Pop! Goes the Weasel
The Fed slashed interest rates. They dropped the rate that they charge to borrow money all the way below ¼ of a percent. My daughter has $100 in a kiddie account at the bank that pays ¼%. You cannot imagine the look on her face when she got her shiny quarter after waiting a whole year. The returns are so dreadful that people are forced to put the money to work elsewhere. That is how a Fed Easing Cycle works: they drain the pond. They drain the pond until the fish grow legs.
Does anyone see the paradox?
After a decade of reckless borrowing, the Fed is forcing us to engage in reckless lending.
The housing boom and subsequent bust was fueled by cheap money. The cure is even cheaper money.
This is far from over. The recovery is tepid at best; unemployment is not abating, and the average American has lost over 30% of their wealth over the past 3 years as housing prices have tumbled. Furthermore, the Fed has done all they can do. They can’t take rates negative.
Do not be confused because stocks are up 60% from their lows. Stocks are still far from the highs, and are starting to stall. We will not be able to regain the standard of living we enjoyed as a nation in the 2004-2007 years any time soon. That period was powered by poor lending standards and greedy borrowers. That period was not like previous booms. Prior booms were powered by innovation and technological advances– advances that caused real growth and real prosperity.
The last five years were not real growth that resulted from any advancements. Rather, it was an orgy of borrowing and bingeing that has resulted in a huge dislocation of credit and resources. Too many people now depend on real estate, mortgage finance and home building for careers. Without stupid lenders and greedy borrowers, the commissions and projects are fewer and farther.
The Fed has cut rates. Hopefully real growth will result. But it is doubtful. More likely, the Fed’s campaign will lead to a new orgy of borrowing and lending that will artificially inflate some other industry for a few years. Maybe that is why stocks are up 60%. It’s just one bubble replacing another.
Tags: credit, economics, Fed, interest rates, recession, recovery, stock market
As a child, I had a series of gears and cogs that could be assembled together. By placing small gears next to large gears, I could generate incredible speed or power, all with a simple turn of a crank. Over time I built an elaborate replica of a clock, complete with spinning soldiers. All of the spinning, turning and revolving was driven by one motor buried deep inside. The possibilities of different contraptions was limitless, but all were bounded by one simple fact: Either you had to have a motor, or a crank; the thing would not turn itself.