Quote from Smart Money:
Mymini,
That was a great post...one that I'll print out and read in detail.
IMHO, bubbles are only bad if they "pop". If they slowly deflate, and give people who REALLY need out, an opportunity to get out, it can minimize the carnage. In my overly simplistic way of viewing things, I think Bernanke and his buddies know that the credit crunch, and the associated subprime mortgage debacle can cause us great pain if we go from 90mph and slam into a brick wall. I think they are trying to slow the descent by offering a source of slightly cheaper money to the banks and hopefully influence the rate that people will lose their houses.
I think that all along, they've been watching as the business sector absorbs the potential losses in these areas. They knew about the pain, but were hoping the markets could work it out by itself. The realtor who can't find home buyers quits his job and works for big business. The people trying to sell their home are able to do so because a new factory just opened up in their small town and the workers need a place to live. And, the banks do OK because they can at least loan money to the businesses for their expansion to cover their mortgage losses. This process has been on-going, and has, IMHO, dampened the effect of the housing overhang, mostly because most Americans, except for people living in key areas, generally feel like their home value hasn't dipped much beyond what it was worth only a couple years ago.
But...if business fails, then there is a problem on all three of these fronts.
Since Bernanke and his buddies have access to the newest data, and see things as they develop, I think their seeing that our economy is like an airplane going into a dive because business activity alone can't handle the weight of the luggage that is the housing market and the credit crunch. Following the analogy, they have a better view of the altimeter than we do, and I think they are making adjustments that will slow the descent, but not end the descent. So I'm willing to bet that all future adjustments will be "behind the curve", rather than in front of them. It will take quite a bit of bad data for another cut. They want the orderly transition to continue. There will still be some pain, but it won't be too bad. . The more time that goes by, and the easier and cheaper that money is, the less damage that there will be.
FWIW, the rate cut is saving me a grand total of $20 a month on a Heloc. Thats it. I'll probably spend it and stimulate the economy. But my $20 a month, and the $20 a month from my neighbors likely won't cause rampant inflation beyond what we have now.
I know some believe that you can't softly close a bubble without creating another one. But perhaps you can trade a big one for a few small ones that won't cause as much harm to people if they pop.
SM
