Fed cuts rates again- and it won’t help.

What happens when the Fed can’t cut interest rates anymore? We’re getting really close to finding that out. No, wait, isn’t that sort of what the Bush administration “Stimulus package” is- when we borrow money from future generations, and hand it out for free?

The Fed cut interest rates again today, and you should be wondering what Ben Bernanke is smoking. The US imports more than it exports, and with a weaker dollar, cost of living will begin to skyrocket. No matter how much they cut the interest rate, it’s not getting passed down to consumers fast enough or even passed at all.

Reactive economic policy is never a good idea, since macro economics are a long term art, not a short term tactic. Instead of stepping in and forcing the banks to cut rates to consumers who are already deeply in debt, with high interest revolving credit- he’s playing with the rates that are only available to the A+ credit people, the ones who already have money and aren’t getting foreclosed on. My economic stimulus plan wouldn’t have cost the government a cent, compared to this catastrophic path we’re headed down.

Fed cuts rates again in bid to stave off recession – Jan. 30, 2008
NEW YORK (CNNMoney.com) — Faced with growing risks of recession, the Federal Reserve made its second deep interest-rate cut in a week and slashed a key short-term rate by a half-percentage point Wednesday.

U.S. stocks, which had been slightly lower ahead of the announcement, surged on news of the rate cut but ended lower after a volatile final two hours of trading.

The federal funds rate – an overnight bank lending rate that affects how much interest consumers pay on credit cards, home equity lines of credit and auto loans – was cut to 3.0% from 3.5%. The rate had stood at 5.25% only four months ago.

The discount rate, which is what banks pay to borrow directly from the Fed, was also cut by a half-point to 3.5% on Wednesday. The cut was made at the request of nine of the nation’s 12 Federal Reserve district bank presidents.

The Fed slashed both rates by three-quarters of a percentage point in an emergency move on Jan. 22….

The rate cuts were necessary because problems in the credit markets were putting a squeeze on both consumers and businesses, the Fed said. It added that it sees growing weakness in both the job market and the battered housing market.

“Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity,” according to the statement. “However, downside risks to growth remain.”

The Fed also appeared to hint that it will keep cutting rates if the economy shows more signs of decline.

“The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks,” the statement said….

“Given where the Fed says the risks lie, you have to ask yourself, ‘Are financials markets going be all that less stressed by March?'” he said. “I think the answer to that is, ‘Probably not.'”

But economists who are concerned about inflation criticized the Fed move, and its apparent lack of attention to price pressures.

“Higher prices are coming, even if the economy slows to a crawl,” said Rich Yamarone, director of economic research at Argus Research. “We’ve seen price increases in company announcements, in our grocery bills and in the economic data. The Fed is telling you they’re going to watch it because that’s in their mandate. But I think they’ll turn a blind eye to that.”

The rate cuts came on a day the government reported that economic growth slowed significantly in the last three months of 2007, matching its weakest performance of the past five years. It also comes as Congress rushes to pass a $150 billion economic stimulus package to spur spending by both consumers and businesses.

I added the bold italics. The banks made bad decisions when giving high risk creditors loans at high rates. The entire housing market is collapsing, with foreclosures in Ohio going up 88% since last year. Revolving debt isn’t being reduced, and it’s all interconnected. By a simple forced reset of the Adjustable Rate Mortgages immediately, many home owners housing costs would be hundreds of dollars less per month, thus freeing up money to pay down higher interest revolving credit card debt. Re-regulating credit card rates, with a cap of 19%- still giving banks a 15% return on their money, would also help consumers faced with mounting bills, and higher gas prices- and gas price pass-throughs (since everything we buy is shipped by truck) to get their bills under control.

Banks haven’t shown a willingness to either refinance at lower rates to anyone but the most credit worthy. This is why the rate cuts aren’t going to solve any problems. BTW: my opponent, Jane Mitakides supports the current stimulus package and didn’t think it went far enough. I guess that would make her a tax and spend Democrat, just like the tax and spend Republican, Mike Turner, that she hopes to replace who also supported this boondoggle “stimulus” solution.

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9 Responses

  1. Dad January 31, 2008 / 12:01 pm
    Ohio used to use the usury laws to cap interest rates. But that ended in 1995 when the legislature approved payday loans.

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  2. Juan January 31, 2008 / 1:49 pm
    WHAT??!! Do you have a problem with 483% interest rates on those payday loans, Mr. Esrati?? What’s wrong with these lenders making an honest return on their investments?

    Seriously though… I think that “real” financial institutions (banks, credit unions, etc.) still operate under the usury laws where they’re capped at 28% or so in Ohio. I don’t know what kind of loophole the legislature created to allow the payday loans, but those that approved it should have been forced to refinance their houses under the terms of those loans.

    Interestingly, I saw a sign in my credit union a year or so ago offering an alternative to payday loans. These were essentially loans for $500 and under that offered weekly payback options. While I’m sure the rates were high by credit union standards, they were better than offered by the traditional payday lenders. This program also gave credit union members a reputable way to build a credit history.

    David – I have a huge problem with your “simple forced reset” of adjustable rate mortages. As we’ve discussed before, both of our ARMs are due to reset soon (yours in April, mine in July). When we signed those mortgage documents, we were both smart enough to know what the terms of those loans were. And, when we took those mortgages out, our “intro rates” were below what a fixed rate would have been. I don’t think it’s the Federal Government’s place to force new contract terms between National City and me. My rate was fixed for 5 years and actually dropped several times after the 5 years were up and then creeped upwards over the last couple of years. The difference now is great enough, and fixed rates are approaching an all time low, I am going to refinance in the very near future, even though my rate will probably drop substantially in July. Take out an ARM, you take a gamble.

