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« Interviews with Andrew Keen and Techcrunch | Main | Real world catches up to (Grumby) fiction - Sighting #2 »

July 16, 2010

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George

Good job on the article Andy..keep up the great work!

David

The WSJ has really lowered its editorial standards! The premise of the artile is not only poor, but the supporting arguments as well. The ZIRP is not even close to the problem. The primary problem is excess capacity, excess housing inventory, and overly levered governments and households. Because of the size of the bubble, these may remain a problem for a number of years. So we should get used to strong head-winds in the economy.

As for companies investing in projects above the risk-free rate, you need to take classes beyond Economics 101 and get into some higher level economics and finance courses - and come into the real world! Capital is scarce and constrained. Companies cannot borrow at the risk-free rate (Berkshire Hathaway and a couple of other companies come close, but only because they consciously RESTRICT the amount of capital they borrow to well below their natural capacity and put up significant amounts of more expensive equity capital, both signs of constrained capital). Rather companies borrow, on average, at their cost-of capital, which in every case I am aware of, is greater than the risk-free-rate. At least theoretically, in allocating capital, companies invest in their rank-ordered HIGHEST RETURN PROJECTS that EXCEED their marginal and average cost of capital. If not, they would not be better served to retire equity or debt than to move forward with the project. This has little relation to the ZIRP other than a ZIRP may lower the hurdle rate somewhat and allow more projects to cross the threshold, ceteris paribus. There is no confusion about which projects to fund caused by short-term, risk-free rates are at zero as projects are not normally funded with risk-free, overnight funds.

Bottom line? This article does not represent good journalism, good economics, or good finance. Shame on the WSJ editorial staff for letting this through.

Ramsey33Holly

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Timberland Outlet

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