[OPE-L:6118] Re: Re: possible ways out of the 'crisis'?

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Wed Oct 31 2001 - 12:56:17 EST

Gerald_A_Levy <Gerald_A_Levy@email.msn.com> said: 

> c) On whether cuts in interest rates can help the working class. Some
> workers may re-finance their homes. However, not many workers
> under the current [recessionary] conditions are going to purchase
> [new or used] homes.

yes new home purchases have already petered out. 

 Indeed, I think that this will also be the case with
> all major consumer durables.  Perhaps some workers will take out bank
> loans to pay-off credit card debt (something to consider so long as there
> is a major difference between interest rates offered to consumers and
> rates charged by credit card companies as 'penalties' and 'finance
> charges').  Yet, what you have not noted is how interest rate
> reductions affect working-class *savings* (especially important for the
> elderly): i.e. it lowers their savings and total income (yet, this may have
> been one of the reasons for the interest-rate decreases by the Fed since it
> _forces_ working-class households to take their money out of 'safe'
> savings accounts and use the money to buy stocks and bonds).

excellent point indeed. so far the wizard's rate reductions seem only to have 
(yet again) financed an asset inflation that has bore no relation to the real 
economy. P/E ratios have increased over the course of the year. This and the 
next two quarters' reports should however puncture the bubble despite 
Greenspan's efforts. We may find that once the bubble is burst, the lower 
interest rates had only encouraged more indebtedness for the purposes of 
speculation (e.g., mortgage refinancing to free up income for stock market 
investments); as the stock market wealth disappears, that indebtedness will 
then weigh the economy down.  Which is to say that the wizard has probably done 
worse than merely push on a piece of a string. 


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