IT'S ABOUT RISK!!!!!!!!!! NOT MONETARY SUPPLY

The Fed can drop rates all day long and IT WON'T MATTER! Lenders are not being compensated for the risk of the unknown with a lower interest rate. They will not lend money without being compensated for the RISKS they are taking. The Fed needed to raise rates or at the very least stay still with rates. By raising or keeping rates steady the Fed would have strengthened the dollar, kept its self a viable entity and put a slowdown on inflation. But NO!, they had to do the politically expedient thing that we have all been conditioned too mean prosperity and reduce rates to help "spur" on the ailing economy. The thing is, the credit crunch is about the perceived risks of the borrowers and NOT a tight monetary system. Lenders are not being compensated for their RISKS!!! with low interest rates. Get ready for higher prices at the pump and the grocery store. The following is something to be concerned about.

"While easing borrowing constraints, the central bank has also pushed money market yields below inflation, giving consumers an incentive to spend or take on more risk in their investments to earn a return. The Fed's preferred inflation barometer, the personal consumption expenditures price index, minus food and energy, rose at a 2.2 percent annualized rate in the first quarter. Six-month Treasury bills yield 1.7 percent."

You Want What!!!????

I want HIGHER interest rates. "Why, that is un-american" you (and almost anyone else) says. Now do I want to go back to early eighties 12-18% rates? No. But if things continue the way they are going thats where we'll be. We, as a nation, have been conditioned to think that as the Fed drops rates that economic bliss will follow. This time it may be different. Now while I will be the first to say that the phrase "this time it's different" is a misnomer and usually false, sometimes things are different because they are caused by different things ;).

First, as the Fed keeps lowering "interest" rates the dollars value declines and so more dollars are needed to buy something. This is known as inflation. This is what we have now. People hedge against inflation by buying tangible items such as oil, gold, grains, metals, etc. This increased demand drives up the prices of those basic items and also the items derived from those basic things (gasoline, jewelry, bread, steel, etc). So what we basically have now is inflation (and possibly a commodities bubble). Keeping inflation (and bubbles) in check has been the Fed's mantra for close to 30 yrs if not longer and by lowering interest rates further it's driving inflation higher. The Fed needs to keep interest rates level or even raise them 25bp (0.25%) to put a slowdown on the inflation we are all feeling at the pump and grocery store.

Second, as the Fed reduces rates, the Risk-Return equation gets skewed. A higher inflation rate means your real investment returns are less. This leads to more risk taking in that you chase a higher yield to help compensate for the higher inflation rate. Just what the average American needs now is MORE risk, volatility and the stomach ulcers that come with watching their portfolio rise and fall like the proverbial yo-yo. This skewing the the Risk-Return equation also hits the banks. With a low interest rate atmosphere combined with total fear of the unknown unkonwns (see link) lenders are NOT being compensated for their perceived risks.

It will only be a matter of time until we need to cap inflation, strengthen the dollar and return this country to prosperity and as it now stands about the only way to do that will be with some very tough love as in extremely high interest rates to compensate for risk and pop the inevitable bubbles. Or we could all go the way the politicians want us to think we should go and start being paid daily and running to the store to buy normal things before they double the next day (think German women with wheel barrows full of Marks running to the corner store to buy ONE loaf of bread in the 1920's). Of course there would be an upside too. Just think of being able to pay off your home with only one days pay. Your mortgage is priced in dollars isn't it? Maybe thats what all the overextended gamblers, oh I mean home owners, are banking on. :)

Therapy

I don't know if thats how you spell "therapy" but this link was my therapy (thanks Spencer) for todays previous post. Don't worry, its pretty clean.

I'mmmmm Soooooo Tired!!!!!!

I haven't written anything for awhile because as today's title suggests I'm so tired of the goings on in the financial world. I hardly check Bloomberg anymore and rarely read my financial blogs. It's frustrating to be bombarded by bailouts and such of those who took great risks and over leveraged themselves whether they are homeowners or CEO's. "Moral Hazard" is the term used to describe the mechanism by which a risk taker is punished if the risk THEY take on VOLUNTARILY goes bad. Well the Gov. and the Fed are making sure that moral hazard has been wiped clean off the face of risk.

While I feel for the family who got in over their heads because of the appearance of home values with no ceilings and the cash machine those homes became, it still stands that if they can read they knew what they were doing. An age old axiom is that "never sign anything unless you understand it", its evident that some did not understand the docs. they signed. Unfortunately myself and those who did not take on these risks and in turn "missed" out on the benefits (ie cash, flat panel TV's, new cars/boats/vacations, etc.) get to pay for those who did accept, sign, and cash out on these same risks and now have nothing to show for it.

We now have the Fed stepping in with new regulations to help "protect" us in the future from these same problems. The best thing for the Fed to do is to let the market work! Stop lowering interest rates (the rates could go to zero and we would still have a credit problem. The banks are afraid to lend money because of the uncertainty of their balance sheets, not the rate on interbank loans) and destroying the value of the dollar because of the inflation, whether real or imagined (did you see the gov Feb. inflation figure of 0%, HaHaHaHaHaHa.....,.) lower interest rates can cause. Let the market work! Companies NEED to fail! The owners, managers, employees, consumers, need to be RESPONSIBLE for their actions. They need to be punished for poor choices and risks. Competition needs to see failure to find success (I'm beginning to sound like those people who sum up life in one sentence :) ) Responsibility is a lost word in many aspects of todays society where everyone wins a medal and trophy no matter how "good" they are.

So as of today I am starting a campaign to bing back moral hazard. Maybe we can rally at the capital! Imagine 50,000 voices chanting "BRING BACK MORAL HAZARD! BRING BACK MORAL HAZARD! BRING BACK MORAL HAZARD! BRING BACK MORAL HAZARD!..." ad infinitum. It would be great. We could make signs saying "Make Moral Hazard, not War", "Get us out of this Non-Moral Hazard place", or "Death to Non-Moral Hazardites", etc. Only then can/will our voices be heard. Who's with me?????? Anyone? Anyone? Bueler? Bueler?

Apparently I am alone in this view. How sad for us, our children, grandchildren, and our country.