Good News!? ... Maybe?

The Fed lowered the Fed Funds Target rate to the range of 0 to 0.25 percent.

Since real estate depends heavily on borrowed money, this theoretically makes borrowed money cheaper, so this should help buyers and sellers of real estate get deals done.

SRS, the ultrashort real estate fund dropped 25 percent today, meaning that the Dow Jones Real Estate Index (IYR) went up 12.5%, so people assume that this move is a positive one for real estate.

I am mixed on the subject. For starters, where do we go from here? The Fed can only keep the rate at 0, if it lowers the rate to below 0 people will just hold cash instead. This is because people do not want a negative rate of return.

The bank of Japan did this in the early 1990's and we all know how that turned out. The called it the Lost Decade:

The economic miracle ended abruptly at the very start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fuelled a massive wave of speculation by Japanese companies, banks and securities companies. Briefly, a combination of incredibly high land values and incredibly low interest rates led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable (resting, as it did, on unrealizable land values - the loans were ultimately secured on land holdings), the Finance Ministry sharply raised interest rates. This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government.

Eventually, many become unsustainable, and a wave of consolidation took place (there are now only four national banks in Japan). Critically for the long-term economic situation, it meant many Japanese firms were lumbered with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; even now the official interest rate is at 0% and have been for several years, and despite this credit is still difficult to obtain.

Overall, this has led to the phenomenon known as the "lost decade"; economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life has been rather muted, however. Unemployment runs reasonably high, but not at crisis levels (the official figure is a little under 5%, but this is a considerable underestimate - the real level is probably around twice that).

This has combined with the traditional Japanese emphasis on frugality and saving (saving money is a cultural habit in Japan) to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the
miracle.

I am starting to think that the people who are running things, nice people as they may be, have not a clue as to what they are doing. $700 billion for really no reason at all.

I am more than willing to watch events unfold from the safe distance of, say 10 years or so, but unfortunately I, you and we are all stuck here, now.

We must resist the urge to run from one end of this mess to the other, never looking back. There is no safe distance and there is no end, it extends in all directions forever.

The hope that I have is that these changes to the interest rate, the government borrowing to finance the $700 billion, the printing of money, deflation (possibly inflation again), these are not the *real* economy and monetary policy has no effect on the real economy. At least in the long term.

By the real economy I mean jobs, food, real estate, things that money can buy, etc. These things do not go away and are what most people care about when push comes to shove.

So the wealth that you built up over the past 10 years. Yeah, it is gone with diminishing prospects of returning. It was just money, and it is gone now.

Will this be the start of the American "Lost Decade"?

Every new month brings one more ditch and another last ditch effort.