SEARCH BLOG: FEDERAL RESERVE
It's deja vu all over again. 1980 and interest rates on homes hit 16%. Oil markets were running amok. People selling gold and silver like crazy. And then we got over it and forgot it.
- We forgot that oil dependency leaves our economy vulnerable to the whims of the world
- We forgot that housing markets can crash and stay down for years
- We forgot that the payment for "free lunches" is more expensive than we realize
The Fed's worst nightmareOn January 7, I wrote:
Ugly retail sales and a somber forecast from CFOs point to recession, but rising oil and gold prices and a weak dollar show inflation. What's Ben Bernanke to do?
At this point, the Fed can do little right. Lower rates below 4% and the dollar crashes; don't lower rates and recession is probably assured. Pick your poison. 4% was the right target [when I said it was needed in Sept. '07]; the Fed process [which didn't recognize the developing problem] was simply inept. SEE THE SUMMARY IN THE RIGHT COLUMN.Further lowering of the interest rates is irrational at this point. It will simply exacerbate the problem. If the Fed had acted properly to begin with... not rapidly raising rates making ARMs unaffordable for subprime borrowers and then delaying the cuts thereby letting the damage get done... the banking crisis might have been considerably less.
All the Fed has accomplished with its recent actions to deeply reduce rates is screwing the dollar and causing inflation... which it will then take credit for curing by raising interest rates again. The Fed has not only not protected the banking system, it has not protect the economy from inflation.
Can you say "chasing your tail?"If B. Bernanke were a CEO, he'd probably be getting a $100 million "golden parachute" about now. But that's another issue.
Last November, I wrote that the Federal Reserve didn't cause inflation, but simply mucked up the economy. The recent mess with the banking system and pumping of money into the banking system along with rapidly dropping the interest rates has pushed the dollar lower resulting in pricing increases for necessary commodities such as oil. The Fed is not wholly to blame for the dollar's decline, but is certainly aiding and abetting this time.