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.