Well, most of the time… Today, the Federal Reserve cut two key interest rates by 3/4 of a point to help stave off a recession in the United States. There’s a time and a place to cut interest rates, or raise them, but to prevent a recession isn’t one of them. Recessions happen because there’s an imbalance in an economy. It happened in the Great Depression, it happened in the 70’s, we had a small recession at the end of the 90’s and into the 00’s, and we need one now (that’s right, I said need).
The current recession is being brought on by bad lending. Lending companies were going crazy over the housing boom and low interest rates. They were virtually throwing money at people to buy houses. They wanted to cash in appropriately, and made grand deals where consumers would have what are called Adjustable Rate Mortgages, or ARM’s, and would have dramatically low interest rates, for say the first 3-5 years of their mortgage, then their interest rates would catch back up to whatever the standard interest rate of the day would be. So say you bought a house 5 years ago at a 3.0% ARM, and it expired in 5 years and todays interest rates are higher than they were then, your payments would shoot up from $800 a month to $1600 a month. Obviously, that’s quite a dramatic increase in your house payment.
People aren’t able to afford it. They’re trying to sell left and right, driving the cost of homes down. They’re foreclosing and lenders aren’t able to dump the properties because the market is so poor, and now the lenders, with ideas of beach mansions and third world servants serving frozen margaritas, are going bankrupt and are having to be bailed out by larger financial institutions or they’re selling off their entire book just to have a house for them to go home to.
The housing bubble is significant because a person’s home is probably the most important investment they will ever make in their lives. People who spent their life savings buying a house are now broke with no equity and no way to sell the house that they now can’t afford. So the Federal government, over the past year or so, has been systematically cutting key interest rates to try and reduce the burden that homeowners and lending companies are currently paying in order to help stave a recession. Here’s the reason why this is bad…
Analogy Time:
I remember being at my parents house a few years back and observing something that astonished me. My nephew (who we’ll refer to as Pedro, to protect anonymity) was young, about 2 at the time, and was trying to go up the stairs to the second floor. My parent’s stairs are very steep and they’re wood, so it isn’t safe for a toddler to be climbing them alone. But his cousins, or whoever, were up there and he wanted to play with them. My in-law, one of the child’s parents, told Pedro not to go up the stairs. Pedro ignored my in law and continued to try and go up the stairs. So my in law stood up, picked Pedro up and set him back, farther away from the stairs, and told him to not go up the stairs. Pedro turned right back around and started heading up the stairs. My in law stood up, picked Pedro up and moved him back so that he was farther away from the stairs. Pedro turned around, crawled to the stairs, and proceeded to climb the stairs. And yet again, my in law stood up, picked Pedro up and set him back away from the stairs. Over and over and over… This whole process was absolutely astonishing to me as no discipline was laid down for Pedro’s actions, and nothing was done to really prevent his desire or will to climb up those stairs. In the end, my in law put a child fence thing at the opening of the stairs so Pedro couldn’t go up. He cleverly moved the fence and started to climb up anyway.
This is exactly what the Fed is doing with these interest rates. They are delaying the inevitability of our economy sliding into a recession and not allowing the economy to correct itself. When you’re gushing blood, small bandages here and there won’t heal your wound, they’ll just slow the bleeding until they become so saturated that they ultimately serve no purpose. The Fed’s constant cutting of interest rates is like that. The only way to stop the bleeding in this case is to let the housing market crash, learn from the mistakes and move on. This recession won’t cripple our economy in and of itself; however, there are other factors that make our economic outlook frightening. This recession will hurt people who made bad choices with their money when they thought they could get one over and buy a house at a ridiculous interest rate. And these lenders will be hurt and be put out of business because they made bad loans. They deserve the repercussions.
There’s no avoiding this. There’s only a delay. What the democrats and some republicans are proposing is an economic bailout/stimulus plan for these people. It will Shift the burden from those who made the mistakes to the rest of the American tax payer, thus hurting our economy exponentially more. This year will see the United States in a recession and inflation will probably be at an all time high. The good news—yes people, there is good news—is that when that happens, and a sell-off in the housing market is at its peak, it will be a prime time for our economy to rebound; it will be a prime time to buy the house you’ve always wanted; it will send your property and home value skyrocketing, and that market will then again correct itself.
People are going to lose their homes and have to live in small efficiency apartments. People are going to lose their jobs because lenders and large financial institutions are going to have pretty significant layoffs. But a capitalistic economy is a symbiotic economy. When one facet of our economy does well, every facet of our economy will benefit. It goes around and around and around. When one facet of the economy blunders (the housing market, the internet bubble of the 90’s, etc), every facet of the economy suffers. But in America, it always rebounds. We have to allow it to happen, even though it hurts a lot of people. As a loving people, we hate to see others hurting, but there’s always a light at the end of the tunnel. This recession will ultimately make America stronger if it’s allowed to happen.
