The Fed’s Irresponsible Move

Here’s a dissenting view from Vitaliy N. Katsenelson:

I’ve seen this movie before, and it doesn’t end pretty. That’s what I thought on Sept. 18 when Federal Reserve Chairman Ben Bernanke took the road so often traveled by his predecessor, Alan Greenspan, and threw the financial markets a sop in the form of a big cut in interest rates. It was clearly what the markets wanted, as the immediate 336-point jump in the stock market confirmed. But popular decisions are not always the right decisions. (Just consider Greenspan’s popular 2001 interest rate cuts, which actually caused the current housing bubble.)
Indeed, at the core of today’s credit mess—whether in housing or the now battered markets for commercial paper—lies a glut of global liquidity. That has dramatically altered our perception of risk and fueled an unwillingness to accept traditional credit limits. If a homeowner couldn’t qualify for a conventional mortgage, brokers were more than happy to offer an exotic loan the borrower could never realistically pay off. If a loan was too risky to be sold as investment-grade, investment banks could always concoct elaborate bundles of good and toxic credits that (supposedly) eliminated the risk.
Nowhere was this disregard of financial reality more apparent—or damaging—than in housing. The housing bubble was fueled by many years of low interest rates, which eventually priced many people out of their dream homes. But instead of settling for less or renting, people pursued their American dream (the house with a white picket fence, 2.7 kids, and 1.2 dogs) with a vengeance, taking out adjustable-rate, interest-only—or even worse, negative-amortization loans.

Posted by on September 21st, 2007 at 2:20 pm


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