US rate cut towards zero expected

[frigidmagi]

BBC

US interest rate-setters, led by Federal Reserve chairman Ben Bernanke, are expected to cut rates from the current level of 1% on Tuesday.

They are expected to lower it at 1415 EDT (1915 GMT) to 0.5% or even 0.25%.

As they run out of room for further cuts, the policymakers may give details of what other tools they plan to use.

Other possible measures include buying debt backed by home loans, in the hope of halting the dramatic decline in the housing market.

Deflationary threat

It was problems with mortgage-backed debt that set off the problems in the US in the first place, but the Federal Reserve may decide that increasing demand for it could help to stimulate the economy.

A central bank printing money to inject into the markets is a strategy known as quantitative easing, which was pioneered by Japan as a way of battling its own deflationary problems in the 1990s.

Deflation becomes a greater risk as interest rates head towards zero and is a problem because if people believe that prices are going to fall then they have incentives to postpone buying anything they can, which means there is even less activity in the economy.

Federal Reserve chairman Ben Bernanke discussed quantitative easing in a speech at the beginning of this month.

Fresh weakness

"Our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth," he said.

The Federal Reserve has already been doing some quantitative easing with the billions of dollars it has been pumping into the financial markets through emergency loans to banks and other institutions.

The Federal Reserve's key rate, the target rate for overnight federal funds, has been cut drastically from the 5.25% where it stood in September 2007.

There have been fresh signs of the weakness of the US economy already this week, with figures on Monday showing that industrial production fell 0.6% in November, with the struggling carmakers among the worst hit.

Somehow I'm not sure this is gonna work.

[SirNitram]

Laser-faire, or however it's spelt, economics basically demands flowing and easy credit. The problem is that no one has admitted the two underlying problems: That the banks aren't lending(See my bit about the rush to negative, with treasuries), and that easy, limitless credit was the problem.

Deflation is here. This is setting up a continuance of it. Keynes really need to be invoked and in a big way, and yes, you have to turn the presses in the mint to max output.

[The Cleric]

Or if people had been responsible about their home purchases in the first place...

[Cynical Cat]

Or if people had been responsible about their home purchases in the first place...

Or if, you know, the banks had bothered to make sure that the people who were borrowing could have paid it back. Or if the crappy loans hadn't been bundled with other financials and sold sneakily as investments. Or if most of the securities market wasn't a house of cards waiting to fall.

There are lots of people who will borrow more money than they realistically can pay back. A rising real estate market makes that even more likely, as people plan to be able to flip the property for a profit and pay off the loan. There's a reason a morgage has traditionally been a serious load requiring proof of income and a sizable down payment up front. There's plenty of people who are irresponsible with money. They're the ones who are supposed to be turned down for morgages, not giving them out.

[The Minx]

I'm very skeptical of claims that it is simply the free flow of capital is the problem. Rather, it is the combination of such flow with unwise regulation. Note, not "too little" or "too much" regulation, but "unwise" as opposed to "wise" regulation.

For instance, for all that its intents are noble, measures decrying "redlining" and passing laws against it affect the ability of banks to make sound judgements about who they lend money to. In such an environment it is not the free flow of capital itself that is the issue, but the fact that regulations require banks to lend to those who cannot pay back.

Obviously banks are trying to make as much money as possible, and they bear responsibility for trading in securities and lending money to those whom they should not. However, once regulations that promote irresponsible lending are in place, they will fall over each other in an effort to make more money and remain competitive.

[Charon]

Or if people had been responsible about their home purchases in the first place...

Like Cat, I would like to point out that the requirements for getting a loan were ridiculous. I am only barely joking when I say that there was only one requirement. "Do you have a pulse?" And I'm sure if we looked we could find cases of dead people getting loans.

[Cynical Cat]

I'm very skeptical of claims that it is simply the free flow of capital is the problem. Rather, it is the combination of such flow with unwise regulation. Note, not "too little" or "too much" regulation, but "unwise" as opposed to "wise" regulation.

