Well, there’s something you don’t see every day. William Cohan articulates the case for the Fed’s raising interest rates:
The case for raising rates is straightforward: Like any commodity, the price of borrowing money — interest rates — should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.
The only way to return the assessment of risk to something resembling normalcy is to stop the manipulation. That requires nothing less than serious intestinal fortitude from the Fed and a willingness to raise interest rates in the face of determined opposition from Wall Street.
I honestly don’t know what the Fed should do. I’m glad it’s not my call. While I think that removing money from the economy would be a mistake at this point, the harm that the present very low interest rates is doing is enormous. Just look at the risks being taken in pursuit of yield by individuals and organizations that are in no position to take risks. Very low interest rates over the period of a generation let alone forever will be a disaster.
A big problem is that fiscal policy and monetary policy have been pulling in the opposite directions. IMO nearly everything that has been done since the recession has been an error. If there hadn’t been mis-steps there’d have been no steps at all which probably would have been better.
I saw something a few days ago. I think it was at Zero Hedge, or I started at a link there. It was an article talking about Wall Street Investment Banks making personal loans using your portfolio as collateral. I think there was a limit, but you could buy a car, house, golf clubs, vacation, whatever using your stocks and bonds as collateral.
I do not know if this is new, but I have suspected something like this. If the purchase were a hard asset, the investment bank might be able to recoup part or all of the loan, and it could be a better risk than a strict investment loan. I seriously doubt that this is the case.
The wonder of leverage is that it can inflate prices quickly. The problem of leverage is that it can deflate prices quickly. When margin calls begin, it is not panic selling. It is forced selling. Money must be handed over to the lender, and unless one has cash available, part of the portfolio must be liquidated to satisfy the margin call.
The percentage of investors who have borrowed to purchase stocks and bonds will determine the depth of the damage. There could be panic selling in addition to the forced margin call selling, and this will only increase the damage.
The Taper Tantrum is not necessarily without merit, but this all is proof that the stock market and business is some bastion of rationality. Businessmen/women somehow cannot price risk without hand holding. They are like Wile E. Coyote, and as long as they cannot see the downside, there must be no downside. With Wile E. Coyote, gravity does not apply to him until he notices that he is hanging in thin air, and apparently, the same holds true for businessmen/women.
The truth is that they do not care about the downside risk. They intend to pass it off on somebody else. It could be the taxpayer, the customer, or the clueless co-worker.
Here is a prediction. The interest rates will eventually raise, and there will be some disruptions. Things will settle down, and it will be off to the races again as if nothing happened. Rinse and repeat.
There’s certainly nothing new about personal loans being secured with financial assets. 70 years ago in the days before credit cards my dad used to out personal loans frequently using stocks as collateral. He did that just about any time an extraordinary expense came up—occasions when people would use a credit card today. I don’t know how common it is at the investment banks.
However, it does bring up a good point. This is the age of unsecured credit.