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Fed Cuts Rates - Banks Raise Rates |
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Thursday, 14 February 2008 |
I've noticed in the last few weeks people are actually surprised to hear about rising interest rates on loans and credit accounts in good standing being shut down. People are indignant, they exlaim "But the fed cut rates!" See, the fed rate isn't the market rate. As much as central planners would love to dictate and regulate the day to day health of an economy, its impossible.
People quickly forget the words "credit crunch" but if there were ever a soundbyte to remember, this is it. Many banks are looking at huge losses and this isn't limited to the U.S.A. Japanese banks announced a massive sub-prime related loss, as have British banks. As the portfolios of debt unwind and losses are fully priced in, more banks in more countries are likely to be affected. So? The fed cut rates! And that doesn't change the fact that the banks are close to broke and few investers are ready to take anything resembling a risk in the financial markets. This means: fewer mortgages and fewer home sales, few student loans at higher interest rates, and less money available for individuals thinking to start a business. Of course, this could negatively affect home prices, future work-force education levels, and even job creation. Since inflation is probably higher than reported in the CPI, this is another disincentive for anyone to provide loans in this economy. Even if everyone paid their debts off, a 6% interest rate might not cover a 10% currency devaluation or a 10% rise in the cost of living of the average person. Is there a way out? I think any economic contraction / slowdown in investment is cyclical and somewhat unavoidable. A few months or years of cutting costs and converting spending to more optimally productive resources will put the economy on track. In the meantime, things might get a little tough. It never hurts to set a budget and invest, just remember the real interest rate you need to get on your return is higher than that fed target. You aren't allowed to print more out of thin air, after all.
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Last Updated ( Wednesday, 09 April 2008 )
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