When Central Banks Tamper with Interest Rates
Mar 13th, 2009 | By Don Stott | Category: Featured, Macro Economics
I really believe that all bubbles must burst. Bubbles are highly unstable! This one had to pop eventually, and of course it did. Most will blame it on greed, but that’s like blaming plane crashes on gravity. There were several causes of the current depression, but the main one is that there is no ”market price’ on interest rates. When I say ‘market price,’ I mean the marketplace setting interest rates, and not the Federal Reserve. A credit worthy applicant might and should get a lower rate than a greater risk. Bad risks should get no loans at all. When a central bank attempts to stimulate an economy by setting low interest rates, and then floods the marketplace with low cost dollars, guess what is going to happen? There should be no central bank which sets interest rates. It destroys the marketplace, which levels all things.
When, on top of the central bank making interest rates absurdly low, and the Barney Franks and other do-gooders urging banks to loan to the unworthy and threaten to fine them if they didn’t, a lot of bad loans were made by bankers to those who were irresponsible. They had to, because a Jimmy Carter “Community Reinvestment Act,” would cause the irresponsible bankers to get sued if they didn’t make bad loans. In addition to the pressure from the CRA, ACORN was blocking bank drive through lanes with pickets, and threatening banks if they didn’t make bad loans. Loans requiring no money down were made by the thousands. All you needed was to be a minority, or a bad credit risk, have a low income, and want a home. Sort of like the Bol Weevil in the song. “Jus lookin’ for a home.”
Homes were being bought so fast, and with such easy mortgages, that home builders decided to build to meet the demand. With the good times rolling, developers borrowed, bought land, built streets, sewer lines, underground utilities, and waited for spec house builders to show up and buy the lots. A few did, but by then, the crash had started. There’s thousands of empty lots on hundreds of empty developments in America today.
Banks might not have been so irresponsible, but for the fact that if they made a bad loan, they immediately sold it off to Freddie and Fanny, thereby releasing them from any risk. Fanny and Freddie, then bundled the loans in batches, and sold them to everyone who would buy them. When the bundled packages of mortgages were rated at AAA by rating agencies such as Moody’s, how could they lose?
Cheap money is what it was, and everyone was partaking. Cheap money draws people like flies to honey. More dollars were created between the years 2000 and 2007 than in the entire history of America, and that’s nothing compared to what’s going on now. From 1998 to 2006, home prices went up 150%. Homes didn’t change; only their prices. Mortgages were given to virtually anyone, who immediately sold them to Fanny and Freddie, who resold them in attractive “AAA” rated packages to investors around the world. Everyone was off the hook! Victims are the buyers of the packaged mortgages which were falsely rated “AAA.” Home prices got so high, and the flippers of houses did so well, that when the obvious peak was reached and the bubble would simply have to pop, guess who was holding the bag? Governments, pension funds, central banks, individuals, and you name it. Why shouldn’t someone buy a packaged group of “AAA” rated mortgages? Besides, the mortgage packages were insured by AIG, the world’s largest insurer. How many hundred billion to AIG so far? Then, brilliant Wall Streeters decided to place huge bets on the phenomena, called ‘derivatives.’ Hundreds of trillions of dollars worth.
Fanny and Freddie are government backed institutions, “too big to fail,” have been bailed out, and operate at the instructions, funding, and power of the Congress. When the Barney Franks told Fannie and Freddie to make sub-prime loans to help the poor and worthless, they did, and told banks to send them all they wanted. They did, and made even more bad, sub-prime loans to virtually anyone who walked in the door. Mortgages were so easy, that thousands of people became “Mortgage Brokers” overnight, and set up in shopping centers and any available office space. Everyone was having a blast! Commissions and points were flying around like trailers in a hurricane. When the peak was reached, a chain reaction was started, which hasn’t stopped, nor reached the bottom yet.
All the while, before the peak was reached, the majordomos of economics, such as Sir Alan Greenspan, were encouraging people to get ARMS, or Adjustable Rate Mortgages, which was a sure guarantee of a failure. Greenspan said in 2003 that “The notion of a bubble bursting and a whole price level coming down, seems to me as far as a nationwide phenomenon, really quite unlikely.” It may have seemed “unlikely” to Sir Alan, but it didn’t to me. When it started down hill, naturally we needed more government to fix it, so the “Emergency Economic Stabilization Act of 2008″ was passed, which authorized the Treasury to purchase $700 billion in assets “at any time.” The taxpayer was on the hook. Then there is the “Troubled Assets Relief Program Act,” which allows the Treasury to seize any financial institution’s assets at whatever price it dictates. Then, short selling was prohibited under, “The Uptick Rule,” as it destroyed the banks reputation. This is an outrage, of course, as are all the bailout programs. Government officials are running around like the well-known chicken with its head cut off. We now have the “Term Auction Facility Act,” the “Term Securities Lending Facility Act,” and the “Primary Dealer Credit Facility Act.” Sound like more government to you?
