The Fed is taking a lot of action with this “crisis that we are in”. Cutting interest rates like crazy, flooding cash into the sytem. What does everybody think about this? Seems like they are really looking in the short term and not worrying to much about the effects. Obviously its the Fed so they know what they are doing. But with all the cuts in the rates and putting so much money into the system could make inflation a huge problem.
Also, they are doing thos because of the mortgage problem, but the housing market has a history of having troubles, roughly every ten years something major happens in that market. And they are so worried about a recessions, but recessions happen naturally as a form of realignment to fix arbitrage opportunities.
Could all this action being taken by the Fed be of major concern for the future.
March 10th, 2008 at 10:14 am
The fed really has no other chose but to cut rates. He needs to stabilize the market and wait for the weak dollar to do its work. The message is rather mixed since the long term rates keep going up while the short term rates are going down. I think the market will rally in the next few months. The weak dollar is not really hurting us since U.S. goods and stocks look cheap to the European consumer. Due to the currency rate the Europeans are getting U.S. stocks at an extreme discount and will take advantage of that while they can. Also European industries are now moving into U.S. to take advantage of the dollar just look at BMW.
BMW is cutting jobs in Europe and moving a lot of productions into U.S. the story is bellow.
http://www.cnn.com/2008/BUSINESS/03/10/bmw.jobs.ap/index.html
Personally I love the housing correction since house prices became crazy in the last 5 years. I don’t think the Fed is really bailing out the home owner but trying to save the banks with his rate cuts.
But that’s just my 3 cents
March 10th, 2008 at 10:18 am
what do you mean by “wait for the weak dollar to do its work” do you mean foreign nivestors buying u.s stocks or something else?
March 10th, 2008 at 10:20 am
Yah foreign investors buying U.S. stocks and buying a lot more U.S. goods. We have a huge inbalance of trade that we need to fix.
March 10th, 2008 at 10:31 am
Read the post I put up, the Fed is cutting rates to fight off deflation. We have an imbalance of trade, quite simply, because we are such a large entity. Think about it, Japan, the UK, Germany, they’d all have to purchase 3 goods per person to every one good per person in the US just to account for population differences. China has more people, and will eventually reverse the trade deficit, but their currency and lower class both need to adjust higher first.
March 10th, 2008 at 10:38 am
Yup, serg just sent it to me, great post. Cleared up some of my thinkings
March 10th, 2008 at 10:49 am
I agree with you that it’s most likely a short term fix instead of long term. I dont think interest rate cuts and money flooding is going to help the current mortgage problem. I think there’s plenty of money to go around it’s just right now the people that have the money dont want to spend it on what they think is an overpriced market. The market is currently facing a valuation problem and pumping money into it isn’t going to fix it and sure as heck isn’t going to help with our economic growth. There is zero shortage of consumers they just need to make current home pricing lower.
The current weakness of the US dollar is a scary thing and like you said is going to become a big problem with inflation. I think we as consumers are already seeing it at the gas pump and will continue to see it as the foreign market reduces there appetite for US Debt. I’m not afraid of recession but right now the situation does suck.
Then again I’m just a 24 year old young adult that does a lot of reading. Like you said I just cross my fingers and hope they know what they are doing
March 10th, 2008 at 11:22 am
http://money.cnn.com/2008/03/10/news/international/china_trade_surplus.ap/index.htm?postversion=2008031006
China is already feeling it. Their trade surpluss was down 63% last month.
March 10th, 2008 at 11:44 am
People don’t realize how good we have it here in the states.. Were spoiled
P.S. Why the heck is this site so slow lately?
March 10th, 2008 at 11:46 am
I think there is a lot of traffic and we may need a faster server. But Paul is the expert on that not me. It could be the asian hackers that were in the news today.
http://www.cnn.com/2008/TECH/03/07/china.hackers/index.html
I DON’T FEEL SAFE lol
March 10th, 2008 at 11:59 am
Whoa whoa whoa, slow down there! Let’s get our stories straight, you kinda jumped around on us there. Sure the dollar is down, that’s what happens when you import more than you export. No one buys our stuff, so they don’t need dollars. We buy lot’s of their stuff, so we sell dollars. This means that we have to pay more for international commodities and goods, and people pay less for our goods. Two fold benefit, 1> incentivizes us to create alternative energy 2> boosts aggregate demand in the best economic way possible (think as our neighbors buy our stuff and we get richer, then we buy their stuff and they get richer and on and on).
The foreign markets will never lose their appetitie for US Debt. Quite simply, they have nowhere else to go. The US Government’s debt market is the most liquid and stable market in the universe. Dumping their positions means selling prices down on themselves and really having nowhere else to go.
The mortgage market is the consumer side of the national credit market that is currently in crisis. While your perspective is that prices are too high and this is the problem, the fact is that we NEED prices to stay where they are. Think of it like this: Sergey goes out and buys a $450,000 home by taking out a mortgage from Gaybadoo bank. He puts a 5% downpayment in and finances the rest with an adjustable rate mortgage. Gaybadoo bank puts Sergeys loan on its books and issues more loans off the capital. Sergey’s house declines in value over the next 2 years by 12% and at the same time, his mortgage rate increases so his payments go up. Sergey is an unscrupulous Russian, so he decides that rather than pay a mortgage that is more than his home is worth, he’ll ‘walk away’ and default the mortgage. Gaybadoo bank loses his loan, and now has to come up with collateral for the extra loans it made from his loan. Multiply this by the highest rate we’ve ever seen, and that’s the mortgage side of the credit market. Instead, if we can somehow make prices rise again, Sergey will not walk away from his loan, and the bleeding will stop.
On the institutional side, now suppose Gaybadoo bank sold Sergey’s loan, packaged with a bunch of other mortgage loans and guaranteed by MBIA (a bond guarantee company) to XYZ company as an investment. Once Sergey and others default on their loans, XYZ’s investment loses value and that loss must be reflected in the balance sheet. Moreover, MBIA is supposed to make up the difference in value lost, but (as we have now found out) DOES’NT HAVE TO MONEY TO DO IT! This is how the institutional/corporate side has been affected, and it’s proving to be much much worse than the retail/consumer side.
March 10th, 2008 at 12:16 pm
I’m not sure I would use Gaybadoo bank since Gabadoo is broke but in I would totaly walk away from my loan.
March 10th, 2008 at 1:32 pm
Dont worry sergey.. you know I got connections I’ll tell Aeree to tell the koreans to hack the Chinese so in turn the chinese dont hack us who are hacking everybody..
Damnit shouldn’t the pentagon be reaaaallly hard to hack.. It’s scary that information can be compromised that easily.. (well not easily.. done by two really smart guys.. but still scary)