Posts for Tag: interest rates

0% interest rate ... yikes!

So the Fed lowered the prime rate again to between 0% to 0.25%. While most folks may cheer about this, I believe it is a harbinger of some tough times ahead. Back in the early part of the decade, Japan cut its interest rates to 0% and that's where it remained for almost 6 years. Could that mean the US is in for a recession that could last that long. Not sure, but I think the optimists who think this is a half to one year long recession are deluding themselves. The circumstances of Japan's decade long recession are different so it's not an apples to apples comparison. However, Japan's recession was for the most part localized to Japan. The recession we are in now is a global recession that touches almost every country on the planet. If it took one country a decade to emerge from its recession (only to be caught up now in a global recession), how long will it take us to turn the corner?

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.