Economist Loves to Party
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James Joyner | Tuesday, August 28, 2007 |
Slate’s Daniel Gross says that Jim Cramer and other fat cats who want the Fed to cut interest rates constitute a Punch Bowl Caucus who want to be bailed out against the long term interests of the economy.
College students don’t alleviate the after-effects of an evening spent at the punch bowl by returning to lap up the dregs. Just so, finance types should know that cheap money, credit on demand, and endless leverage aren’t the cure for a hangover caused by too much cheap money, leverage, and credit on demand.
At least he’s consistent. Three years ago, he argued that low interest rates with an anti-party message:
Ordinarily, a prolonged period of rock-bottom interest rates should be an excuse for consumers and corporations to party. And the recent data showing job creation, high growth, massive productivity gains, and cheap borrowing rates make a pretty potent cocktail. The problem is that not everybody is joining in the revelry. Indeed, interest rates remain low in part because far too many corporate executives are sitting on the sidelines, sipping club soda.
Of course, it now seems that too many people joined in the party, buying homes they couldn’t afford on loans they couldn’t pay back. While the club soda sippers shouldn’t bail them out for their bad decision, it might make sense to cut rates to allow them to refinance their loans so as to avoid making us all smell the after-effects. Think of it like offering a designated driver or letting them sleep it off on the couch rather than putting them on the road drunk.
About the Author: James Joyner is the publisher of Outside the Beltway and the managing editor of the Atlantic Council. He's a former Army officer, Desert Storm vet, and college professor with a PhD in political science from The University of Alabama. He lives just outside the Beltway in Alexandria, Virginia.
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Cutting rates isn't going to bail out many people that are living on the edge, but it may save the rest of us from a recession.
The most recent problems with the credit markets that the fed needs to be concerned with are such things as overnight commercial paper and CMO's comprised of credit worthy borrowers. Those markets shouldn't seize up because of sub prime, but they did.
Maybe an interest rate cut would help those who have good credit....but I think on average, most with problems have mortgages that are out of reach even with a serious interest rate cut.
There needs to be increased discussion of the other side of this equation. Why did the rating agencies fail? It looks to me as though it failed because they didn't understand the instruments they were supposed to be rating and they have substantial incentives for giving them a pass. Very concerning.
If there is to be relief for borrowers (discussion of which I think is premature at this point), there should also be increased regulatory pressure. If you're going to reimburse farmers don't let them build on the bottom land. But what to regulate?
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