Well the cut was announced today. I won't steal Dave or Bellz's thunder by geeking out over it before them, but here is a contrary opinion about the effectiveness of this move.
Alan Greenspan spoke to some German magazine recently about the turmoil in the US. Saying this about our government's economic CPR:
"Global forces can now override most anything that monetary and fiscal policy can do. Long-term real interest rates have significantly more impact on the core of economic activity than the individual actions of nations. Central banks have increasingly lost their capacity to influence the longer end of the market."
But, Mr. Greenspan, how could that be?!?!?
"The resources of central banks relative to the size of global forces have markedly diminished. We have 100 trillion dollars of arbitragable long-term securities in the world today so that even large movements initiated by central banks have little impact." Anyway, let's keep ignoring the fact that our money is weaker than Bellz's game and we have trillion's of dollars worth of IOUs all over the world....
An interesting note: Should we be expecting any bubbles, the interviewer dared to ask?
"Bubbles are not created unless you have low inflation and stable and low long-term interest rates. In other words: One of the costs of a stable economy is that it often generates bubbles. The negative consequences go with it unless we are willing to forego the benefits of these stable periods with their rising asset prices and wealth creation. The negatives have always been far less than the positives. But we still have a choice. A central bank can always prevent bubbles by creating inflation."
BAM! Greenspan is so smart.....
Here is a fantastic Financial Times (think British WSJ) article about what is going on right now, albeit this article was written before the half-percentage point cut today. Even the Brits have concerns about the true effectiveness of the US Central Bank...
OH! And most importantly of all, Greenspan's interview ended suggesting that the growth of East Asian GDPs, and their approaching chance to challenge the US's [sic] economic soverignity as having "severe political consequences."
To which AL responded "The expansion of global forces is a positive development, not a negative. We have taken hundreds of millions of people out of poverty. This process benefits us all."
Amen!
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How effective are Fed rate cuts in stimulating the economy? Not very at all, it's like giving a human sized steriod dose to an elephant, it doesn't matter that much. The reason the rate cuts were necessary is NOT because of the economy. It's because of the mess our real estate market and the financial instruments tied to it are in.
ReplyDeleteThe rate cut will help people, millions of them, who are on an arm mortgage that's about to reset. It gives hope to deliquents that they may be able to refinance. It encourages money that's on the sidelines to be either spent or invested which will boost the economy or stabilize the market (which we need right now). I agree 100% with Greenspan's analysis of the rate cut's impact on the economy, but that's not why we need them.
One place rate cuts do have an immediate affect is on lending rates (Wachovia, Wells Fargo, B of A and others all lowered rates THIS AFTERNOON) which is exactly what we need. You can criticize the cuts, but they gave us medicine right where we needed it.
That's true, this need not be considered a short term fix to what will probably end up being a long term problem... Dave is correct in noting that this should help out the near 2 million people refinance their evil adjustable rate mortgages.
ReplyDeleteBecause banks don't want those empty houses, and neither do the neighborhoods.
I perhaps wrote too strongly suggesting that this move is "ineffective." Instead, just realize that this cut to near zero real interest rates (adjusted after inflation) probably won't be enough to stave off a recession.
I concur
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