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Rates Are Not Going Up Anytime Soon

23 June 2010 2 Comments

A good video from Yahoo! Tech Ticker in which the guest says the next move by the Fed is not to tighten, but to ease.  I completely agree.  The economy is in terrible shape and the Fed will continue the course of action to intervene and prevent a deflationary recession/depression.  It doesn’t matter that it is a futile attempt, they will do it regardless.

Since rates are already near zero and the Fed just stopped buying mortgage-backed securities, the guest in the below video expects the Fed to stop paying interest on banks’ excess reserves, which in theory will force banks to lend.  A move which would also lead to increased inflation in a short time (if the banks do lend).

Banks aren’t lending, however, because there is no opportunity for real growth that demands lending from banks.  Banks want to lend.  They just don’t see credit-worthy borrowers with sound opportunity.  The deflationary forces are real and are increasing.  Bernanke’s efforts to prevent them will not work.  Even if they implement this move to force banks to lend, I see it failing as well.  Gold will go higher but more out of a loss of confidence versus traditional inflation in my opinion.

2 Comments »

  • wingtipwalker said:

    I don't see lower rates spurring commercial lending…asset values are super low and default risk is super high, and there's not much cash flow lending going on out there…because there is no cash flow.

    So, that leaves consumer lending. Do you think there is a rate low enough to recreate a housing bubble? If you could get an ARM at 2% for 5 years, I think there might be people out there who might act on it, especially with the de facto backstop of the federal government encouraging banks to make stupid loans.

  • 20smoney said:

    I don't know. Just don't know who is still going to buy a house who didn't already buy one? Sure there are a few people out there, but not enough to really create the demand needed to push housing prices back up.