Barry Ritholtz of The Big Picture financial blog discusses his soon-to-be-published new book, Bailout Nation.
Prediction: The dreaded bailout will pass, the markets will rally, then that pesky reality will intrude again, causing another big downdraft. The credit markets are currently frozen up, WaMu is on its last legs, so really, anything could happen.
You can’t make money loaning at 5% when inflation runs higher than 5%. That’s simple math. So until the Fed gets inflation under control, the credit markets won’t loosen up. (The offical inflation rate for 4th Qtr 2007 was 6.8%– and the “real” rate might have been high as 14%. Who’s going to risk lending money for the long term in that economic climate?) Plus, who’s the biggest borrower, competing with would-be homeowners for what funds are available? The Federal government.
The Fed’s been ignoring inflation for two years now. And the bailout, in the absence of a tax increase (which ain’t gonna happen), will be paid for by deficit spending and/or inflating the money supply. That’s going to tighten the credit market even further, not loosen it.
You’re absolutely right: reality will intrude.