Monday, April 20, 2009

Low interest rates

It seems that a fundamental problem with our economy is the Federal Reserve driving the interest rate environment.

The current interest rate on Bank of America savings accounts is... 0.20%. I just don't get it. If I am a bank, I make fundamentally make money by loaning people money at a rate higher than what I pay other people for giving it to me (and charging a few fees). But who's going to give me their money at 0.2%?

This rate is extraordinarily low, but interest rates have been really low for years now. The fiscal policy behind this was pushed by Greenspan. We know now it had some weird side effects, like most government fiscal policy, that have basically crushed our economy.

On 60 Minutes last night they had a piece about people "losing" half of their 401k balance. This would mean they were 100% in equities, with maybe some in corporate bonds. Why were they 100% in equities? Especially when they were approaching retirement age?

Maybe it had something to do with the low interest rates. Even with a CD yielding 2%, your money is growing slower than the inflation rate. So, people poured their money into equities, creating a bubble. To make it worse, a lot of prominent companies haven't been paying dividends lately, so they weren't even getting any income from these investments. Stock price to earnings ratios still seem high when you look at all of the companies where the investors don't see any of the earnings, and have to speculate by selling the stock to take advantage of the price.

Lower interest rates drove the price of houses up. Government backed loans drove the price of houses up. Since the price of houses were so high, the government started buying risky loans from banks so that people could keep buying houses.

So, low interest rates may help companies grow, but most large companies sell bonds, they don't borrow from banks like I do. Who exactly are these low interest rates helping? Is there someone out there who just loves bubbles?

Wednesday, April 15, 2009

The sad state of...

It almost seems that people are starting to realize what's happened, but still aren't accepting it. The money's gone. We have a an unbelievably large debt. We're about to go into an inflationary period. So, the paradox of savings is upon us. We need to spend less, which means the GDP shrinks. Good- it was based on leveraged consumerism. I like to think of the shrinkage as a return to realism.

Orszag says the budget shrinks the deficit by half over 4 years, but John Stewart fails to call him on it, just pretends not to get it. That was painful to watch. All of the planned budgets have deficits, which means the total amount borrowed continues to increase. We're still making it worse.

I really didn't mind paying taxes this year. I wish I made more money so we could pay this debt down faster. But then, these guys want to spend more and more and more. Maybe everyone should pay taxes. Maybe they need to make more things to sell to China...that's where the money is.