The Dow fell 500 points in the last hour of trading today. It's about time! Fed funds futures are now pricing in an 86% chance the fed will cut rates tomorrow. Why? Because traders and investors on Wall Street want a "psychological lift" to prevent the market from falling even more. Well, too bad! The current rate is only 2% - already way too low. The Fed must sit tight at least until March of next year. The fact is, the market should have taken a dive over a year ago, but the Fed and our government have been artificially propping it up this whole time. Had our government not bailed out Bear Sterns, maybe, just maybe, reality would have set in and all these other firms would have taken action to stem their losses.
Thankfully we did not bail out Lehman Brothers. Sorry, but the American taxpayers should NOT be paying for the STUPIDITY and GREED of the banking sector. Let them go bankrupt; making the taxpayers pay for irresponsible industry practices is just unfair. As for AIG, Governor Patterson did the right thing (surprisingly) by allowing them to shift their assets. But, we do not need another bailout.
The Fed has increased liquidity to the market and even lowered the collateral required for cash loans. Firms had better start taking advantage of this, because so far they have been holding out, allowing themselves to fall further and further behind, all in anticipation of a government bailout. Well, the Free Lunches are OVER!
If the fed cuts rates tomorrow, our economy will go into an irreversible tailspin. The Dollar has finally started to level off BECAUSE rates have not been cut. Eventually rates must increase, but our economy cannot handle that right now. A cut will lead to horrible stagflation. Inflation has been steadily creeping up on us for years, just as the economy started to tank. Commodity prices are starting to fall, but if rates are cut Gold will shoot right back up; foreigners already started buying gold today. Commodity prices are only falling because the market is pricing in a weak economy and falling consumption, not higher supply. Therefore, although falling commodity prices are usually seen as a benefit to the economy, in this case they should be sending out alarm bells about the economy.
Cutting rates tomorrow may give a psychological boots to traders on the floor, but it will send a panic out across the world as economists will view such a cut as 1) a sign that the Fed does not understand economics and 2) that the United States economy is not fundamentally strong. A cut tomorrow may lead to one good trading day, but the market will crash beyond anything we have ever seen on Wednesday.
This economic disaster was started by Alan Greenspan back in the late 1990's. He just could not stop himself from cutting rates. Greenspan caused the Tech bubble and bust, but he ushered in the current housing crisis as well. When investors were forced to cover their margin calls in 1999, the tech bubble burst, but that only sent a small ripple through the economy, since average Americans only had limited exposure to the market. The undervalued consumer durables that were laggards for so many years during the tech boom suddenly became desired stocks to own, and General Mills shot up in price as JDS Unifase went bankrupt. Today there is no undervalued asset class left EVERYTHING is overvalued (except precious metals). The Dollar has been losing value for years; until the Dollar gains strength, there will be no end to this economic turmoil.
Low interest rates made mortgages more affordable, but it was the Federal Government that ultimately caused the credit crisis. By encouraging people who could not afford homes to buy them anyway, our government created an economic boom based on NOTHING. The boom was created because people unable to afford homes could now get sub-prime and interest-only mortgages without any down-payment. These people then caused housing prices to rise, so they turned around and took out home equity loans and went shopping, so the rise in consumer spending led to an increase in jobs. But then, banks wanted to get paid, and they raised variable-rate loans and all these people could not afford to pay up. Now, all these jobs are gone, especially in construction, because there is no imaginary cash flow to plug into. Banks and investment firms took advantage of these sub-prime loans because they closed their eyes to reality; their greed allowed them to take excessive risks. Essentially, they were playing "Hot Potato" and were betting that they would be able to toss off the bad debt to another firm before the inevitable collapse came. They were caught in the oven, and now they expect us to turn off the heat.
The housing and credit crisis never would have occurred if it wasn't for the Clinton Administration. Then Secretary of Housing and Urban Development (HUD) Andrew Cuomo loosened mortgage lending regulations (Freddy and Fannie) and even legalized giving kick-backs to brokers. Obama and his supporters are trying to blame this on George W. Bush, but the fact is this economic crisis has been bubbling under the surface for years. Only an idiot, like Nancy Pelosi, can say with a straight face that the Clinton Administration had nothing to do with it. It is absolutely impossible that an economic collapse of trillions of dollars can have just suddenly happened.
Right now I don't have all the details of what exactly Cuomo (now NY Attorney General) and other members of the Clinton Administration did. I only know for a fact that the Bush administration did not cause this, and in fact, it was the Bush tax cuts, particularly the Capital Gains cut, that prevented this situation from getting even worse. Bush may be to blame for excessive spending, but he could not have done that without Congress's approval. Bad trade deals and our national deficit fall on the hands of both Parties.
Right now I'm going to sleep.