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  3. David Esrati January 31, 2008 / 7:08 pm

    Juan,
    The forced reset is a way to stimulate the economy faster than the “buy the voters with a loan from future generations” solution. You do realize bankers make money on the fees every time you refinance, don’t you? The only stocks that went up when the market crashed were bank stocks… hmmmmm.
    The rate cap on credit cards is currently 29% which is still too high- it’s called usury.
    As to payday lenders- and “rent to own”- we need to put restrictions on both. Preying on the poor isn’t a way to make an honest living.

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  4. Jeff January 31, 2008 / 8:04 pm
    I think they call check cashing places, RALs, and payday loans fringe banking.

    There’s a lot of it spring up around town. Ive used the distribution of these places to locate decling suburban areas.

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  5. gene January 31, 2008 / 9:49 pm
    Fed cuts can’t and don’t work…. as far as I can see……

    a rebate check will promptly go into an investment rather than a local restaurant – I eat out enough as is …… that won’t help either ……. how lib of me…….. dunking

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  6. Juan February 1, 2008 / 7:19 am
    David, David, David…OF COURSE I know that banks make money and charge fees for refinancing. And many of those fees, especially on a refinance, are just junk fees. But, part of our responsibility as individuals in the free market is to make sure that, after paying those fees, it still makes sense to refinance. If I drop my rate a couple of percentage points, but have only a relatively small balance on my loan, it might only make a $100 or so difference in my payment – especially if I’m not extending the original loan term. So, if the bank charges me $1877 – $3225 in closing fees (obtained from NC Mtg’s website last week), it’s going to take a couple of years to recoup that fee. It may or may not make sense. And, although the responsibility is mine to determine if it makes sense, I would agree, that at some level, the mortgage companies have a moral obligation to the consumer to let them know if it makes sense.

    And, I don’t need a definition on the word “usury”. I think I used it in it’s correct context in my original post! :)

    I would tend to agree that the RTO’s and Payday lenders need some sort of restriction. It’s unconscionalbe (did I spell that right?) what they do to people. It truly is predatory. I would also agree that preying on the poor is not a way to make an honest living. But, I think there’s a special (warm) place for those types later on.;)

    Holy Cow! Gene and I both agreed with you on something! This news bulletin just in – HELL FREEZES OVER! Film and more on the story tonight at 6:00!

    But, I still have a fundemental problem with FORCING banks to reset loans. Be careful with what you want to FORCE upon businesses. The next thing you know, someone will introduce legislation to force advertising agencies to hire Republicans! ;)

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  7. David Esrati February 1, 2008 / 7:53 am

    Juan,
    The thing is- we’re forcing policy now- and injecting cash like a one-armed bandit hitting the triple cherries. We should get something back.
    The point is to free up cash quick- and inject it back into the economy- and stop home foreclosures. Waiting for people to act- and trying to process all those re-fi’s in a hurry won’t solve the problem- nor will you be happy, when you get rejected for high credit balances, or find out your house is worth 20% less.
    Remember- the Fed just devalued the dollar to it’s lowest level in years.

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  8. Payday Loan Advocate October 17, 2008 / 2:17 am
    Back in 2006, both Presidential candidates, Barack Obama and John McCain, gave their support to the bill that took away a select group’s access to no fax payday loans. The bill, which went into effect in October 2007, capped interest rates that payday loan stores could charge military personnel at 36 percent. This action was based off the increasing number of American soldiers in the Army, Navy, Coast Guard, Air Force, National Guard, and other branches, who had loans taken out under their names without their knowledge, which sometimes led to becoming victims to identity theft. Other times, their spouses take out loans under their names without their consent. Despite the well-beings of the greater number of American citizens who are occasionally in need of financial help, they passed this bill in hopes to prevent further financial mishaps based on this reasoning. Now, Barack Obama has made another declaration to broaden this bill to affect every single one of us. With our financial freedom at stake, think about this before casting your vote.
    Post Courtesy of Personal Money Store
    Professional Blogging Team
    Feed Back: 1-866-641-3406
    Home: http://personalmoneystore.com/NoFaxPaydayLoans.html
    Blog: http://personalmoneystore.com/moneyblog/

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  9. Payday Loan Advocate October 17, 2008 / 4:32 am
    Ted Strickland, the Governor of Ohio, is in the process of trying to convince people in his state to vote in favor of House Bill 545. Enacted unethically, without the voice of the people earlier this year, support of the bill would put a cap on the annual interest rates that no fax payday loan companies can charge to 36 percent. This would mean that for every $100 that a lender issues to a customer, they can only make a measly dollar and change. Considering that no business can survive by making just over a dollar per transaction, House Bill 545 would drive this entire industry out of the state. What’s worse, is that democratic presidential candidate Barack Obama now is trying to do Strickland one better, as per his campaign promises. Should he win the White House, Obama has gone on record stating that he wishes to impose Strickland’s interest rate cap nationally. What this will definitely mean is that people will be much more hard-pressed to make ends meet in tough times. Therefore, if their job pays them a lot less than they’re used to, or life throws them one of its little surprises, hitting rock bottom is almost inevitable. Such measures illustrate the importance of voting and having your voice heard.
    Post Courtesy of Personal Money Store
    Professional Blogging Team
    Feed Back: 1-866-641-3406
    Home: http://personalmoneystore.com/NoFaxPaydayLoans.html
    Blog: http://personalmoneystore.com/moneyblog/

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