The US gutted its banking regulations, many of them measures designed to prevent another Great Depression. It is unwise to allow financial institutions to grow to the point where their collapse will devastate the economy and thus demand a bail out be allowed to operate at will by men who will pick up large bonus checks if they can just wrestle the short term profits and stock price up a few points and have no interest in the institution's long term success and stability. Privatized profit and socialized risk is about as unwise as you can get.

[The Minx]

The US gutted its banking regulations, many of them measures designed to prevent another Great Depression. It is unwise to allow financial institutions to grow to the point where their collapse will devastate the economy and thus demand a bail out be allowed to operate at will by men who will pick up large bonus checks if they can just wrestle the short term profits and stock price up a few points and have no interest in the institution's long term success and stability.

They gutted the regulations which promoted long term success and left those in place which promoted/mandated lending to unsuitable customers. Hence my rejection of "more vs less" as opposed to "wise vs unwise" regulation. Bankers, like everyone else, are simply trying to maximize their personal profit in the environment given.

Privatized profit and socialized risk is about as unwise as you can get.

I'll agree with this sentiment.

[The Cleric]

Banks were greedy for making the loans, and people were stupid, short-sighted, and irresponsible for taking them. Blame goes both ways here.

[Comrade Tortoise]

Banks were greedy for making the loans, and people were stupid, short-sighted, and irresponsible for taking them. Blame goes both ways here.

Yes, but the blame is much stronger on those who should have known better. You cannot expect a person to know how the securities market works, or what process the bank uses to determine who is or is not eligible for a loan. Most people dont know how market bubbles happen either.

People evolved to be short sighted and to eat as much as they can when they can, and it takes education or a high IQ that the majority of people do not have for them to think differently.

The people deciding bank policy, and those doing the securitization did know better. But they did it anyway because they were banking on the bubble they knew they were creating not bursting before they made a crapload of money off these bad debts. That does not absolve them of the responsibility of turning a few hundred billion dollars of debt into a financial clusterfuck half the size of our fucking GDP, and doing so knowingly. They gambled with our entire economy knowing that eventually they would lose, and lose bad.

[Cynical Cat]

Banks were greedy for making the loans, and people were stupid, short-sighted, and irresponsible for taking them. Blame goes both ways here.

No shit, but the bad loans were just the tip of the iceberg and being half way intelligent who they give money to is a banker's job. It's like saying corrupt cops only share part of the blame for the crimes they get paid off to ignore. It's true, but it doesn't get the cops off the hook.

[The Minx]

Banks were greedy for making the loans, and people were stupid, short-sighted, and irresponsible for taking them. Blame goes both ways here.

Yes, but the blame is much stronger on those who should have known better. You cannot expect a person to know how the securities market works, or what process the bank uses to determine who is or is not eligible for a loan. Most people dont know how market bubbles happen either.

People know whether they are able to pay back the loans they take. They don't need to know how markets operate to do that.

[Charon]

Banks were greedy for making the loans, and people were stupid, short-sighted, and irresponsible for taking them. Blame goes both ways here.

Yes, but the blame is much stronger on those who should have known better. You cannot expect a person to know how the securities market works, or what process the bank uses to determine who is or is not eligible for a loan. Most people dont know how market bubbles happen either.

People know whether they are able to pay back the loans they take. They don't need to know how markets operate to do that.

But that is rather akin to getting pissed at the dog because it ate the steak that you left on the floor. Sure it shouldn't have eaten it and sure it probably knew it shouldn't have eaten it, but you're a fucking idiot for leaving it on the floor for the dog to eat in the first place.

Banks new damn well what would happen if they removed restrictions on getting loans, but they did it anyway.

[The Minx]

But that is rather akin to getting pissed at the dog because it ate the steak that you left on the floor. Sure it shouldn't have eaten it and sure it probably knew it shouldn't have eaten it, but you're a fucking idiot for leaving it on the floor for the dog to eat in the first place.

