Stock Prices Surge after Fed Cuts Interest Rates
by D. Cupples | I'm not expert on finance, economics or securities markets. From what I've read, though, it seems that unreasonable gambling and speculating had something to do with the sub-prime mortgage crisis, the current Bear Stearns predicament, and a host of related financial and economic woes.
How did people at the stock exchanges celebrate the Fed's cutting of interest rates today? By paying higher prices for stocks -- i.e., more gambling and speculating. The Associated Press reports:
"Wall Street stormed higher Tuesday as investors, optimistic following stronger-than-expected earnings from two big investment banks, were also galvanized by the Federal Reserve's decision to cut interest rates by three-quarters of a percentage point. The Dow Jones industrial average soared 420 points, its biggest one-day point gain in more than five years.
"Many investors were expecting the Fed to cut rates a full point, but appeared to overcome their early disappointment, especially since a 0.75 point cut is still substantial. The central bank's benchmark fed funds rate is now at 2.25 percent — its lowest level since December 2004, and less than half what it was last summer. The Fed began lowering rates exactly six months ago, after the credit markets seized up due to soaring defaults in subprime mortgages." (AP)
So, what happens next? Will the Fed keep interest rates low for a long time, like it did after 9/11? If so, will people ultimately start buying houses at inflated prices again -- thereby, preventing housing prices from falling back to earthly pre-bubble levels? That would be nice for real estate agents and sellers, but what about the long-term effects on our economy?
Will the people running big companies feel even more comfortable with unreasonable gambling, after the Federal Reserve decided a few days ago to help bail out big banks that lost big on unreasonable bets?
Will people keep buying stocks for more than they're actually worth, thereby putting their own retirement security at risk?
Doesn't anyone remember the term "irrational exuberance"? Memeorandum has commentary.
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