Posts for Tag: alan greenspan

Rate cuts are not necessarily good...

I'm far removed from my days as an economics grad but I think rate cuts by the Fed are not necessarily a good thing. Yes, it'll make it cheaper for banks/corporations/small businesses to borrow money but it seems somewhat artificial versus real value/wealth creation. Remember it was this artificial (and arguably fraudulent) boost that led us into the current recession. It's almost like a drug that the economy has grown accustomed to. I wonder if the Dow would have jumped almost 900 points today had a rate cut not been rumored.

But why is the rate cut necessary? As a corporation, would borrowing money at 5.5% versus 4.5% swing you from profitability to a loss? As a small business, if your credit card rate was 15.99% versus 14.99% would that really matter much? And if you couldn't afford to buy a house at 6.75%, you probably won't be able to afford that house at 6.25%. If nothing else, the market correction of the past few weeks should reset everyone's expectations that life won't be as it was during the boom. We should all adjust our spending accordingly and move on to the business of true value creation. Innovate more - work harder. Then the gains you have are real gains and not artificial ones.

If you have the time, This American Life has a great show on the background to the mortgage implosion and how interest rate cuts made by Greenspan contributed greatly to the downward spiral.