People are not dogs. They are responsible for their finances. They are responsible if they take loans that they cannot pay back.

If you think people cannot be held responsible for their own finances, you are subscribing to paternalism: let the powers that be manage their affairs all together since they are too dumb to do it. I mean, if they cannot be trusted not to take loans they cannot pay back how do you expect them to vote?

Banks new damn well what would happen if they removed restrictions on getting loans, but they did it anyway.

And people know exactly what happens if they take loans they cannot pay back, but they take them anyway.

Mandating the removal of restrictions on loans to people with bad credit was a political decision too, incidentally, see my comment on "redlining", above.

[frigidmagi]

I'm more then happy to blame people for borrowing money they can't pay back, but here's where I'm coming form.

You're a bank. Managing money is your fucking job. You get paid to do it because you're suppose to be that damn good at it. Part of managing money is being able to tell when giving it to someone is a bad idea.

This means you should be able to do basic shit like "hey this guy is a damn moron. If I give him a loan I won't get it back. I might as well just burn it all Joker style while laughing uncontrollably wearing freaky makeup, then at least I'll have some kick ass memories."

But no that didn't happen. Worse instead of being honest about it, they went out and mixed these bad debts up with good ones and sold them out to everyone. This is like running out and having loads of unsafe sex in the the busiest whore house in the nation after finding out you've got AIDS. Seriously, people are shot for that kinda stuff in more enlightened places.

So basically in the forms of the banks we have people who utterly failed at their jobs. Completely and totally. And then because failing at the one fucking thing they're suppose to be good at (managing money) wasn't good enough, they spread the pain around as widely as possible while lying their asses off.

To top if all off when the glass house of bad calls, self deception, fancy tricks and lies collapsed in on itself as it was inevitably going to do.... They demanded we give them more money that they would never have to pay back and could do anything they wanted with so they could just keep on going doing the same thing!

The people who took out loans they couldn't pay are losing their homes. They are feeling pain over their idiot moves. Frankly I'm okay with them feeling pain, pain teaches. But only so much pain. Having your life ruined over one bone headed call that didn't kill anyone is to far for me. The banks are looking to escape with no pain and the only lesson they're learning is they can do whatever the fuck they want and the government will just give them more money. I'm against this lesson. The boys up top should suffer for this in my view. While we can't let the banks collapse (I would like to, just to see suits actually having to deal with pain and learn something) the amount of collateral (oh look a bank word!) damage is unacceptable. But this shit? Over 10 trillion dollars in free money? Worse off MY MONEY!?! Without any real pain attached?

Yeah, I'm perfectly fine with screaming and blaming the banks because they're the ones determined to fuck everyone else to save themselves from feeling the slightest tinge of pain.

[The Minx]

As I pointed out, they had to contend with regulations that required them to loan to people they otherwise would not loan to. There was also the market for "sub-prime" loans making things worse. Sub prime lenders (sundry companies) were providing loans to people the banks would not touch. The sub-prime lenders in turn were receiving loans from the banks. Thus, when the people who should have received no loans went bust, the sub-prime lenders went bust, and they could not pay money to the prime lenders, so they went bust. When the mortgage bubble burst, part of the brouhaha was that many responsible lenders went down because they had lent money not to people with bad credit but to companies who no-one knew how many bad loans they had made to others. This ridiculous sub-prime market is the legacy of one Alan Greenspan.

Please note that I am not claiming that banks are guiltless, but to simply blame the banks is an oversimplification. The banks should absolutely not escape with no pain. I objected to the bail outs, especially with no strings attached and all going to bonuses and golden parachutes with nothing going to help the people who suddenly found themselves with no roof over their heads anymore.

[Charon]

People are not dogs. They are responsible for their finances. They are responsible if they take loans that they cannot pay back.

If you think people cannot be held responsible for their own finances, you are subscribing to paternalism: let the powers that be manage their affairs all together since they are too dumb to do it. I mean, if they cannot be trusted not to take loans they cannot pay back how do you expect them to vote?

