Saturday, April 11, 2009

Government Loans/Low Rates a Sign of Hope ????

Several weeks ago President Obama was preaching doom and gloom on the economy and warning that failure to adopt his "Stimulus Package" could lead to Depression. Now he tells us there are signs of . . . . Hope! The main tangible sign, the President said, is an increase in loans made under a particular loan program administered by the the Small Business Administration !!!! The Washington Post reports the story here:

This may be the first time in history that a responsible public official has invoked the number of loans made BY THE GOVERNMENT as a plausible indicator of economic progress. The vast majority of small business financing comes through the private sector, often through informal networks of family, friends or old fashioned self-financing. Loans made by the SBA are a drop in the bucket compared to these other mechanisms. Hence, an increase in the number of loans from a particular SBA program is an extremely thin reed on which to base one's economic prognostications.

The President also pointed out that mortgage rates are low now, thereby providing an excellent opportunity for some to refinance their homes. He's exactly right in the sense that folks should consider refinancing as a way of lowering their monthly payments and/or escaping an adjustable rate mortgage. However, interest rates (the price of credit) are low despite massive federal borrowing, precisely because private business and consumers are not demanding credit. Lower demand means lower prices for credit, i.e., lower interest rates. Interest rates were even lower during parts of the Depression for the same reason.

There is another possible explanation for today's low rates, an explanation that could complement the one just provided. The Federal Reserve could be printing money and using it to buy up newly issued Federal Debt, thus improving the demand for US securities, raising their price and lowering interest rates. While this policy COULD stimulate the economy in the medium or longer term, but it would be odd to say that the adoption of a policy that COULD work is a "hopeful sign."

The President's prognostication also raises the following question. What has caused the VERY sudden turn around in the economy's condition ? Certainly not the "stimulus package," most of which has not even taken effect. If in fact the economy IS recovering already, then perhaps there was no need for the stimulus package (and trillions in debt it will bring) in the first place !