7 ms·

Either I'm stupid or Fed is amazingly stupid. I'm not sure which one is the case though I really hope it's me. The reckless mortgage boom and the ensuing crisi

by chime 19y ago

Either I'm stupid or Fed is amazingly stupid. I'm not sure which one is the case though I really hope it's me. The reckless mortgage boom and the ensuing crisis was caused when the Fed cut rates to avoid recession and made borrowing so easy. Now to fix the mess caused by lowering interest rates, they're trying to lower interest rates? If you're bleeding from your wrists because you slashed your wrist with a knife, you don't slash your arm higher up to stop the bleeding from the wrists. Well true, it does stop you from bleeding from the wrists but now you're bleeding from the upper arm! Of course, you can stop the bleeding there by slitting your biceps. Pretty soon you're going to have to cut off your arm to "stop" the bleeding. How about they just let there be a recession so the organizations that were investing poorly lose money and go out of business while the investors who were smart and focussed stay in the game?

Dauntless 19y ago
They expect that now when everyone is scared to st, that they will start spending like crazy? Well I somehow doubt that, especially as they didn't fix any of the problems that created the recession. Those people should be sent to jail, the dollar will soon be worthless. But if you agree with the FED, it should be easier now to get money for your startup... even though 1 million dollars will value about 1000 euros.
comatose_kid 19y ago
I don't agree. I think the Fed should have lowered rates earlier. Lower rates lead to a better lending environment which leads to economic growth. If the Fed had cut more drastically earlier, we wouldn't be worried about a recession right now. And I'll bet the dollar would be even higher, since the world likes investing in currencies that are backed by a strong economy. There is no need to go through a recession just to make the 'organizations that were investing poorly' pay. The market won't discriminate to that degree (ie, good investments that have nothing to do with housing and have wonderful balance sheets like Apple will also go down). If you're going to use medical analogies, I'd say that avoiding a rate cut to punish the 'bad' companies is like committing suicide to alleviate an upset stomach.... Anyways, the problems weren't caused by lower rates alone - banks weren't very good at evaluating the risk profile of the people they were loaning money to. And repackaging mortgages to sell them to the 'bigger fool' gave them little incentive to be more vigilant - in fact, it rewarded aggressive lending practices . I think lenders are now more aware of the problems with this line of thought, which is why they are so reticent to lend now. Hopefully the Fed will cut again at their next meeting.
- Dauntless 19y ago
  You clearly don't know what hyperinflation does to an economy. It's not like lowering rates is a silver bullet to economic growth. Lowering rates compromises long term growth for short term growth. "Hopefully the Fed will cut again at their next meeting." ... ahhh, forget about it.
  - comatose_kid 19y ago
    You're clearly assuming that lowering interest rates will cause hyperinflation. Back that up instead of talking down to me. Explain how hyperinflation will occur when what is typically a person's most valuable asset (home) decreases in price. Explain how hyperinflation will occur if we're in for a recession and the associated job losses. Lowering rates does not sacrifice long term growth. Rates were drastically lowered in 91 and 82 (83?) as well, and that didn't exactly negatively impact long term growth. I'm serious, and I'd appreciate something concrete to help me understand why my viewpoint is incorrect.
    - david927 19y ago
      By lowering the prime interest rate, they are making it easier to borrow dollars, which lowers the dollar's value, which causes price inflation. If you have a strong dollar, you can lower rates. But the dollar is at an all-time low, so then to have a 75bps drop hit it, the result is essentially pushing it towards hyperinflation.
      - comatose_kid 19y ago
        Right - I understand this part. But I think this is more than balanced by the positive effects of rate cuts on our economy. Rate cuts make it smarter to borrow than to save (for businesses and individuals), and the spending of this money means more growth. Economic growth is what will make the US dollar a more attractive investment. I guess that given the huge drops in housing values, combined with the layoffs that will (and have) occurred in the banking and housing industries, I am more worried about deflation than inflation. $100 oil and a lower dollar don't matter as much as banks going under and people walking away from their houses.
david927 19y ago
The wrist bleeding is a poor analogy, but you're right the Fed is pretty ckufing stupid. The Forest Service used to do the same thing with forest fires. They were considered an anathema and each fire was put out the second it started until the fuel (dry brush, etc.) would accumulate to the point that a single match would give you an unprecedented, unnatural, monstrous firestorm. We've become so afraid of an economic downturn that rates are slashed at the first chance, etc. At some point, it won't work anymore -- there's just too much fuel waiting to burn. Put on your asbestos, kids. This one's going to get hot.
dpapathanasiou 19y ago
The problem is that credit assets (all those mortgage-backed SIVs & CDOs) aren't trading. So the Fed is doing what (little) it can to encourage the market in those assets to function again. Ultimately, though, it cannot force people to take on risks they don't want, so even a large rate cut like this one may not make a difference in this climate.
imsteve 19y ago
It's you.

