Here's the money quote:
I wrote here last month that the Fed did the right thing by cutting just a quarter of a percent a few weeks before the holidays. That would give them a chance to see how the consumer was really doing.
They got the answer pretty fast: The consumer is doing horribly. The value of their homes, especially in the most inflated parts of this country, has deflated. The availability of credit via their homes or other sources has deflated. The value of their 401ks and IRAs has deflated.
As a result, their confidence has been crushed, and it’s unclear how many rate cuts it will take to reverse the trend. The trouble, away from Wall Street, is really quite simple: America has been living out of its means, fueled by a Fed that made credit so cheap that it appeared, at one point, you were getting paid to take the cash. With today’s cut, the Fed Funds rate will fall to 3.50%; last time it was that low was August 9, 2005, when the market was lower than it is today. By contrast, it sank to 1% on June 25, 2003. Mortgage rates, meanwhile, for 30-year loans are averaging around 5.5%, still well above their boom levels; ditto for the prime rate.
I agree completely with his analysis.
Greenberg always has a very fresh perspective on what is going on in the economy -- you should read him whenever he posts something because you are sure to get an angle you hadn't considered.
2 comments:
I completely agree Americans have been living beyond their means. Yet their standard of living today is lower than 30 years ago, and they require 2 incomes per houshold instead of 1 and still must borrow to survive. Why is that?
Usurious interest rates, various taxes on the middle class that eat up to 45% of income, collusive pricing practices in banking, energy, health, insurance, education and food. Oh, and off shoring the good paying manufacturing jobs and replacing them with jobs that involve serving fries and cleaning bed pans.
And not only was credit cheap, it was given to those who did not have the ability to pay, including illegal immigrants. This is called profiting by foreclosure. Legalized theft, which is what our regulatory environment is all about.
In some states, like NY, there is still on the books a law of fraudulent conveyance. Any loan made to someone without verifying they have the ability to pay it back, or establishing conditions which make the pay back impossible, can be declared null and void. The same tactics were used to cheat farmers out of their homes and property 80+ years ago, and so the law. It should be applied today with sub-primes and credit card debt.
And the solution to the current crisis is making credit cheap for the consumer?
Ask yourself who benefits from the incremental interest rate reductions over time. Those investing in bonds, which are mainly the banks, whose value increases as interest rates drop, giving them a way to shore up their capital as the Fed monetizes their bad loans. It has nothing to do with the consumer.
Even the so called bail out to taxpayers is nothing but a way to inject capital into the banks from the bottom up. The consumer is just a cash cow, no bail outs for them, when they can not pay their debt, their assets are seized (most can not even declare bankruptcy as corporations can due to the infamous 2005 bill to protect credit card companies).
The Fed is owned by the banks, and our government has been bought, and they act in the banks interests, not the consumer.
Michael Richards, please.
Cheap money got us into this mess, and now cheap money is going to get us out of it?
What these gyrations in the markets, here, and abroad, most remind me of, right now, is the Day-Trading frenzy that was so in vogue in the USA in the late 1990s among Individual Investors, except now it's whole markets that have gone delusional in the same fashion.
The markets may be up, for spell; I suggest enjoying it, while it lasts, because it ain't real, and it ain't a gonna last.
~Nyc
Post a Comment