The Maestro’s Confession
Monday, September 17th, 2007
By Michael Lombardi, MBA for Profit Confidential
In the financial advisory business, I was one of the biggest opponents against then Fed Chairman Greenspan’s decision to bring down interest rates so low after the tech-bubble burst. By decreasing interest rates to a 46-low, Greenspan, I believed, was setting the stage for massive amounts of borrowing by consumers.
And that’s what consumers did. They took advantage of decreased interest rates and bought new home, upgraded their own homes, and even bought second and third homes. Being a real estate man, I long ago learned the bigger the property boom, the bigger the bust that always follows.
Last night on “60 Minutes,” the Maestro (as Greenspan was often called) confessed that he had not realized until it was too late that the historically decreased interest rates would cause the credit crisis we have now. In his own words, Greenspan said, “I really didn’t get it until very late in 2005 and 2006.”
What Greenspan really failed to realize is that consumers as borrowers are human beings. And humans are full of emotions that often run in the way of logical decision making. Many Americans, even if they were comfortable with their homes, upgraded to bigger and better homes because reduced interest rates meant decreased monthly payments. Because of decreased interest rates, California and Florida are chock full of second homes consumers bought for vacation purposes. The developer made a fortune while the boom lasted.
Now, as interest rates have risen, consumers are having difficulties paying higher monthly payments. Property taxes have gone up, and so have utility costs. Cautious lenders are making it difficult for consumers to refinance and hence the bust phase for both real estate and lending is upon us.
Greenspan et al made a huge mistake in bringing interest rates down so much because such low rates simply induced millions of Americans to borrow more. It will be very interesting to see how the U.S. economy deals with “payback time” over the next couple of years. Personally, I believe the U.S. economy is entering a very difficult period.
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Tags: interest rates, U.S. economy
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