by chime 19y ago

Dauntless 19y ago

They expect that now when everyone is scared to st, that they will start spending like crazy? Well I somehow doubt that, especially as they didn't fix any of the problems that created the recession. Those people should be sent to jail, the dollar will soon be worthless. But if you agree with the FED, it should be easier now to get money for your startup... even though 1 million dollars will value about 1000 euros.

comatose_kid 19y ago

I don't agree. I think the Fed should have lowered rates earlier. Lower rates lead to a better lending environment which leads to economic growth. If the Fed had cut more drastically earlier, we wouldn't be worried about a recession right now. And I'll bet the dollar would be even higher, since the world likes investing in currencies that are backed by a strong economy. There is no need to go through a recession just to make the 'organizations that were investing poorly' pay. The market won't discriminate to that degree (ie, good investments that have nothing to do with housing and have wonderful balance sheets like Apple will also go down). If you're going to use medical analogies, I'd say that avoiding a rate cut to punish the 'bad' companies is like committing suicide to alleviate an upset stomach.... Anyways, the problems weren't caused by lower rates alone - banks weren't very good at evaluating the risk profile of the people they were loaning money to. And repackaging mortgages to sell them to the 'bigger fool' gave them little incentive to be more vigilant - in fact, it rewarded aggressive lending practices . I think lenders are now more aware of the problems with this line of thought, which is why they are so reticent to lend now. Hopefully the Fed will cut again at their next meeting.

Dauntless 19y ago
You clearly don't know what hyperinflation does to an economy. It's not like lowering rates is a silver bullet to economic growth. Lowering rates compromises long term growth for short term growth. "Hopefully the Fed will cut again at their next meeting." ... ahhh, forget about it.
- comatose_kid 19y ago
  You're clearly assuming that lowering interest rates will cause hyperinflation. Back that up instead of talking down to me. Explain how hyperinflation will occur when what is typically a person's most valuable asset (home) decreases in price. Explain how hyperinflation will occur if we're in for a recession and the associated job losses. Lowering rates does not sacrifice long term growth. Rates were drastically lowered in 91 and 82 (83?) as well, and that didn't exactly negatively impact long term growth. I'm serious, and I'd appreciate something concrete to help me understand why my viewpoint is incorrect.
  - david927 19y ago
    By lowering the prime interest rate, they are making it easier to borrow dollars, which lowers the dollar's value, which causes price inflation. If you have a strong dollar, you can lower rates. But the dollar is at an all-time low, so then to have a 75bps drop hit it, the result is essentially pushing it towards hyperinflation.
    - comatose_kid 19y ago
      Right - I understand this part. But I think this is more than balanced by the positive effects of rate cuts on our economy. Rate cuts make it smarter to borrow than to save (for businesses and individuals), and the spending of this money means more growth. Economic growth is what will make the US dollar a more attractive investment. I guess that given the huge drops in housing values, combined with the layoffs that will (and have) occurred in the banking and housing industries, I am more worried about deflation than inflation. $100 oil and a lower dollar don't matter as much as banks going under and people walking away from their houses.

david927 19y ago

The wrist bleeding is a poor analogy, but you're right the Fed is pretty ckufing stupid. The Forest Service used to do the same thing with forest fires. They were considered an anathema and each fire was put out the second it started until the fuel (dry brush, etc.) would accumulate to the point that a single match would give you an unprecedented, unnatural, monstrous firestorm. We've become so afraid of an economic downturn that rates are slashed at the first chance, etc. At some point, it won't work anymore -- there's just too much fuel waiting to burn. Put on your asbestos, kids. This one's going to get hot.

dpapathanasiou 19y ago

The problem is that credit assets (all those mortgage-backed SIVs & CDOs) aren't trading. So the Fed is doing what (little) it can to encourage the market in those assets to function again. Ultimately, though, it cannot force people to take on risks they don't want, so even a large rate cut like this one may not make a difference in this climate.

imsteve 19y ago

It's you.