Taking a Bite out of the Credit Crunch!
I didn't go to College for Economics. In retrospect, perhaps I should of. I didn't go to College for Political Science. In hindsight, perhaps I should of. Instead, I graduated with a major in Psychology & minor in Philosophy. Something in me wanted to spend the rest of my life on top of a mountain handing out Prozac like it was candy at a Parade.
FED RATE CUTS ARE NOT GOING TO SOLVE THE CREDIT CRUNCH!
That's my opinion at least. I could be wrong, mislead, irrational, off-base, & off of my proverbial rocker. But I could be right. Time is the only teller...
A FEW THOUGHTS
- In its most simplistic terms, when the FED cuts the rate, they are essentially charging Banks & Lending Institutions less of a Rate from which to borrow money. This has happened on occasions in hopes of nipping all the volatility of what's going on in the bud. It won't though. The interest rates Banks & Lending Institutions are charging consumers has remained pretty stable, if not going down from time to time. Smart Money would be to raise the rates after these FED rate cuts to increase the loss reserves (shielding themselves from the default on loans gone bad). Think about it like this, the FED cuts the Rate and Bank A decides to increase the rates they charge consumers by 1/4% to 1/2% to maintain a healthy loss reserve. While that's probably the smart thing to do, it won't work across the board. Why? One word, Greed. Banks B, C, & D will keep their rates the same and Bank A will price themselves right out of the market. Losses will continue and the reserves will continue to deplete and the crunch will continue to be taking a bite out of our economy.
- Raise Prime Rate & Bank Rates! I know, I know, that very sentence is going to make me about as popular as dressing in drag at a Lewis Farrackhan pep rally. However, I'm not quite sure the Banks can continually operate at such minimal profit margins considering the ongoing losses and rising delinquencies in portfolios of Mortgage Loans. For the consumer, increased Prime Rates and Bank Rates would make more capital available and products would be more aggressive, simply because the profit margins would get back to where Banks & Lending Institutions were used too back in the early 2000's. Home affordability would decrease, so instead of being able to afford a $350,000 house, perhaps you only will be able to afford a $275,000 home.
- You want more consumer spending? How about having Interest Deduction on interest paid on Credit Cards and Installment Loans (such as car loans) which is how it was before Ronald Reagan took office. (Of note, I still liked Mr. Reagan). That would allow consumers increased deductions, increased refunds, give us more money to spend rather than giving us an occasional $600.00 refund that will hopefully cover my Heating Oil Bill, being the unmarried male with no kids that I am.
Bottom line, there are no short-cuts to life. Sometimes solutions aren't easy and maybe even a tad hard at first. If I open a wound on my arm, I'll be the first to pour Hydrogen Peroxide on the cut. It stings at first, most things do before the healing begins......