People certainly aren't dogs, but frankly you can't trust them to know everything they should or to always make good decisions. My example is often called a PARABLE. As in, not exact but meant to get a point across. People made stupid decisions, and they are paying for them. The banks made even more stupid decisions (namely because they are supposed to know better), and they are not paying for them. There is a problem with this.

And people know exactly what happens if they take loans they cannot pay back, but they take them anyway.

Mandating the removal of restrictions on loans to people with bad credit was a political decision too, incidentally, see my comment on "redlining", above.

And did the government also mandate that said banks had to put their conditions to get a loan so low that any person that had the ability to put an x on a sheet of paper could get as much as they wanted? If so why did the banks then do their freaking job and go "Uhhh, this is a bad idea."

Don't get me wrong, there is plenty of blame to go around here, and I am all for spreading it out to both the people, the government, and the banks. But the point frigid and I are trying to make is that we are seeing the people suffering for their idiot decisions to get loans they couldn't pay off, we are seeing the government suffer at least a little with Bush having the lowest recorded approval rating in history and a general complete distrust of every "old school" politician, but it looks like the banks are not only not suffering for their stupidity, but actually getting paid for it!

[Cynical Cat]

It's really simple: some people are not responsible with money. Las Vegas exists because of these people. Loaning money to these people, and then stealth selling these loans to other people bundled with other financial instruments, is ethically and morally bankrupt.

[The Minx]

People certainly aren't dogs, but frankly you can't trust them to know everything they should or to always make good decisions. My example is often called a PARABLE. As in, not exact but meant to get a point across. People made stupid decisions, and they are paying for them. The banks made even more stupid decisions (namely because they are supposed to know better), and they are not paying for them. There is a problem with this.

I know it was a parable, my point was that it was not a good one. People cannot be expected to know everything, but they can be expected to know whether they can pay back.

Yes, the banks should absolutely pay too. I'm all for that.

And did the government also mandate that said banks had to put their conditions to get a loan so low that any person that had the ability to put an x on a sheet of paper could get as much as they wanted? If so why did the banks then do their freaking job and go "Uhhh, this is a bad idea."

Pretty much. Freddy Mac and Fannie Mae were specifically instituted by the federal government to provide loans to people who shouldn't get any.

The Community Reinvestment Act of 1977 was made to require the same lending practices to all communities. The idea was to prevent banks from denying loans on racist grounds, which was a very noble and necessary objective; some lenders were arbitrarily denying loans to districts with minorities. But there were unintended consequences, since it also prevented discrimination based on income level.

The Federal Reserve under Greenspan actively promoted sub-prime lending (see above), due to the idea that it somehow made the market more efficient.

Don't get me wrong, there is plenty of blame to go around here, and I am all for spreading it out to both the people, the government, and the banks. But the point frigid and I are trying to make is that we are seeing the people suffering for their idiot decisions to get loans they couldn't pay off, we are seeing the government suffer at least a little with Bush having the lowest recorded approval rating in history and a general complete distrust of every "old school" politician, but it looks like the banks are not only not suffering for their stupidity, but actually getting paid for it!

I'm pretty sure we agree on this.

[SirNitram]

If the above is a reference to the CRA, a 1977 law requiring some *gasp* equality in lending... It's a fucking farce to declare it part of this problem. Subprime lending has always existed. It's the whole concept of 'Your credit sucks, so we're gonna make you pay more for this loan'. Or offer more collatoral. Or get a co-signature from a better risk.

For proper testimony on the CRA, here is congressional testimony by a scholar who studied it's thirty year run: PDF Warning

As noted in the testimony, most participating found it at least somewhat profitable, low risk, with extremely low charge-off rates. Indeed, most places had a zero charge off rate.. That is, they never had to abandon the mortgage's made.

