If you thought Greenspan was a maniac for temporarily dropping interest rates to 1% in the years after 9/11, just wait until you seen what Uncle Ben Bernanke has in store.  Since taking on his positioin, Bernanke has so far ratcheted the federal fund rate down to Greenspan’s low of 1%.  But the two day fed meeting that started today is expected to commence tomorrow with an announcement that interest rates are going lower, and quite possibly to zero percent!


The United States bubble based economy is in trouble.  Instead of focusing on innovating and exporting our way to a stronger economy, we instead choose to borrow more, cut taxes, inflate, and spend.  Our government insists on short sighted solutions to keep asset prices artificially high.

In 1981, the federal fund interest rates topped out at over 19% and mortgage borrowing costs were expensive.  Borrowers were responsible, 20% was the customary home down payment, and the economy was humming along.  But with the first sign of economic trouble, the targeted strategy was to inflate asset prices at any cost, and the preferred solution was lowering interest rates.  Since that time, every new sign of trouble brings lower and lower interest rates, and those rates are now widely expected to hit zero percent in 2009, if not sooner.

Stimulating after zero percent? – Japan had deflating asset problems in the 1990’s Rather than allow the market to naturally self correct, they chose instead to aggressively lower interest rates.  When they approached and  hit zero perecent, they extended mortgage terms to 100 years to dupe consumers. 100 year mortgages were introduced in Japan starting in 1995 obsessed only with monthly payments and no comprehension of true value.  If desperate homebuilders, mortgage lenders, and real estate agents have their way, they will be introduced in the United States starting in 2009.

The sellsius real estate blog called for 100 year mortages recently.  Sellsius attempted to justify 100 year mortgages with seven ridiculous and unfounded benefit claims to the 100 year mortgage.  Unfortunately, every indication is that the United States will follow on with every policy mistake Japan has already made, including the 100 year mortgage.  Consumers will initially resist 100 year mortgages, but later embrace them.  Stupid Creative financing wins over most unsophisticated borrowers in the end as they consider only the monthly payments with no regard for longer term considerations.   But a few savvy consumers will make better choices.  And in most parts of the country, the wiser choice is still building equity through renting.  The equity comes from investing and compounding all the additional disposable income you keep from not buying inflated assets!

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