THE FED AND INFLATION
Larry Summers a while ago compared the Fed's situation as driving in a fog at night. He did not mean to imply that they were making a mistake doing so, a possible interpretation, but only that they were lacking any experiential information on how to proceed and did not have the option of waiting for better visibility.
What he did not say was that they had only two tools: sell the various low rate obligations they were holding or raise short term rates, and neither of these tools were perfectly satisfactory to sop up excess liquidity.
Many commentators have pointed out how horrible a practice it is to borrow short and lend long. They neglect to mention that this is the nature of banking!!!
What is truly stupid is to lend long at too LOW AN INTEREST RATE.?This is he equivalent of contracting to give money away at regular intervals for a long period of time.
Good banking is to lend at HIGH rates and to. keep as much money invested at as high a rate of return as possible. Safe high yielding assets can in one way or another usually be held to maturity or sold at a profit.
A bank or mortgage lender that is incapable of lending at high rates is not a business but is a philanthropy.
Quantitative Easing is by definition lending at a low rate.?The Fed was able to get away with this because it is not a short term borrower.?The result was giving a huge amount of money away to people who borrowed at artificially low rates, ballooning the money supply and resulting in high asset inflation.
Artificially low interest rates depressed the value of the dollar, reducing domestic demand.
The Fed's increase in interest rates over the past year increased the value of the dollar, increasing domestic demand and exporting inflation.?The rest of the world is now forced to raise interest rates and depress the value of the dollar.
THERE IS NO CHANCE THAT THE FED IS GOING TO REDUCE RATES FOR THE FORESEEABLE FUTURE.?Wall Street and other asset investors are whistling past the graveyard.
Fed rate increases are not going to be able to sop up the excess money supply. All they will do is suppress interest sensitive sectors of he economy such as the useless regional banks and conventional mortgage lenders and the homebuilders.
I have repeatedly suggested that the Fed has to be given more effective weapon, most obviously control over withholding tax rates. Withholding taxes can really sop up dollars!!!!!!?
Another idea which appeals to me is to give the Fed (or some other independent agency)?A LINE ITEM VETO which could not be easily overridden. Government is simply spending too much money on foolish things.
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