Reader feedback continued
Reader feedback continued
Monday, Jan. 28
Posted 4 p.m. Eastern
Reader feedback continued: Picking up from the earlier post, here are some additional reader e-mails about last week’s Fed rate cut and the state of the economy.
–”If you ask me if we need a rate cut, however, I say no and we should not have cut rates since September. Inflation will grow at a staggering rate after the onslaught of the interest rate cuts which will put us in a possible depression in ‘09. Add to that the price of oil/gold/silver/platinum/corn/wheat/hogs (at all-time highs) we are set to be jacked as an economy. Let me throw in another wrench of losing economic prosperity where we outsource manufacturing jobs. We are too reliant on foreign sources for our goods. We send out raw materials and import their finished goods. It is going to be the 1930s soon enough — are we too naive to realize this? What happens when unemployment reaches 6 to 8 percent in the coming years - and the jobs we have pay minimum wage - we’d have to work an hour or 2 daily just to pay for getting to work. Throw in the added price pressures on core necessities (food/energy) and we’re living in debt without the splurging on luxury items (TV, electronics, clothes).”
–”It seems to me that any interest-rate tinkering will not affect a recession. Consumer confidence is low, cheap loans have left the market already, and the American consumer is already deeply in debt. I think that liquidity will not enter the market through the consumer in enough force to stop a recession. I suppose the Fed could add liquidity to the market as it did in (correct me if I’m wrong) September, but that would be tantamount to creating inflation. And that would mean that the average consumer, who cannot borrow any more due to current debt obligations, also cannot afford basic staples due to a flood of money. All I can say is it’s a bad time to save, a bad time to spend and a bad time to invest.”
–”Why is everyone trying to help the ones that never have saved a dime! Who suffers, the people that have saved and put their money in CDs. If you can’t afford to buy something, don’t buy it. As far as the Fed goes with his protecting the people that just want to be bailed out. I hope he loses everything. Now the savers will end up getting 1% on their savings!!! The BIG SPENDERS with no money will just go out and borrow more.”
–”To be honest, I think the economy needs a little recession to clean things up a little, and to help cut inflation. I’m thinking inflation is the bigger problem right now, and the Fed is just delaying the inevitable, which will be worse the longer they apply a Band-Aid to the problem. This will only create another bubble somewhere else, and the cycles we’ve seen over the past 10 years will continue.”
–”Wow! I’m excited as I’m purchasing another home for retirement, and refinancing my current home is on the horizon. It pays to be careful with our money as excellent credit goes a long way.”
–”As a limited fixed-income person, the Fed just caused my MM and short-term CD rates to drop further as they did after their last cut. In my opinion, they are the major cause of the housing problems in the first place. Keeping the rates unrealistically low for so long caused the lenders and borrowers to get greedy. Now, when I hear a borrower will have to actually have a job and verify their income, and maybe also be required to make some kind of a down payment, I think “duh” that is the way it used to be when I took out an FHA loan in 1973 (which by the way was 7.5%, so even before the latest rate cut, 30 year fixed rates were a bargain), and never should have deviated from. If the government and lenders really want to FIX the problem, they should keep strict requirements for receiving a loan, and do away with the ARMs. On one hand, we are told we don’t save enough, and then they do everything to punish those of us who try to with MMs and short-term CDs. The only people who gain are the ones who spend every dollar they have, and borrow more. Too bad our economy is so dependent on them doing so. I think the housing market is just returning to where it should have been if the rates hadn’t been too low under Greenspan. Now it appears the Fed is going to make the same mistake again. This is one saver who is tired of seeing my small returns get even smaller so the borrowers can have lower rates and borrow even more. When our whole economic outlook depends on how much the country spends at Christmas, it should be obvious something is wrong.”
