After a meeting of the INKWELL 3, we decided to try and answer these questions for people. If you are a homeowner you have been watching the drama unfold with the housing markets and the sub-prime thing. Well, what is happening?
The Fed lowered its discount rate to banks in an attempt at heading off the collapse of the banks and such. IMO, this move could create what is known as a “moral hazard” to economists. This occurs when the government rescues people of institutions from the consequences of their judgement, bad judgement. The bad judgement was that of the hedge funds managers, who invested in the sub-prime market without doing their homework, because the market was so lucrative. By cutting rates, the Fed is encouraging these funds to continue to make risky and faulty investments.
Another problem that will soon show its ugly face is a drop in the housing markets. Home prices fell about 3.2% nationwide and could drop as much as 10% before the thing is over. But the government is playing the same game that they played with the Savings & Loan crisis in the 1990’s. When the government absorbed the bad debts and stuck the taxpayer with the bill. in the long run the average taxpayer will be paying the price of the greed of the funds. Basically, the government would be bailing out hedge funds for making bad decisions.
Once again, I ask , where is the free market in this? The taxpayer is just subsidizing the wealthy, while placing themselves in a position that they cannot extract themselves from anytime soon. The people need to pull their collective heads out of their butts and see just what is being done in their name.
08 Sept 2007