posted on Sep, 20 2005 @ 04:28 PM
Jrod, not sure what your point is regarding 9-11. That wasn't any breaking point on the rate - the Fed was, as you say, decreasing the rate prior to
9-11, and then continued to do so afterwards - one might well consider that they really accelerated the decreases after 9-11, with three 0.5%
decreases in a row. Yes, there were a string of these earlier in 2001, but most pundants felt that the decreases were nearing an end until that
IMO, all the decreases starting in 2001 were a desperate attemt by the Fed to halt or reverse the post-bubble stock market slide. All they
accomplished was to create a real estate bubble which will be ever more so devestating than the stock market bubble ever could have been.
We are now at an all-time low in personal savings rate. People do not look to their bank accounts as a buffer for the future. Instead, they assume
they will be able to tap the "equity" in their homes. What happens when that equity goes negative?
It takes character to admit you were wrong and take steps to reverse your bad decisions. While Greenspan and the Fed haven't exactly taken
responsibility for the mess we are in, at least they have taken steps to undo it.
Unfortunately, it is going to be a bitter pill for many ordinary people to have to swallow. Our government will say 'we never told you to throw all
your money into real property." And, you know what? They didn't. They just made it so tempting that few have not done so.
You know a financial bubble has reached it's peak when "everyone" is invested. Another telling aspect is "panic buying". I do think the panic
buying is over on this one. It is now just a matter of time. Housing prices don't turn like the stock market - it is like turning an aircraft
(My favorite stock market bubble anctedote - walking down a row of cubicles at work - not a financial institution, broker, etc. but an engineering
firm employing programmers and electrical engineers - and seeing EVERY computer screen in EVERY cubicle displaying stock market quotes. This just so
happened to be THE DAY that the market peaked.)
I hope we at least manage to avoid massive bank failures. The continued reduction of spreads between short-term and long-term rates have really been
frustrating the Fed, as risk premium has all but disappeared. There is way too much willingness to take on increased risk for virtually no reward. You
will see the rate stabalize or again reverse only when the spread and risk premium are rising.
To have continued to lower rates, or leave them where they were, would have been pure folly, allowing the real estate market to go hyperbolic. (In
some parts of the country, of course, it did.) Crashes from hyperbolic markets tend to be quite ugly. I think it best to avoid that at all cost.
[edit on 20-9-2005 by Bay_Watcher]