Marc Cuniberti It’s no wonder our economy and stock markets keep getting into trouble.
We go along for a few years and everybody is giddy and spending money like crazy. Then the economy tanks, or inflation catches fire and the houses come out spraying what they think are remedial actions by various government institutions to try and fix the mess and calm the masses. The remedy is usually oodles of cash.
From where I stand, I blame much of our economic problems on the recurring bouts of ignorance on behalf of those we expect to understand the economic ship they are tasked with steering.
To be specific, our elected officials controlling the purse strings (who likely mean well), understand very little about the workings of an economy. Since most of the top brass politicians have spent their entire career climbing up the long political ladder in order to get to those lofty levels, they have done little else. This includes never having run an actual business enterprise.
That’s not so good for us worker bees as the United States is essentially one big business. In fact, it’s the largest business in the world.
One could make the argument that the reason our economy seems plagued by recurring problems is that it is run by politicians who have little if any experience operating a business. Indeed, most of the world’s economies are run by the same breed of bureaucrat.
Politicians are, for the most part, just well spoken, charismatic people with high aspirations and big egos with no real world experience. It seems like a prerequisite for the highest levels of political office.
The latest politician to illustrate her economic illiteracy is no other than Senator Elizabeth Warren. In a January 29th, 2024 article by columnist Rebecca Picciotto entitled “Sen. Elizabeth Warren pushes Fed Chief Chair Powell to cut astronomical rates, ease housing pressure”, Warren is quoted asking Federal Reserve Chief Jerome Powell to “bring down interest rates” to make housing more affordable.
On the onset, that sounds like a valid request. But economics is more complicated than thinking making loans cheaper by lowering interest rates is a remedy for reducing housing costs.
Gee, if it was that simple, why did I study economics my whole life?
And if you, dear reader, believe Warren has solved the unaffordable housing problem with one swift kick, it’s the reason economics requires years of study to truly understand the complexity of how money things function in the real world.
So follow me closely class. Lower interest rates make money cheaper, and cheaper money means more spending, and more spending means higher demand, and higher demand means things cost more. The words “things cost more” is known as INFLATION.
Fed chief Powell knows lowering interest rates, sans government intervention into the real estate market, will INCREASE home prices, offsetting any savings from lower interest rates (which translate to lower mortgage payments).
The persistent near zero interest rates since the dot.com crash is a large reason home prices have tripled since the early 2000’s. Simply put, Senator Warren is advocating the very thing (lower rates) that caused home prices to skyrocket in the first place.
It’s no wonder that many believe the actions in certain situations by governments to solve an economic problem actually exasperate them.
Warren is highly educated with a law degree, schooled at some of the finest institutions and with many honors to her name.
Like many politicians however, who pursue their ideals through childlike and simplistic solutions, the real remedies elude her and many like her.
The news media they follow and may be relying on to arrive at their solutions may be just as clueless.
In the very article that covers Warren’s conversation with Fed Chief Powell, columnist Picciotto adds the following commentary: “Home prices surged …… due to record high (interest) rates……”.
Excuse me Ms. Picciotto, but high interest rates cause home prices to FALL, not rise. Low interest rates cause prices to rise.
In the article, Fed Chief Powell has this kind of perplexed look on his face as he faces Warren when she pronounces her edict.
I feel sorry for Powell. He has to answer to the likes of Warren, her being a powerful Senator and all. But it would be interesting to be a fly on the inside wall of his brain to know what he’s thinking as Warren spouts off her ignorance.
Powell knows he must keep rates up to quell inflation. Warren thinks rates must come down to solve it.
It’s a good thing Powell has the final say.
At least until the likes of Warren fire him.
“Watching the markets so you don’t have to”
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. insurance services. Email: [email protected]
