So much for the trickle down effect of tax cuts for the rich.
Posted by Bill Bonner on Sep 26th, 2007
The Fed hit the markets with a half-point rate cut. The S&P shot up more than any time since the invasion of Iraq in March ’03. And now we read in the paper that Goldman’s (NYSE:GS) earnings in the last quarter rose 79%…and Abu Dhabi sank US$18 billion into giant buyout firm Carlyle.
Investors must think that the Fed’s intervention in the credit markets will be as effective as the Bush Administration’s intervention in Mesopotamia. And they’re probably right! In neither case does a campaign of shock and awe bring guaranteed results. Some problems just don’t lend themselves to meddling from outsiders.
In the case of the US economy, the Fed’s rate cut offers borrowers more credit at lower cost. But it is not as if the US economy has been short of credit. Total credit in the United States rose from 150% of GDP in 1971, when the dollar was cut loose from gold, to about 340% of GDP today. That, dear reader, is a credit expansion! It is what has made the US economy what it is today…and it is why a cut in the Fed funds rate may not be as effective as investors hope.