Isn’t That How We Got In This Mess?
Just a quick thought on the ’stimulus package’ the federal government put together.
Cheap money courtesy low interest rates.
Cash in everyone’s wallets thanks to the ‘rebate.’
Isn’t that how we got in this mess in the first place???
Not to beat up on the Fed some more, but isn’t cheap money the root cause of things like housing bubbles? Won’t very low interest rates further hurt the already pulverized U.S. dollar? Haven’t we seen this movie before?
And about those checks you won’t be getting until June. According a Brookings Institution study on the results of the last time they did this, about two thirds of the average check was spent (the other third paid down debt or was saved). Of that two thirds, much of it was spent on clothing. When was the last time you bought a piece of clothing made in the U.S.? Why don’t we just box up some more money into shipping containers and send it to China et al? I don’t get it.
January 25th, 2008 at 8:33 am
I’m so glad you wrote this! I blurted out the exact same line - “Isn’t that how we got in this mess in the first place?” - when I heard this on the radio.
My check is going straight to my student loan debt… no big purchases for me, from the US or China.
January 25th, 2008 at 8:38 am
The Fed rate cut is a separate policy as the Bush stimulus package. And I think you’re missing out on a major reason why the Fed cut rates: there’s no liquidity in the credit market. Subprime didn’t happen as a result of low interest rates but rather looser lending standards. When subprime blew up, the credit market dried up because lenders wouldn’t give money to even very credit-worthy issuances. When lenders refuse to lend, business grinds to a halt.
I’m not all rah-rah about either the rate cut or the stimulus package, but don’t conflate the two and oversimplify the situation. A lot of people are complaining about the stimulus package (and the rate cut), but the same people would be complaining if the Fed did nothing about the frozen credit market and Congress sat by while a recession happened.
Just so there’s no confusion, I don’t think the rate cut or the stimulus package will prevent a recession. I’m just pointing out that whether the government acted or not, people would be blasting them for action/inaction.
January 25th, 2008 at 11:05 am
I’m not expert, but it seems to me that refinancing a loan at a lower interest rate is better for the banks than eating all those foreclosures. The low interest rate gives people in bad loans an opportunity to refinance and lock in better rates while giving the lenders an opportunity to cut their losses. I think the low rate is a subprime bailout without bailing anyone out.
January 25th, 2008 at 11:58 am
@ BrianK - For God’s sake don’t save your money or pay down debt!!! Your fellow Americans need you. Spend, spend, spend. That’s the way to economic salvation.
@ Lily - I didn’t intend to meld the two. I was just presenting them in the same post (though maybe that’s the definition of ‘conflate’ - I’ll have to check). I appreciate your comments, but I have to disagree on one point. I don’t think the housing bubble (of which subprime is just a part) occurred simply as a result of loose lending practices (though that was a contributing factor). Things like the housing bubble and the stock market bubble because of excess liquidity. Increasing liquidity is how we got into this mess - that was my whole point. And I agree - the federal government is in a damned-if-you-do-damned-if-you-don’t position.
@ Pete - You’re right. Unfortunately, most people who really NEED to refinance can’t because they’re poor credit risks and/or have no equity in their homes. Low rates only help you if someone will loan you the money.
January 27th, 2008 at 1:58 pm
[…] Isn’t that how we got into this mess? KMC asks a very good question in this short post. The economic stimulus package coupled with low interest rates will trigger a wave of cheap money, which is how the housing bubble started to inflate. I think that the weakening US dollar and inflation will sneak up quickly and before you know it we’ll have a situation like the 80s. However, I would like to believe that the US government is too smart to allow our nation to get into deep trouble, am I being optimistic? […]
January 27th, 2008 at 3:10 pm
I think the Fed is doing the same thing lenders did: recalculating lending standards to get the desired result. They do this by bailing out the people who took the risks. I think the Administration is doing the same thing payday loan companies do: loaning money to people now who might have a great deal of trouble paying it back later. There will be a line on next year’s 1040s asking if folks received a ‘rebate’ and then working it back into what folks owe. How many people know they probably should hold on to the money because they’ll likely be giving it right back to Uncle Sam?
January 30th, 2008 at 4:00 am
You’re right, what we may very well see after this next rate cut is negative real interest rates. Keep in mind this is the largest rate cut in such a short period in our nation’s history. The Fed is sending a signal that things are very bad. But at the same time, they risk creating another asset bubble. I think they should let things play out to some degree, it’ll be painful but eventually liquidity will seep back into the market and it’ll be stronger. Right now they are basically satisfying the wishes of the big banks whose lack of risk controls caused a lot of this mess.
If you’re a saver, which most of us are, you are getting screwed. This is policy meant to encourage consumption, not saving. A very stupid way to offer a short-term fix but create more long-term problems.
January 30th, 2008 at 5:37 am
Great post! I agree that throwing money at everyone will not solve our problems. A more productive way to stimulate the economy would have been to give small businesses the tax rebate or a tax cut instead.
January 30th, 2008 at 2:46 pm
I agree, where are they going to get the money for this stimulus pkg. When they did this before there was a surplus, now there is a deficit. If we do buy anything I’m going to make sure it’s made in the USA.
January 31st, 2008 at 8:48 am
As NL & Festivus point out, buying your way out of financial trouble doesn’t seem to make sense to me.
February 20th, 2008 at 2:29 am
[…] offering their own solutions. Some bloggers, however, are openly skeptical about a recession, stimulus, or government intervention. And now, the Canadian bloggers are even joining in the […]