Why doesn't the fed just cut interest rates in order to jump start the housing market now that it's in a crises situation?
That's the question that a lot of people here on AR and in the real estate markets (from the agent on the street to the hedge fund manager who's trying to figure out how to keep his fund out of bankruptcy) are asking.
The unfortunate answer is that the Federal Reserve Bank pretty much has it's hands tied and really can't do anything about it. They are between a rock and a hard place. With the current level of deficit spending the Fed has to be realistic in setting it's fiscal policy in order to make our bonds attractive enough to foreign investors so that they keep buying the bonds and financing our deficits. On the other hand, housing does make up somewhere near 30% of GNP and the current liquidity crises has the potential for throwing the entire country into a recession, if not a (drum roll please) DEPRESSSION!
That's right, I used it. The "D" word! It might be a bit tad early to be breaking it out, but the fact remains that the US government has pretty much painted itself into a corner here. While not a certainty by any means, the statistical probability of the US (and probably the world's) economy going into a major slump, for a protracted amount of time has been getting more and more likely as we have continued to spend money that we, as a country, don't have.
I've used the analogy before, it's like throwing a big party and paying for everything with a charge card. "Pizza guy's here...whip out the plastic." "How are you going to pay for the band? Cash or Charge? Again, out with the plastic!"
For awhile you can have a hell of a time and depending on your cash flow, you can keep up the illusion that everything is hunky dory. But eventually, those bills come due and instead of putting your cash flow into building a better life, you have to at least pay the interest. As your balances go up it's only understandable that your charge card companies start to get concerned. To put it in real estate and mortgage terms, our collective credit scores have dropped because our charge card balances are too high in relationship to their limits.
As our credit scores are dropping, it's getting more and more expensive to borrow. Which means that more of our cash flow is going to have to go towards paying interest charges and not doing useful things. Such as bailing out the housing industry!
Alright Bob, you're so smart. What do you think it is that we should do to get ourselves out of this mess?
I'm glad that you asked! What I think that our government should do is the same thing that I would advise an individual or family to do if they had gone buck axx wild with their charge cards. I'd tell them to STOP SPENDING!
I don't care if you're Democrat, Republican, Independent or any other political persuasion, if you're for the war or against it. The fact of the matter is that we can no longer afford to be spending 12 billion dollars a month on a foreign excursion. Ditto for the War on Drugs and all of the other corporate welfare programs out there. If it's not something that contributes to our fiscal bottom line, we need to cut it out!
The other advise I would give a consumer would be to increase their income. I'm not talking about raising the income tax (though I do think that it sucks and is basically a scam that our tax code is so complicated that you have to have an advanced degree to understand it (think, if you can't dazzle them with brilliance, baffle them with Bullshxt!).
I'm talking about giving an honest look at things like legalizing drugs or at least marijuana and taxing the hell out of it. Why should the drug dealers and distributors be the ones making all of this money? It would cost next to nothing to grow marijuana commercially. You could then tax it back to the point where the black market has it priced and generate billions of dollars in tax revenue. That's not to mention the cost savings that we as a society would get by not spending money having Navy destroyers pulling over sail boats in efforts to interdict the importation or the money that we spend in keeping non-violent offenders locked away in prison.
Bob Mitchell
Comments (5)Subscribe to CommentsComment