I was going to write an article discussing the oft-predicted rate cut by the Fed tomorrow, noting my usual objections and beliefs that cutting rates only inflates confidence, encourages bad behavior and won’t solve anything long-term. Another article where I express my views on fed intervention, which some have dubbed as being similar to a Puritanical Preacher who calls debtors and those in trouble due to the credit crunch “sinners”. But then I realized, I already wrote such an article back in August and nothing has really changed since then. So why repeat myself?
I say the above with my tongue firmly implanted in my cheek, as there are plenty of other reasons why a rate cut almost doesn’t matter beyond keeping the present day market moving and giving people a dose of what I believe to be false confidence:
Housing: A rate cut can’t save the housing market, slow down the foreclosure rate or resolve the oversupply issue. People purchased homes they couldn’t afford long-term, inflated confidence led to over-speculation, home builders overbuilt, prices are disconnected from people’s incomes, etc. A rate cut simply can’t resolve all of those issues AND if saving the housing market means returning us to 2005, how is that a good thing, if housing prices and the factors driving them up were unsustainable? Raise rates, cut rates, doesn’t matter, the factors that drove prices into the stratosphere are long gone. It’s time for the real estate market to accept that and move on.
Finally, if you’re a family struggling to make ends meet and pay your mortgage, a rate cut won’t put cash in your pocket to pay your bills and keep your house. A rate cut may make it easier for a company like Thornburg to originate NEW loans, but it won’t keep a company like Countrywide from losing money on pre-rate cut loans.
Losses from Bad Investments: Since loans are merely investments, it then follows that losses from lending and debt securities are just investment losses. Since when do rate cuts magically cause investments losses to suddenly disappear and turn into profits? In other words, a rate cut simply cannot resolve the consequences (investment losses) of past mistakes by banks, investors, hedge funds, lenders, etc. The credit crunch, mortgage crisis, et al, was caused by companies losing money, not because rates were too high.
Un-sustainability: The alleged financial engineers (I say alleged, because real engineers design things that work long-term) who designed the strategies, schemes, products, etc, which created this mess were only thinking about making money today, not making money next month, next quarter and for the next forty years. As a result, they created an unsustainable house of cards; if the Fed cuts interest rates, cheap money won’t suddenly turn those houses of cards into fortresses of stone.
If the Fed cuts rates tomorrow, the balance sheets of troubled financial companies will look the same as they did last Tuesday and probably won’t get better in the near future either. AT best, you have better access to funding for future operations, but the losses from the mistakes of the past will keep adding up.
Whilst I understand the need for some sort of intervention to fix the situation, I don’t understand the overriding focus on a quasi-solution that won’t solve the bloody problem.
Disclosure: The Author doesn’t own positions in any of the companies mentioned in this article, nor does he give Puritanical sermons denouncing debtors as sinners.