The problem was less 'Subprime Lending' in general, and more the kinds of subprime loans. The CRA was still enforcing it's '77 regulatory mechanisms, which meant plenty of documentation. Subprime loans with no documentation, phony appraisals, exotic methods, etc, were the culprits. So was 'Alt-A' financing, which was the idea that an A credit rating was all you needed, with no regard for if you could actually keep up with the payments. Securitization of these loans in a merry parade of fee-charging made it worse.

But it's easy to say 'Subprime lending'. And even easier to pin it on a cause championed by damn dirty liberals.

[The Cleric]

I was going to add, but Minx covered most of what I wanted to say. I'm all for ruthlessly gutting the management of the entire bank (and Wall Street, and the media outlets for that matter), but the people taking out the loans are still responsible for the poor choices they made. If you can barely cover a mortgage when you sign for it, don't come crying when all of the sudden you can't make payments. I know several people who played it cautious and DIDN'T buy when the economy was booming, and are being well rewarded now for not being upside down twice again in their house (and I know a few people like that too).

[The Minx]

The problem was less 'Subprime Lending' in general, and more the kinds of subprime loans. The CRA was still enforcing it's '77 regulatory mechanisms, which meant plenty of documentation. Subprime loans with no documentation, phony appraisals, exotic methods, etc, were the culprits. So was 'Alt-A' financing, which was the idea that an A credit rating was all you needed, with no regard for if you could actually keep up with the payments. Securitization of these loans in a merry parade of fee-charging made it worse.

But it's easy to say 'Subprime lending'. And even easier to pin it on a cause championed by damn dirty liberals.

I really don't care whether it was liberals or conservatives who championed sub-prime lending initially. They certainly both supported the practice ardently enough.

As for whether more documentation can make them safe, I'm not terribly optimistic. Despite all the write-ups of the practice, you are in the end still using federal tax money to insure lenders who provide loans to those who cannot pay normal loans. These lenders will still need to take loans of their own from prime lenders to make the cash available.

Obviously, the current environment with securities and obfustication in general was not making things safer! One party wanted less regulation while the other wanted more, the result was removal of such regulations that were necessary for oversight, but regulations encouraging or mandating risky practices like this remained. It was, of course, special interest politics in both cases.

[Cynical Cat]

I'm all for ruthlessly gutting the management of the entire bank (and Wall Street, and the media outlets for that matter), but the people taking out the loans are still responsible for the poor choices they made.

I'm not saying they didn't fuck up, nor am I sympathetic to them. They are only to blame for fucking up their own lives. The blame for the damage to the economy goes elsewhere.

[The Minx]

I'm all for ruthlessly gutting the management of the entire bank (and Wall Street, and the media outlets for that matter), but the people taking out the loans are still responsible for the poor choices they made.

I'm not saying they didn't fuck up, nor am I sympathetic to them. They are only to blame for fucking up their own lives. The blame for the damage to the economy goes elsewhere.

No one is an island in matters like this. While each home owner is ostensibly responsible for messing up only their own lives, in truth their screw-ups affected the lives of others too. Specifically, those whose businesses and lives in turn were depending on the repayments that never came. You don't judge an individual home owner as responsible for having tanked the economy, but you do judge him for having tossed his little load-stone in to the pile which did do so. So did each individual banker (though they tossed in an individual truck-load).

Certain specific individuals may be given our particular ire, though. Such as Greenspan, he was supposed to be the god-damned regulator and the promotion of the trading of sub-prime loans in the form that was used was his brainchild and legacy. Allowing the trade of loans is one thing, not providing mechanisms to make it work it like you are supposed to be doing is something else.

[Cynical Cat]

[

Certain specific individuals may be given our particular ire, though. Such as Greenspan, he was supposed to be the god-damned regulator and the promotion of the trading of sub-prime loans in the form that was used was his brainchild and legacy. Allowing the trade of loans is one thing, not providing mechanisms to make it work it like you are supposed to be doing is something else.

Oh Greenspan's guilty alright. Every Randroid economist in the States helped make this disaster, but the people responsible for so many bad loans in the first place were the banks. They dropped standards for getting credit to damn near zero with no verification.