>>Is this ludicrous or plausable?<<
Yes...no
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WARNING: WEAK COMEBACK AHEAD
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>>Shelley, you need a vacation, or a move from the panhandle, because hurricanes are in your future.<<
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RESUME SPEED
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>>BTW, I just heard on the news that Greenspan is going to halt raising interest rates until we recover from this disaster. Good for the market? Should be.<<
All the human suffering and destruction of Katrina aside, the economics of the situation is yet to be realized--especially due to the current trend of the areas' over leveraged homeowners who tragically lost their homes. The recent trend of diversifying risk by bundling and selling mortgages and equity loans to investors and the effect of their subsequent defaults or early pay-backs will play out in the months to come. But that won't concern Greenspan in the short time he's got left.
Greenie "claims" he'll only dink with the interest rates to keep inflation in check. He raises Fed fund rates to slow down the economy headed for inflation or lower rates to ramp up the economy when heading for recession. He started cranking down rates after the "tech bubble burst" and then after "9-11" to keep the economy moving. As a result of cheap money, the focus switched from the "Tech Bubble Weenies" trading on margin to "Real Estate Vultures" leveraging real estate (same greed, different melody).
With corporate profits moving up in the past couple of years (believe it or not) he started raising the rate (measured of course) to keep inflation in check. Additionally, he needed to continue to raise rates because at 1% to 2% the Fed had no cushion to rely on should there be another major economic catastrophe. By raising the Fed funds rate, he was counting on the long-term interest rates to increase (that's what Economics textbooks say they should do)--but that didn't happen (a conundrum) and the yield curve flattened. So to this day he keeps increasing the rate hoping the long-term rates will cry "uncle."
With the high gas prices, the cost of everything will start going up (retailers and manufacturers can't keep eating the costs forever) and we'll experience inflation--just the kind of thing Greenie wants to avoid.
If Greenie sticks by his guns, he should continue to raise interest rates to keep inflation in check. He may skip the next interest rate increase to make Bush look like a hero in the face of his administration's screw-up in the New Orleans, but those rate hikes have gotta start moving the long-term rates (which drive the mortgage rates). Of course if the long-term rates continue to stay low (or worse, fall) we will find ourselves in a recession which isn't good for the economy either.
My guess is Greenie wants to stick to his guns and continue his increases. If he does stop, he'll identify a reason like some "lower than expected X-economic indicator..blah..blah..blah." But with the 10-year yield down to 4.03% today, I don't any reason for him to stop raising the rates.
Either way, some investors may find it prudent to think about putting their money into the "Bank of Serta" until the economy settles.