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cramer1Recently, Jim Cramer has been going absolutely Postal about the Fed's inaction on interest rates (see here). He was even on the national news this evening, and instead of giving us news, used his precious 30 seconds to demand the Fed lower rates ASAP.

His reasoning is this. The Fed has interest rates too low in 2002 and 2003. People then took on mortgages they could not finance, because the short end of the yield curve was only 1%, and now it's up to 5%, which for interest only loans is a huge increase. The rise in foreclosures is hurting banks, investors, and borrowers. The Fed created this mess by having rates so low, so they must bail everyone out.

The problem with this reasoning is that it merely compounds a mistake. Saying they were too easy in 2003, and using that fact to say you should ease again, is like saying you should get rid of a hangover by drinking vodka. It will merely push the problem into the future, and make it worse.

I remember William Greider's book on the Federal Reserve, and the only nice thing he had to say about it, was that the inflationary 1970's were a good way to transfer wealth from lenders to borrowers, because the unanticipated inflation helped people with nominal debts. But this ignores the lower productivity, the sharp recessions, that were directly related to containing the inflationary spirals.

This is where you have to have to look at not merely the first order effects, the direct effects, but the indirect effects. Lowering rates to bail out bad deals subsidizes more bad deals, and only works by inflating the currency, which then causes a greater misallocation of resources. Bear Stearns has recently fallen from 170 to 114 this year, but since the beginning of 2003, that's still a 14% annualized stock increase. If you start bailing people out for making bad investments, where does it stop?

The Fed should do nothing. Drinking more to get rid of a hangover is simply not good advice.
Ronan (guest) meinte am 10. Aug, 17:16:
Hair of the dog! Or is it a shaggy dog story?
Drinking can sometimes ease the pain, it really depends on the desired functionality of the action 'ex post' intoxication. If one must fuction for a period, albeit in a limited fashion, consumption can temporarily abate an issue.

Some motions over in the EU re: cash, are not really good in my view either. 
Paul N (guest) meinte am 11. Aug, 03:23:
I remember thinking in 2002-2003-2004 that we'd pay for the insanely low rates down the road...

I know people are dumb, but how dumb do you have to be to buy an interest-only mortgage when you won't be able to make the payments at 5% interest? Or perhaps I should ask, how dumb do you have to be to lend money to the type of people who can only afford an interest-only mortgage when rates are sub-3%? Do we really want to subsidize the dumbness of these groups?

I was reading about LTCM 1998 today, that was like 1 year before I noticed stocks, etc.; it's fascinating and sort of familiar to what's happening now, in a way, i.e. people dumping $ into levered private equity they don't understand the risks of, and when things go bad all hell breaks loose, then everyone needs to get "bailed out".