Fed lower rates - solution ?
The federal reserve today lowered one of its interest rates to 2.25%. They lowered it 0.75%, which although was less than the market’s expectations, yet was an acceptable move by the market at large. All of the stock market indicators moved higher with the biggest leap almost in five years, happening in one day.
But, the question poses itself: is lowering the rate to such point a solution for the real estate problem? will it ease the foreclosure pressure from many of the homeowners? As expected, the answer is no. Lowering the rate is a move to make the banks lend more money, with lesser restrictions.
Let’s remember that the problem is not the real estate market. The real estate market is however, the outcome of the problem: our economy is structured to grow only with an increasing amount of credit. There’s lots of reasons for this, including that the US gross domestic product is mostly due to services, and not due to manufacturing (which was shipped outside). Because of that, fictitious money has to be created by the federal reserve to keep people happy. One way of creating the fictitious money is by easing lending, so people borrow more. And when people borrow, their banks have to borrow from the federal reserve to give them the money. And since the federal reserve can create money out of thin air, they just do and the people will be happy for another while.
By moving the interest rate to higher or lower levels the federal reserve can control how much fictitious money gets created in the system. This money is fictitious because it was not created through manufacturing, but rather through punching numbers in computers and thus it does not equate to any merchandise in the economy.
Due to interest, the money pool with the people gets constricted by time and moves little by little to the owners of the federal reserve (the federal reserve is privately owned by banks). Once that money pool get very small, more money has to be created to keep the people happy, which means more people have to borrow.
The problem comes when no one can borrow any more because it is very hard to do so, and what’s worse is when the federal reserve rate is already low - and how low can that rate go? now we’re at 2.25%? well… that’s the real bubble, and that’s the real problem.
There’s actually two solutions for that problem, the first is the correct but hard one and the second is the easy one. The hard but correct solution is to move manufacturing back in the US thus most of the GDP should be out of manufacturing and not financial services and creating fictitious money will have a lesser effect on inflation, since we have growth in products as well. The easy solution is to introduce fresh people in the system that can borrow - and thus new money can be created aka immigration reform. Although immigration reform is something good if ethically handled, yet the economic pressures will ultimately lead to using immigration as a way out of the economic crisis. However, immigration reform is like putting a band aid on a wound as you still have to treat the wound, and the same problem will hit us again in a few years.
March 24th, 2008 at 8:06 am
[...] Posts: Market is bouncing back Fed lower rates - solution ? Home owners are giving up Light at the end of the tunnel Homes Resale at 9 year [...]