An AP article today reported that some economist’s are concerned that Bernanke’s low interest rate policy is hurting the economy. I do not have to label myself an economist to know that, or to have any special clairvoyance to understand why? The Fed interest rate means nothing if the banks will not loan money. If the Fed would loan me the money at 0.5%, I would borrow it and invest in municipal or sovereign bonds that pay 6% and make a fortune.
Guess what? If my little non-bankers brain can understand that arbitrage, then the banks do too. Of course.
They are borrowing by the billions at 1% or less and buying bonds that pay 5-6%. The more they borrow the more they make. And they have been borrowing billions. Why should a bank loan the money to us? We might not pay it back! Right? But is it not possible the sovereign, other country’s, bonds will go bad? No sirree, Bob. Why? Because the Fed, or the world bank will step in and prevent default on the bonds.
Under these conditions, who makes the money? The banks. Who understands this? Warren Buffett? That is why he invested $5 Billion in Bank of America today. He got a great deal. A deal that only he could get, and he made $500 million on his warrants before the stock market closed down today. The rest of us made nada as the market took it in the shorts again.
Recently, a close friend “applied for and received approval” for a loan by a respected mortgage company. He was approved by the mortgage company, but no bank would make the loan. Crazy, but true.
The Fed low interest rate policy does not help the economy because low rates only help when money is made available to Americans to borrow. The only answer is we all need to be banks.
No comments:
Post a Comment