Thursday, January 3, 2008

“Money without a brain can be a dangerous thing”

Resign, Bernanke and Paulson

Bernanke's thinking goes like this: Problem: Low interest rates led to way too much lending Solution: Cut interest rates to encourage more lending Slashing rates to ease the credit crunch is like sticking a band-aid on a tumour. The tumour needs to be cut out, no matter how costly and painful. There's only one answer - house prices need to fall - a lot.

Posted by little professor @ 10:55 PM (653 views)
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5 thoughts on ““Money without a brain can be a dangerous thing”

  • As usual, a good no nonsense article from the Fool.

    Like many of us, I saw friends and family during the Christmas and New Year. Property prices and the economy cropped up as conversation pieces several times. Not *ONCE* did any of my friends or relatives express any concern about the current situation.

    On the one occasion I tried to point out some current issues, one of my friends became visibly distressed at which point I changed topic.

    I say this to make the point to all HPC readers that we are still heretics on the margin of society nomatter how much evidence builds up that we are heading for serious economic problems.

    The Fool can publish as many brilliant pieces as he likes but nobody will listen until it is too late I think.

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  • quiet guy: Same situation here, I daren’t mention the possibility of price falls in polite company. It’s like religion and politics, never to be mentioned to anyone unless you already know where they stand (and they stand on the same side as you).

    About the article…. Yes it’s a good article, explaining that reward entails risk and that investors need to learn this the hard way. But (and this is a major but), a lot of the people who stand to lose out are people who rightly trusted that their money was perfectly safe. We’re talking about very-long-term investors: the Florida Pension Fund, the Teacher Retirement System of Texas, and others; these funds were large buyers of subprime backed assets. How long will it be before our pension funds (or our parents’) are tainted by the same mess? Should every person who has a pension, whether state or private, be expected to have an inside knowledge of the alphabet soup of CDOs, SIVs, or RMBSs?

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  • “Should every person who has a pension, whether state or private, be expected to have an inside knowledge of the alphabet soup of CDOs, SIVs, or RMBSs?”

    I think that’s a very interesting question that cannot be easily answered by me. Essentially, I believe that public sector pension liabilities in the US (your country?) and UK (my country) are unaffordable in the long term. The whole concept of a traditional pension looks a bit shaky today when you look at demographic trends and ownership of wealth across society.

    I am fortunate enough to be a member of a private sector final salary scheme. Recently, my employer has been giving *ME* the responsibility of choosing which types of investment I wish to make for my future. I am not kidding at all here; I choose the type and percentage allocation of different investment types for my pension even though I am not competent to do so. My suspicion is that the smarter pension trustees have looked into the crystal ball and decided that it’s time to pass the buck for what may prove to be an impossible long term commitment.

    I’m paying into a scheme but i’m also looking for a plan B.

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  • Assumptions are being made – but cutting interest rates will not necessarily lead to lower rates for the man in the street.

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  • I spoke to a several ”key” folks over the xmas holidays – all of whome have no mortgage – they all seemed to think, house prices are only going one way DOWN!

    I would not have had the conversation with anyone else, as most others have huge mortgages and are at risk. I didn’t want to frighten anyone.

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