On October 9, 2007, the Dow was 14,164.53. See what the real estate crash did to even stocks? Let’s now get back to the primary cause, and that has to be interest rates. The interest rate acts like a floodgate, or the market’s governing body, which keeps floods from ruining everything. If the interest rate is controlled and manipulated, to ‘boost the economy,’ we get into a bubble phase, which feeds on itself, till it has to burst. My banker, I am sure, sets interest rates on those to whom he loans, based on their credit worthiness. Interest rates, SHOULD NOT BE SET BY ANY GOVERNMENT OR PRIVATE BANK. The setting of interest rates way below what the market would have set them, by the Federal Reserve, has caused the world-wide chain reaction we now see. As you know, in my opinion, the Federal Reserve should be instantly put out of business, and the Congress should not subsidize or dictate to anyone. The Fed raised interest rates and flooded the market with dollars 80 years ago, and caused the great depression. It did the same thing between 1995 and 2000, by increasing the money supply 52%, which caused the ‘dot com’ bubble to burst. The Fed’s lowering interest rates eleven times to help us out of the dot com bubble, started the housing bubble. The Federal Reserve is an unmitigated fraud and disaster, and there is no logical reason for its existence.
To fix the mess we are now in by endless printing of dollars and creating more and more bureaucracy, is pouring gasoline on a fire. Hey DC Gang…STOP FIXING IT.
Regards,
Don Stott
March 13, 2009
Great article on interest rates and government tampering with them. Of course the liberals will never accept that interest rate manouvers caused the current financial crisis; they all claim that the crisis was caused by irresponsible, greedy banks. in order to blow that argument away, it is necessary in my opinion to discuss what the banks did to get themselves in such a pickle, and show that those actions were driven by government policy. In this article the banks are said to have tossed all the risk to Fannie and Freddie and therefore they, the banks, took no risks – so how did they get into so much trouble they scared the government into bailing them out?
The liberal refusal to accept that interest rate manipulation is at the heart of the current financial crisis is fatal to any true corrective effort. People will not accept that the Federal Reserve has caused this mess and others until and unless the case against it gets explained in simple, convincing terms – over and over again. It is not enough to convince a rational minority; it is also crucially important to convince a majority of voters.
Regards,
Jerry Citti
Quit when they’re so far ahead? Absurd! This is their baby, and they’ve gotten the shoulders delivered. The rest will pop out easily, leaving blood all over the floor and the operating table, which is very much to the taste of several interest groups.
We Conservatives are usually such nice, sensible people that we have difficulty suspecting others of vile motives. Even when we see fingerlings in the milk we find it hard to believe that it has been watered, insisting there has to be some innocent reason for little fishies swimming in our glasses. Mayhap the cat dropped that goldfish in there…or the baby…
We keep insisting that these people don’t know what they are doing. They just don’t understand, we wail, that the stock market is a barometer of how everything else is doing. They don’t understand, we fume, that fiat currency doesn’t tell us what gold is worth, metal tells us what the currency is worth.
What if…just possibly if…they understand quite well? What if they aren’t ham-handed but deft-fingered? Obama told the people what they wanted to hear, got elected, and raced madly for the finish line doing just about everything calculated to depress the market, the currency, job prospects, and further entrepreneurial activity, and to start the plates wobbling more frantically. He won. He can give Hamas nine hundred million dollars and adopt a hundred thousand pet terrorists if he wants to. He can raise cigarette taxes $6.10/carton if he likes–and the seething in Houston can be heard over a hundred miles away when the price hit $60/carton, today. (Our fellow men saw fit to hit us here with a ten dollar a carton tax slightly over a year ago.) He can run the deficit up $1.3BN in less than two months, raise taxes, cut deductions, introduce ruinous cap & trade, destroy the secret ballot for unions, say flatly that he’s going to bankrupt the coal industry and raise our electrical rates, and smack agribusiness briskly across the snoot…and at some point it really might occur to us that in this game we’re the targets.
They aren’t going to stop “fixing” things for twenty-two months because they don’t HAVE to. They have the votes. They have the White House, both Houses of Congress, the judiciary, the media, academe, the unions, the military, the police, and a brand new Praetorian Guard which will go from one brigade to two this year. Part of it was seen on the sleepy streets of a small town in Alabama night before last, soldiers in full battle dress with hastily-donned yellow tape that said they were “police.” That photograph is well worth looking at.
Will Mr. Obama’s popularity ratings be in the ditch by the end of the summer? In all probability. Will he care? (Well, he, personally, might because he seems to have more than his fair share of narcissistic tendencies.) No, no more than Bill Clinton did. No matter how high the scandal was piled, Bill ignored it and did his duty, which was to veto any piece of legislation the Republicans managed to pass. Would that Dubya and Pa Bush had understood THEIR duty as well.
No, this is going to run its gory course for the better part of two years or until some group rebels and either the Praetorian Guard guns them down ruthlessly, in our very own version of Tienaman Square, or there is spontaneous combustion from enough other groups to plunge this country into a maelstrom of “civil unrest.” What a bland phrase to cover death, destruction, dictatorial acts, and the criminal elements having a high old time. Pun intended.
It is too early to say what the outcome will be, but it ranges from dictatorship to the country splitting into several new nations along geographical and religious lines to a devastating terrorist event–real or feigned–to some miracle of sanity that lets us get over this five hundred foot high bump in the road.
It is always wise to remember that the winners write history and hang the losers…and that sedition is whatever the government says it is. Could be we’ll meet in Gitmo, Don.