Officials term move by Fed a lighthouse in storm

Consider the one-half percent decrease in the discount rate a lighthouse in a storm, area analysts said Friday.

The Southern Nevada economy is still caught in a turbulent mortgage loan crisis, but the Federal Reserve Bank is turning on the light and indicating it's there to help to prevent a calamity.

The Federal Reserve Board on Friday cut the discount rate by 0.5 percent to 5.75 percent. The discount rate is the interest rate that the Fed charges banks for loans which have securities for collateral.

The discount rate change foreshadows a possible Fed move that would cut interest rate expenses for many kinds of loans, analysts say.

The discount rate is mostly symbolic because only a bank in dire straits would borrow from the Fed at the discount rate, said Tracy Clark, senior economist at the JP Morgan Chase Economic Outlook Center at Arizona State University.

Borrowing at the discount rate would be an admission of bank problems and probably trigger regulatory review, Bill Martin, chief executive officer of Nevada State Bank, agreed.

Since Martin became a banking professional in 1964, "the use of the discount window has been as a lender of last resort. It has a stigma attached to it."

While that's true, the Fed's move Friday to lower the discount rate has two big implications, said Dale Gibbons, chief financial officer at Western Alliance Bancorporation, parent of Bank of Nevada.

"One, that they're are not asleep at the switch (at the Federal Reserve)," Gibbons said.

And second, it means the Fed probably will lower the federal funds rate by 0.5 percent to 4.75 percent at its September meeting, Gibbons said. He anticipates the fed funds rate will come down because the fed funds rate usually is 1 percentage point lower than the discount rate.

"That's a big deal," Gibbons said. Dropping the fed funds rate usually causes banks to lower the prime rate they charge their best commercial customers.

Loans for commercial borrowers, consumer home equity loans and some credit card rates often are set a few percentage points above the prime rate. So when the prime drops, those interest rates fall.

Southern Nevada businesses and consumers have been aching for financial relief.

The construction growth engine has groaned into low gear as lenders witnessed a collapse in the market for subprime residential mortgages, loans that are made to borrowers with below standard credit ratings. It has spread to "Alt A" home mortgage loans made to borrowers with high credit ratings but no documents proving income.

Some home owners and residential investors are defaulting on mortgage loans, causing a steady flow of foreclosed properties on the market. At the same time, burned lenders are tightening their credit standards, analysts say, and that limits the number of consumers who can qualify for a home loan.

"They're still people building, and they're still people buying," Martin said.

Just not very many.

Leo Davenport, chairman of the Las Vegas City Planning Commission, is seeing the same trend from a different view.

A year ago, Davenport was going through agendas with more than 100 requests, ranging from developers seeking zone changes to homeowners wanting variances for home improvements.

The agenda list shrunk to 30 items early this year and now it's running about 50 items for each regularly scheduled meeting, he said. "It has dramatically gone down."

The Fed's action on the discount rate follows moves that increased the supply of money and a decision to accept mortgage-backed securities for loan collateral, Martin said.

The Fed typically focuses on debt markets, rather than the stock market or business news, Martin explained. "They are people who really don't like disruptions in the market. The action by the Fed in the last several days is intended to calm (the markets) though placing liquidity into the system."

Clark said: "They are trying to prevent the avalanche by stopping the first few stones. I think the cracks may have spread as far as they are going to spread (in credit markets)."

Cities like Las Vegas and Phoenix, which benefit from large population in flows, should hope that analysts are right in predicting the country will avoid a recession.

People usually delay planned moves during recessions, Clark said.

"The worst possible scenario would have been a housing slowdown and then to have a national recession," he said.