While Dayton is feeling the brunt of the foreclosure crisis- fundamental financial problems are going to plague our country until someone steps in and does something. Today, Fed Chairman Ben S. Bernanke did his part dropping the discount rate half a point:
Saying it now feels that the recent disorder in financial markets has raised the risk of an economic downturn, the Federal Reserve today approved a half-percentage point cut in its discount rate on loans to banks. The move sent markets surging on Wall Street and in Europe…
The cut today in the rate applied to banks that seek funds at the Fed’s so-called discount window appears meant to assure banks that may be having trouble raising money that the Fed will do everything in its power to ensure cash is available at low rates.
Unlike a change in the federal funds rate, a change in the discount rate does not have a direct impact on consumers. The federal funds rate influences everything from car loans to mortgages because it affects how much banks charge each other when they borrow money. The discount rate, however, applies only to banks that are having short-term financial difficulties.
But, that isn’t going to stop Joe-Bob and Mary-Jo from losing their home, or worse. The real problems are three-fold:
- Our dependence on foreign oil
- Our dependence on cheap goods made in China and elsewhere
- Our crazy credit card policy
Since we can’t fix our infrastructure to move to public transit or energy efficient vehicles- and since the people with the oil still like to buy guns and planes from us- the first one will have to sit.
Number two- well, as long as we continue to let CEO’s make 400x what their workers make, and reward offshoring of jobs- that too, will have to sit. Just a note to college drop-out billionaires like Steve Jobs and Bill Gates: if you keep sending your money over to China to get cheap labor, one day, all those American dollars may come back into the market and buy your companies: note, ask IBM about Lenovo.
Number three: Could be solved tomorrow. When Joe-Bob is late on his credit card payment, current practice is to bump up his rate to 29% and leave it there- along with allowing him to continue to charge. Change this policy- and Joe-Bob may be able to make his mortgage payment. Interest rates over 25% used to be illegal. Now, they fund crazy bank profits. Instead of playing with the Federal Funds rate or the discount rate- Congress could cut 10 points off every Americans credit card bill and the economy might go into high gear. The policy has to change to one of counseling and restricting use when consumers can’t make payments- not increasing the charges. Make this change, and you’ll be a lot closer to smart financial policy that is sustainable.
Of course since the guy who gets hit with this penalty doesn’t lobby Congress- nothing will happen to help him.