However, when the Fed sets the discount rate at 1%, keeps it there for a year or more, and implies that it's going to stay low for a while, then banks can borrow short, lend long, and essentially coin profits with little, if any, risk. That's the way the Fed uses to indirectly issue money to the banks. It's not going to be different this time. If things become dire later in 2008, I expect the Fed funds to dip to around 2% or less and stay there for a while.
No risk?
Hardly
Look at Citigroup, Countrywide, the aftermath of 2 million foreclosures, rising credit card defaults, Morgan Stanley, MBIA, Ambac, etc etc etc.
I agree the Fed will lower rates again but banks are so impaired and consumers so loaded up with debt that there will not be the takers we saw the last time. The Fed created a housing bubble and that housing bubble created jobs.
Everyone THOUGHT there was no risk in borrowing short to lend long. They all thought WRONG.
There will not be another housing bubble. Instead Commercial real estate is going to implode making banks all the more reluctant to lend.
Jobs are one of the keys. Show me the jobs and show me rising wages enough to matter (and not just at the top end either)
Mish |