©2008 Natalie Schultz, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Tuesday, September 16, 2008
Last modified: Tuesday, September 16, 2008
The views expressed in this article are those of Natalie Schultz only and do not represent the views of Nolan Chart, LLC or its affiliates. Natalie Schultz is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: CarolO
Date: 2008-09-16 11:04:27
Big secret meeting going on right now with the financial guru's. I'm sure they are worrying about a stock market crash.
Amazing how it's been said for months we were not in a financial crisis.
Posted By: Natalie Schultz
Date: 2008-09-16 11:19:40
Unanimous - hold at 2%! I cannot believe it. That was the longest FOMC meeting ever. Whew.
So, are falling exports really a sign of a strengthening dollar, or just a weakening world market? I say both, but more the latter.
And the market tanks.
If this does not prove that traders and investors are not the same as economists, I don't know what will. Take that, Warren Buffet!
Posted By: Doug Eberhardt
Date: 2008-09-16 11:29:48
Good article Natalie...and I approve of keeping the rates steady. I emailed Richard Fisher during the second to last vote congratulating him on being the only one who wanted to "raise" rates (It was a 9-1 vote).
Note this decision today was unaminous, and a good one. Let the market do what it does...don't bail it out!
I wrote an article on the Fed you may like just now...
Peace!
Doug
Posted By: Traci
Date: 2008-09-16 11:57:17
If I can recall - George Bush ran a program where he pushed for AMERICANS to BUY HOMES...He said he wanted all AMERICANS to BE HOME OWNERS.
How quickly we all forget that Rose Garden Press Conference:
The American Dream Downpayment Initiative (ADDI) was signed into law on December 16, 2003. The American Dream Downpayment Assistance Act authorizes up to $200 million annually for fiscal years 2004 - 2007. ADDI will provide funds to all fifty states and to local participating jurisdictions that have a population of at least 150,000 or will receive an allocation of at least $50,000 under the ADDI formula. ADDI will be administered as a part of the HOME Investment Partnerships Program, a formula grant program.
Purpose
ADDI aims to increase the homeownership rate, especially among lower income and minority households, and to revitalize and stabilize communities. ADDI will help first-time homebuyers with the biggest hurdle to homeownership: downpayment and closing costs. The program was created to assist low-income first-time homebuyers in purchasing single-family homes by providing funds for downpayment, closing costs, and rehabilitation carried out in conjunction with the assisted home purchase.
Type of Assistance
ADDI will provide downpayment, closing costs, and rehabilitation assistance to eligible individuals. The amount of ADDI assistance provided may not exceed $10,000 or six percent of the purchase price of the home, whichever is greater. The rehabilitation must be completed within one year of the home purchase. Rehabilitation may include, but is not limited to, the reduction of lead paint hazards and the remediation of other home health hazards.
Eligible Customers
To be eligible for ADDI assistance, individuals must be first-time homebuyers interested in purchasing single family housing. A first-time homebuyer is defined as an individual and his or her spouse who have not owned a home during the three-year period prior to the purchase of a home with ADDI assistance. ADDI funds may be used to purchase one- to four- family housing, condominium unit, cooperative unit, or manufactured housing. Additionally, individuals who qualify for ADDI assistance must have incomes not exceeding 80% of area median income.
Posted By: Terryeo
Date: 2008-09-16 20:51:20
Greenspan ran an economy during pleasent times and during times of great stress. He was more or less succsessful and was certainly not a huge failure. The datum that he put on the table, which had been largely ignored , was - owning a home is more central to a healthy economy than previously recognized.
Unfortunately, both banks and people made bad decisions and too many loans were made with flexible interest rates that could not withstand rising interest rates. However, those properties are still real properties, they still exist, the homes are still in existence even if their value is somewhat less today than 5 years ago.
I believe we are beging taken on a ride by very large economic forces that will result in business being manipulated by government, and government representitives being manipulated by bigger business. Private ownership of property is becoming something to manipulate instead of bring property owners peace of mind. Greenspan should be listened to, I think.
Posted By: Natalie Schultz
Date: 2008-09-17 20:49:36
Traci, I never said Bush holds no responsibility for this. He does - he is a "Compassionate Conservative" who just gives money away as if it grows on trees. Bush is NOT a real Republican, not nearly a real Conservative. Heck, he's not even a NeoCON - he's just a dim-witted figurehead who was easily manipulated by both the NeoCON war-mongers and Liberal Socialists. That is why we are in this mess.
The fact remains - that stupid give houses away to minorities idea could never have happened if the Clinton Administration had not de-regulated Freddy and Fannie under Andrew Cuomo's HUD.
Real Republicans say You are responsible for your own life. Real Conservatives support charities to help the poor. George Bush smooshed together his religious beliefs with his policies. Obama does the same.
At least Palin has so far proven to separate her religious beliefs from her policy decisions.