–”Can the actions of the Fed avert a recession? No! Alan Greenspan already stated that the Fed cannot avert recessions. Indeed, he said he found the notion “puzzling.” He stated recessions are caused by human emotional reactions. THINK: What changed between early 2007 and 2008 to cause subprime mortgages to go from a great idea to toxic waste? Nothing — except human emotion, which is cyclical. Also, the Fed does not control interest rates, the market does. Check out the current rate of return on short-term treasury bills. You will find the Fed is merely playing catch-up to the market, which has been accepting increasingly lower rates of return, lower than the Fed rates. That’s because the market senses risk and is fleeing to AAA-quality safety.”
Posted 2 p.m. Eastern
Sizing up the week ahead
We’re going to learn a lot about the state of the economy this week. In addition to the regularly scheduled Federal Open Market Committee meeting that concludes Wednesday, there is a boatload of economic data on tap. The most significant of these are (in chronological order): the first look at fourth quarter economic growth as measured by Gross Domestic Product, December personal spending and the January employment report.
The GDP figure is released Wednesday morning at 8:30 a.m. Eastern. While this is just the initial figure — it will be revised twice more — this number will go a long way toward telling us just how much slower the economy was growing at the end of 2007 or, as some people assert, whether or not the economy was, in fact, contracting during the fourth quarter. Personal spending for December will be released Thursday and the all-important employment report comes Friday morning.
These are by no means the only releases of importance this week. Durable goods orders will be released Tuesday along with consumer confidence. Coupled with personal income and spending figures Thursday comes a little something known as core PCE inflation. That stands for core Personal Consumption Expenditures inflation, and it is the price gauge most closely watched by our beloved Fed. The ISM Index, or Institute for Supply Management Index, on manufacturing comes Friday.
As for the Fed, it is not a question of whether they cut interest rates or not, but by how much. For a Committee so intent on communication matters, they seem to keep everybody guessing. In September, they surprised many by cutting by one-half point instead of one quarter. The timing of last week’s intermeeting three-quarter point rate cut is subject to much armchair-quarterbacking as it came only in response to a correction in global stock markets, those of which in the emerging economies of the world were long overdue for a pullback given their high valuations and the slowing growth in developed economies. And while betting men, or at least speculators, are wagering that the Fed will cut by an additional half-point this week, this is a Fed that is becoming increasingly hard to read. A half-point cut would take the fed funds rate to 3 percent, which would be the lowest since June 2005.
At least a one-quarter point move is expected, as it is a long haul until the Fed’s next meeting March 18. If the Fed moved in an insufficient fashion now, only to need another intermeeting rate cut, the Fed would have serious credibility issues. But the Fed has shown a willingness to cater to the demands of Wall Street, and they just might do it again by cutting rates a half-point.
Reader feedback: A number of readers expressed concern about the Fed’s aggressive move last week, feeling that this was going to usher in another era of super-cheap money. Others felt that the Fed wasn’t doing enough or wouldn’t be able to do enough to prevent a recession. Here now are some of those reader e-mails, interspersed with an occasional comment from your humble blogger.
– “The Fed Open Market Committee is indeed acting with less foresight and discipline than it did under Alan Greenspan. The economy is nearing a state of ’stagflation,’ a condition from which it cannot escape through simple interest rate manipulation. The abrupt drop in interest rates will only worsen inflation, which is already accelerating. Most economists agree that the only way out of ’stagflation’ is action by the executive to stimulate the economy, either by spending or tax cuts.”
– “Comment about the recent .75 rate cut: This drop, combined with low and falling house prices, is just going to usher in another housing bubble — it’s the perfect eclipse of low home prices/mortgage rates, and what investor or speculator isn’t going to hop on this bandwagon? God knows there’s plenty of cash on the sidelines just waiting to be put to work SOMEWHERE!
“I myself am looking, and advised my in-laws to do the same.
“Bill Fleckenstein once asked if we (the U.S.) make anything besides houses, and I responded to him, ‘yes — babies!’ Is housing ALL that we have to keep our economy afloat? It makes one wonder.”
– “I’m not an expert when it comes to monetary policy, and on a basic level I can see the merit in the constant rate cuts we’ve been seeing, but I do have just one observation:
“Every time rates are cut, I get a notice from my bank telling me they can no longer provide me with as high of an interest rate on my savings account. It has fallen from 5% to 4.25%, and now probably will fall to 3.5%.
