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Why fed rate cuts won't help

Cutting interest rates has been a long, tried-and-true method used by the feds to inject money into a stagnating economy. Lower rates means that it's cheaper to borrow money, do more people can and do and then spend that money on investments like houses, educations and businesses. You may have noticed it's not helping. It won't. It can't.

Here's why...

The subprime meltdown has destoyed the banks faith in their own lending practices. I don't care if federal rates are cut in *half* from where they are today. The banks aren't willing to loan money to people with excellent credit right now. They're already struggling with the bad debt they've already got out there, and they can't risk making more even *if* the numbers say the risks are low (as with someone with a perfect credit rating). The banks know that even with a past perfect credit rating, the entire economic situation is fragile enough that low-risk, good-credit folks may find themselves in hardship soon because of the job market, fuel prices, food prices...

(And lest anyone forgot, crop returnes are not expected to be high yeild this year from *anywhere* in the US what with the unusual weather patterns all spring, summer, and now fall.)

I was willing to call our situation a depression rather than a recession at the beginning of the year. I think we're seeing it happen now. And I think things are going to get much, much worse, especially considering the epic level of TARFU the feds have already let come to pass.

This will go down as Greenspan's Folly.

I don't think we've seen the full effect of the sub-prime meltdown on our own economy, let alone the ripples around the world. I do think we're in for greater decline in the situitation than where we are now. I think the rate adjustments aren't going to have any positive effect. As I stated earlier, they can't. I think this is an economic perfect storm, and like the 1930s, the weather was all too ready to make a terrible situation worse.

I'm very concerned on what effect this economy is going to have on globalization. The last time this happened, we got WWII. The only thing we needed to do this time around (for Globalization III) was not screw it up. It would have progressed along fine, all by itself. But Greenspan... that dummy... had to go and export our debt never thinking that someday folks would come knocking on our door wanting to cash in their chips.

Greenspan needed to take a class from Vegas and the Nevada Gaming Comission. Too bad he didn't. Though, like any high-ranking official, he was smart enough to leave his post before the bombs started hitting the ground.

You see... from where he was standing on the top of the heap... he could see them falling from the sky.

Chicken Little in reverse.
Sent via BlackBerry from T-Mobile

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( 4 comments — Leave a comment )
mountainpilot
Sep. 17th, 2008 12:34 am (UTC)
I hear ya. Though, I'm not sure I understand your position that it's all Greenspan's fault. As I understand it, the fault lies squarely with the mortgage lending banks who converted their mortgage pools in to securities. These securities were then sold to institutional investors and the like, though they held some of them back in their own portfolios. They then borrowed against their own holdings in these securities. It is by all accounts a byzantine scheme which, at current tally, is going to cost the taxpayers $500BN, though it's expected to rise.

sirwilliam wrote up an interesting take on this, wherein he discusses Greenspan's strategy. Clearly his decisions play a factor in what we're seeing today but were they not initially in response to the dot-com bust? Laying the entire problem at his feet seems unfair.

In any case, I guess it's a good thing we didn't privatize social security.

Edited at 2008-09-17 12:34 am (UTC)
pamc
Sep. 17th, 2008 12:41 am (UTC)
Ah... But ti was Greenspan who changed the mortgage rules to *allow* the financial institutions to make the decisions that got us in this mess...

Greenspan was the gatekeeper who opened the door to this bullshit.
mountainpilot
Sep. 17th, 2008 12:54 am (UTC)
That's not entirely true. The change was the result of the Commodity Futures Modernization Act, authored by then Republican Senator Phil Gramm, a compromise version of which was signed in to law by Clinton.

It's also worth pointing out that Gramm and Greenspan both are top economic advisers for the McCain campaign.
pamc
Sep. 17th, 2008 01:21 am (UTC)
True it's not entirely just Greenspan, but he's the "brillant" mind who also exported our debt-- which is why China (among other nations) owns a ton of US securities.

What *is* mostly Greenspan (though again, there are no solo actors in economics/politics) is how far out he's pushed our luck.

Greenspan is going to be advising both sides. It doesn't matter who has picked him up in the meantime. Whoever is elected is going to have him on staff. Greenspan is still considered the economic MVP, and, as you point out, he's worked with dems and rpubs both.

Economic TARFUs are the halmark of all parties, whether Dem Rpub, Whig, Torrie... It really doesn't matter. The key thing to look for is anyone talking about "new realities", "new ways of business", "new forms of market management". That's code for: lying, cheating, stealing.

Crashes go in cycles. It's a young mans game. Eventually we get far enough from the last crash that no one is left who experienced it first-hand. So out come all the "new" things and, "oops!" Crash again.

What we're having now is (I think) the 100-year crash.

Before there was the 1930s crash, there was the turn-of-the-century crash that kinda got eclipsed with WWI and the Spanish Flu.

Things are different enough and the same enough... It's going to be interesting in a Chinese curse sort of way.

And yeah... I bless my stars regularly that.SocSec wasn't privatized. Otherwise I'd be more fucked than I already am.
( 4 comments — Leave a comment )

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