Tuesday, September 18, 2007

Bernanke, you have failed!

"It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,"
That was what Bernanke said on August 31st of this year.

Today is the day the Fed sent a notice to specuvestors that it's OK to abuse credit and housing bubbles.

A jubilant Wall Street barreled higher Wednesday after the Federal Reserve cut its benchmark interest rate a larger-than-expected half a percentage point. The Dow Jones industrial average was up more than 200 points shortly after the Fed announced its move.

Although some investors hoped for a large rate cut, most were betting on a smaller quarter percentage cut in the federal funds rate. The Fed responded to the spreading impact of credit market problems on the rest of the economy, saying, "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally."

The Fed cut the benchmark rate to 4.75 percent after keeping it unchanged for more than a year.

Of course, even Greenspan is admitting that the problem was caused by keeping rates too low, too long. so why drop now? Easy!

"Privatize Profits, Socialize Losses"

On the upside, were all these speculators offering to share their funny money with me? I don't remember it. Now? they want government bailouts, they want the FHA to insure worse loans (and by "FHA" they mean me) they want lower interest rates (which? historically are already way low), they want HELP! Help with their foreclosures. Why? Propping up inflated asset prices is only hurting the economy and American families.

Is it good for America that young families can no longer afford to live somewhere without working several jobs? Is it good for America that our workforce is completely tied down by overpriced houses, unable to relocate to respond to changes in the workforce or their lives, too busy working to improve their skills, too worried about their mortgages to take on new careers or entrepreneurship? Is it so great that people in the Bay Area can't have children because they can't afford the home they are in, let alone a larger one? WHY does everyone think that housing prices going up is such a great thing? a 20% increase in your house price? HOLY CRAP! 20% inflation ought to be alarming, not pleasing!

So? If I lose $1000 in Las Vegas, will you bail me out too?
Because, really? If you do? I'm just going to keep going back to Vegas.

Moral hazard in finance

Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly. Taxpayers, depositors, other creditors have often had to shoulder at least part of the burden of risky financial decisions made by lending institutions.

If I win, I keep the money! If I lose, ummmm, someone else softens the financial blow, so I sort of win. I like those odds!

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