“Wasn’t it overspending and bad credit that got us into this mess? Why, then, are we discouraging people from saving money?! It seems to me that what banks need right now is cold, hard cash sitting in their vaults. (Am I wrong?) These rate cuts are begging for more of the same behavior from people who will never learn.
“The days of cheap credit are over. Get used to actually working for your money instead of just signing on the dotted line …”
– “Fed policy has been ineffective since the mid-1990s. Today’s action is an attempt to turn the tide of short-selling. The market is likely to rally as short covering takes place. This action will be a smoke screen for additional short-selling after April 15th. Fed policy of easy money will only increase inflation on food and essentials. The dollar will continue to weaken until National Debt is either repudiated or dealt with. Chinese would love to dump U.S. obligations, but just as CDO is teaching us when buyers are removed from the market, assets must be held.”
–”Can you please tell me how lowering interest rates that are by historical standards already low is going to stimulate our economy? All this has done is panic the markets and lost people like myself a lot of money. It has also opened the door wide for higher inflation that has already been increasing. I guess it is supposed to help people struggling with ARM’s but I don’t think it will. With the tightening of the lending standards of late, I fear these people will not qualify to refinance no matter how low they take the interest rate. Help me understand the logic here.”
Actually, homeowners with ARMs are the biggest beneficiaries of the Fed’s rate-cutting bonanza. For someone with a $200,000 loan balance resetting after a three-year introductory rate of 4.5 percent, the payment increase is now a more manageable $50 or $100 each month rather than the back-breaking increase of nearly $400 that would have prevailed last summer. This will enable many homeowners to keep their homes without having to refinance. Of course, those that can refinance are wise to do so because they can permanently lock in a low fixed rate rather than rolling the dice to see what happens next year.
– “If the CPI was published to be 4.1 percent and now interest rates are slashed by 0.75 percent and possibly another 0.25 percent in a week, would that inflate the market and house prices but at the expense of terrible dollar devaluation? Is it safe to assume an annual rate of inflation in the order of 10 percent to 20 percent?”
Inflation may be trending higher, but we’ll sooner see Ben Bernanke on “Dancing with the Stars” than a return of double-digit inflation. I expect the Fed will need to begin raising rates later in the year to quell inflationary pressures.
– “Fed pandering to investors? I think not. When people have money in the market and are watching the red ink stack up, I don’t care if they are employed or not, they are going to rein in their spending (re: Trading Places is not going to be able to buy their kid the G.I. Joe with the kung fu grip).
“The Federal government is partially to blame for realizing lending practices were getting too lax as everybody was making money in real estate (re: Chris Dodd, Chairman of the Senate Banking Committee knew this, but did nothing).
“This is the same thing (albeit not subprime) that happened in the late 1980s. Everybody’s making money hand over fist and lending standards got too loose. Then, the losses start mounting. We never learn.
“Despite the argument that the Fed needs to fight inflation, the “kicker” is this big lending mess that is sitting in the U.S. economy tummy (like a big catch in a boa constrictor) needs to work its way through with a little help.
“Failure to support the economy here will lead to massive failures (rising unemployment as the economy is already slowing, higher foreclosure rates as is already happening).
“In my opinion, while I’m am not nearly as educated about these matters as Fed Chairman Bernanke and his Fedettes, it doesn’t take a rocket scientist to see that the economy was going to slow (given the combination of overbuilding in the residential real estate market along with highly speculative activity in that market and rising interest rates). There’s a lag to the economy on Fed interest rate moves and knowing these adverse issues were going to massively affect the economy going forward, the Fed should have been acting more aggressively last year.
“Also, the U.S. Government would do well to embrace alternative energy and embrace it in a hurry to reduce energy inflation (for starters) not to mention creating the next big job industry right here in the U.S.”
That will wrap it up for now, but I’ll post some more reader e-mails later today.