Nostradoofus

(Contributed by Richard C Hsu)

 

Once again, the Fed has seemingly come to the rescue of the stock market. According to today’s New York Times, “presenting a bleak picture of a deteriorating national economy, Ben S. Bernanke, chairman of the Federal Reserve, strongly suggested on Thursday that the Fed would cut interest rates soon, perhaps by a large amount.” While Wall Street welcomed this with open arms by rising today, what people fail to realize is what worked for Greenspan after the Internet bubble burst won’t work for Bernacke after the housing bubble burst.

The reason that it worked for Greenspan is because homes had appreciated (along with the stock market) during the Internet bubble so there was plenty of equity lying around to deploy when interest rates were lowered. People could use their equity homes as an ATM in order to maintain spending and thus keep the economy going. Now it’s different: the raison d’etre for the bursting economy is precisely the DEPLETION of home equity so when the Fed lowers interest rates, there will be no equity to spend.

If the Fed tries to lower interest rates too aggressively, it will use all of its bullets and then what will be the stock market’s safety net?

This entry was posted on Thursday, January 10th, 2008 at 9:01 pm and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.