Thursday, January 24, 2008

Rate cuts will widen the Gap

This recent NY Times article on the effects of the interest rate cut left me thinking that it will simply widen the divide between those with good credit/secure jobs and those that are struggling.

  • The rate cuts will indirectly result in lower mortgage rates and those with good credit can refinance, but those without credit can forget it.

  • Credit card rates should also drop, benefiting most everyone, but the savings on interest payments is expected to be insignificant for the average card holder at less than 15 bucks a month.

  • Rates on car loans will drop and once again borrowers with good credit will benefit.

Basically, those with good credit that can afford to spend money, will now get a better deal for their buck.

In addition to widening the gap between the haves and the have-nots another big downside to the rate cut is that savings account interest rates, money market and CD rates will all fall. This will negatively affect retirees and conservative, frugal-minded folks who like to save their money instead of invest in the market or spend every penny.

These lower rates coupled with the highest inflation rate in years is quickly eroding the value of a saved dollar. As is typically the case, this economic policy encourages spending and actually hurts those that are hunkering down and cutting back to hang on to the money that is in hand.

The rate cuts are not designed to help “savers” or the average American struggling to make ends meet, rather they seem to help the average financial institution, by inducing more spending. This quote by one of the financial luminaries really seemed odd to me the other day.

"Let’s face it, the U.S. consumer is dependent upon housing prices and stock prices and with both of them sinking rapidly the outlook for the economy is not good.’" WILLIAM H. GROSS, chief investment officer of the bond management firm Pimco.

I think he’s got it reversed. Stock prices and housing all depend on the consumer. If the consumer stops buying, those financial institutions that depend on stock prices and house prices are doomed for negative growth and lower valuations.

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