Article 1: Fed Cutting Interest Rates: Is there an upside?
Who are we kidding? By lowering interest rates last week, the Fed torpedoed hopes that this credit crunch currently strangling the U.S. housing market will somehow go away. This thing created by the “greedy investors and irresponsible borrowers” has stumped even our brightest economists. Our battleship is sunk. The signs are everywhere – Bear Stearns decla
ring its largest profit decline in over a decade; the cost of obtaining a home loan has gone up; Europe’s largest bank – HSBC – will shut down its sub-prime sector and cut 770 jobs; and worst of all, current Fed Chair Ben Bernanke (on the right) and recumbent Fed Chair, Alan Greenspan (on the left), don’t even agree with a recovery plan. Who on Earth (and I literally mean Earth) thought this was a good decision? Surely not the thousands of employees being laid off by the HSBCs or CITs of the world. Surely not the average American homeowner, whose home’s value has already declined 3% and will likely continue. Surely not the Aussie hedge funds or German banks that were so deeply entrenched in the American sub-prime mortgages that they’re now facing record losses. Even the poor schmuck who thinks he’s got it made by refinancing at a lower rate will see his home’s equity value take a hit far in excess of his meager refinanced gain. I see no rhyme or reason to any of this – it feels like this decision was a clueless stab at an unknown monster.I do know this, however, the one in three odds Greenspan gave the U.S. economy for entering a recession is starting to look like a mighty small number.
Article 2: Bernanke to Congress: Butt Out
Ben Bernanke, the Federal Reserve’s Chairman, has testified before Congress that U.S. legislation needs to reflect tighter regulations regarding home-mortgage consumer disclosure. While, at the same time, declaring that, “any new regulations to raise mortgage-lending standards should be careful to avoid limiting the availability of loans in ‘legitimate transactions.'"
Hold on just one second! Isn’t this the source of the credit-crunch nightmare in the first place? Indeed it is, and this, coming from the same guy who punished the dollar a week ago by reducing interest rates? Give me a break. Mr. Bernanke, I realize that historically it’s been the Fed’s de jure policy to ride the fence, and embrace the myriad of ways one might issue and resell a loan, but times have changed, and the more is no longer the merrier. If the mortgage crisis is as severe as the Fed believes it is (and indeed it appears it is – default loans last year exceeded any historical figure since they emerged in the 1980s), then the Fed needs to stick to the task at hand, and firmly enforce the issuance of loans, specifically sub-prime loans, to credit-worthy buyers.
1 comment:
GCM-
In your first post as a response to “Fed Cutting Interest Rates: Is there an upside,” you make numerous valid points that the author failed to discuss, and pointed them out clearly and accurately. You took a no-holds-barred approach to your response, and it came out perfectly. While the author took a less realist approach in their own blog, you showed broad knowledge concerning the Fed interest rate cuts and made your points very accurately and without any concern for caution. In a time when the rates are being cut like this, I think that was the perfect approach to take. With the Fed dancing around the issue of a recession, saying that there’s only a “one in three” chance of that happening, you showed that all of the signs were there, but nobody is willing to admit it. In your second post, you do a good job of expanding on the author’s initial thoughts on the speech made by Fed chairman Bob Bernanke. Bernanke and Co. made this drastic decision based on limited information, hoping that by doing so they would see immediate results and would be praised for saving the value of the U.S. dollar as it steadily declines. They got their immediate response, but what’s going to happen in the long run. I think you could have delved into this subject more in your post, because it seems as if no one has addressed this issue at all. The author of the second post made a short comment on it, but I think the long-term affects of this interest rate cut could be some of the more ominous than we have seen in a while. As in your previous comment on the first pose, you did a very good job of making your post convincing and no nonsense. It is obvious that you realize the Fed has taken drastic measures in a time when maybe such drastic measures weren’t necessarily needed. And since they have taken this course of action, they need to get working on a new plan to fix what they have done, and hopefully get the U.S. out of the recession that they so wonderfully led us into.
-ERS
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