Wednesday, October 29, 2008

A Lesson Easily Forgotten

Over the past few years as America's home values have plummeted, credit markets have frozen, stocks have plunged, and job layoffs have surged, people have constantly looked back and tried to figure out what put us here.

The general consensus was that bringing interest rates down to an unbelievably low rate of 1% in 2002 and holding them there was a direct cause of the banks malinvestments that led directly to our housing bubble. It was said at the time that the interest rates cuts were necessary to protect us from the recession of 2001 as the tech bubble burst.

Now, as we are deep in the painful process of suffering through the horrible monetary mistakes of Alan Greenspan, we receive word today that the Fed today has decided to cut rates down to 1%.

Wow. Not only are people not surprised, but many are calling for additional rate cuts, possibly down to 0%. We "need" to be saved from the current recession that is taking place now. No one takes about the effects of this current free money down the road, and for some reason it appears that they are now forgetting why we are in this trouble in the first place.

When the Fed cut rates down to 1% in 2002, they were trying to re-inflate the recently burst stock market bubble. In doing this they accidentally blew up the real estate bubble. Now that that bubble has burst the new 1% interest rate has now been put into effect to try and re-inflate the recently popped real estate bubble. Unfortunately, it is not working this time either, so where will this money blow up the next bubble? That is the trillion dollar question.

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