Ugh. I was against the fed lowering the rates, because I don't believe people who assume risk should be bailed out whenever things go south. And I didn't really understand why the fed thought it important to do so today.
I still believe that, however I just read a statistic that concerns folks quite a bit. Right now aggregate margin debt as a proportion to market capitalization is at a historic high. Higher than 1929, higher than 1999-2000, higher than 1987.
Markets crash because of snowball effects, either runs on bank funds, or spiralling stock prices due to lack of buyers, or lack of liquidity from avoidance of all loan risk.
Apparently people have been taking out home equity loans or refinancing mortgages to adjustable rates and investing them in the stock markets.
The first test is going to be in September when adjustable rates on most mortgages are going to go up by 30%. If people are forced to sell stocks to make payments on their mortgages, or feel that they need to cut spending elsewhere to pay their higher mortgages, stocks will go down even more than this August. Right now, people are predicting the future, and trying to get out now, which is why stocks have crashed.
So the question is, will we see a real recession like in 2001-2003? Will this snowball take out so much with it that it depresses the global economy like 1929?
I think Bernanke's vacation's over, and he's going to have his hands full over the next 9 months. But I also think it's one of the best teams ever in charge of the fed, and they'll do everything possible to smooth out any large downswings.
http://www.discursivemonologue.com/2007/07/17/nyse-member-margin-debt-at-all-time-highs-in-both-real-and-nominal-values/
Check out this Time article from 1999 talking about the same thing. They said there could be a huge stock crash...
http://www.time.com/time/magazine/article/0,9171,991852,00.html
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