all, the job of a banker is make money with as little effort as possible. So when financial institutions can borrow money at zero interest from the federal government and lend it back out at 5% interest to consumers, bankers don’t worry too much about the public relations fallout from borrowing hundreds of billions of dollar from taxpayers to keep the gravy train rolling.
If the taxpayer takes a another shot to the chin, so be it. The beauty of being a banker is that, when the landscape shifts, any added costs can simple be passed on to borrowers in the form of higher interest rates. That’s what consumers could and should expect after the Federal Reserve’s surprise 0.25% interest rate hike (from 0.5% to 0.75%) in its key discount interest rate.
The discount rate, also known as the primary credit interest rate, is the rate that banks borrow money from the Federal Reserve. When banks pay more to borrow from the Fed, they invariably bump up lending rates on mortgage loans to consumers.
That’s why Wall Street mortgage traders are up in arms this week. For months, the mortgage market was feeling its way along in the dark, somewhat convinced that interest rates would rise, but lacking any physical trigger that would actual rates upward.
Now mortgage securities traders feel they have their trigger. After the news of the Fed rate hike, the mortgage market saw a big sell-off.
Typically, when the price of mortgages declines, interest rates shoot upward. Banks and lenders view Federal Reserve rate hikes as a sign that the economy is getting better, and that rising rates are necessary to fight off inflation, which economists view as a huge threat to economic growth.