Fed shows that no lessons were learned by slashing rates by 75 basis points.

[Jacobtm]

Here's a little chart of recent Fed Funds rates


As you can see, right as the stock market bubble started bursting, interest rates started dropping precipitously to give more liquidity to investors. 9/11 happened, and interest rates continued to drop to prevent a recession. Interest rates dropped down to 1% and stayed there for about a year. Then, because of low interest rates, this housing bubble emerged. People began buying homes that they couldn't afford, but credit was so cheap that it hardly mattered to whom banks were lending.

Because interest rates were so ridiculously low, the economy began to expand very quickly, and interest rates needed to raise rapidly to stop the economy from over-heating.

The whole reason we didn't go into a bigger recession in 2001 was because we began to finance our nations economic expansion on debt, allowing it to grow quicker than it rightly should've, and likely expand beyond its long-term average. What is needed now, to allow the economy to return to a healthy state, is a general contraction of the economy and a tightening of credit, so that people who cannot afford houses don't try to buy them and get buried in debt, and so that banks won't have any incentive to lend ridiculous sums to these people that can't pay them back.

But no one will learn these lessons. The federal government is bailing out every bank that loaned money to people who clearly couldn't pay it back, or invested in sub-prime mortgages, which clearly many people wouldn't be able to pay back. These banks should pay for their stupid loans, lose money, and even go out of business if their investments were so stupidly focused on these non-performing loans. People should face tighter credit so that they don't think they can have a $40,000 salary and buy a $250,000 house. Tighter credit means higher interest rates, which will encourage people to save and discourage spending. After years of spending more than we earn as a nation, this is needed to get ourselves back on a reasonable track and bring our expectations of what we can truly afford down.

Just because your credit card allows you to buy something, doesn't mean you can afford it. The rises in unemployment and home foreclosures we're seeing now are the true cost of years of debt-based expansion.

The Fed, however, is just cutting interest rates right back down, allowing credit to become so cheap again that people can borrow their way into new stupid investments, which will backfire in another 4-8 years, and cause more troubles just like this, and just like the dotcom bust.

[I spent the winter writing songs about getting better]

At the very least, we're going to need tougher regulation on loans, to prevent something like the housing bubble from emerging again.

[MODU]

And, of course, it shows that the Fed was right by lowering the rate by cooling a recession trend triggerred by a collapse of the largest market at the time in 2000.  So today's action isn't a bad thing.  I was just surprised that they went with three-quarter point rather than a half-point.

As far as someone with a $40K salary buying a $250K home, there is nothing wrong with that, depending on what the person/couple puts down in cash.  If they are trying to finance the full $250K, then it is up to the bank to determine if the person will be able to make the payments (which he/they can do depending on what other debt they might have), assign a proper rate, assume the risk of issuing such loan, and only after councelling the lender ahead of time so the borrower fully understands the situation.  Ideally, a borrower will put 20% down on a house at the time of purchase, so in this case, he/they will only be borrowing $200K, which is managable at $40K/year.

[Bono]

At the very least, we're going to need tougher regulation on loans, to prevent something like the housing bubble from emerging again.

No, we're gonna need a fed that has got the balls to not cut interest rates every time investors get scared.

[2952-0-0]

It seems like everyone's ignoring the giant elephant again. This entire mess was started by banks finding creative means to sell loans and pushing the buck to the rest of the world. This entire mess, in essence, was caused by massive debt. Unless there's an effort to alleviate this mess, even borrowing a page from Japan and lowering rates to 0 ignores the real issue.

[Person Man]

It seems like everyone's ignoring the giant elephant again. This entire mess was started by banks finding creative means to sell loans and pushing the buck to the rest of the world. This entire mess, in essence, was caused by massive debt. Unless there's an effort to alleviate this mess, even borrowing a page from Japan and lowering rates to 0 ignores the real issue.

Yes. You can fudge the numbers however you want, but the long term is important. Responsibility is key. Also, keeping down infrastructure costs is important too.

[Swing low, sweet chariot. Comin' for to carry me home.]

It seems like everyone's ignoring the giant elephant again. This entire mess was started by banks finding creative means to sell loans and pushing the buck to the rest of the world. This entire mess, in essence, was caused by massive debt. Unless there's an effort to alleviate this mess, even borrowing a page from Japan and lowering rates to 0 ignores the real issue.

no, it wasn't the amount of debt, the markets easily absorbed the amount of debt, it was the faulty risk assessment of that debt

[frihetsivrare]

No, we're gonna need a fed that has got the balls to not cut interest rates every time investors get scared.

We need a fed that has got the balls to disband itself.  Either that or we need a congress that's got the balls to disband the fed and return to sound money.

[Person Man]

It seems like everyone's ignoring the giant elephant again. This entire mess was started by banks finding creative means to sell loans and pushing the buck to the rest of the world. This entire mess, in essence, was caused by massive debt. Unless there's an effort to alleviate this mess, even borrowing a page from Japan and lowering rates to 0 ignores the real issue.

no, it wasn't the amount of debt, the markets easily absorbed the amount of debt, it was the faulty risk assessment of that debt

Exactly. It's just that the money is never coming back.

[Cubby]

No, we're gonna need a fed that has got the balls to not cut interest rates every time investors get scared.

We need a fed that has got the balls to disband itself.  Either that or we need a congress that's got the balls to disband the fed and return to sound money.

Ron Paul says this.

What would happen if we abolished the Fed, and why is it so important to Libertarians? I don't have an opinion, I'm genuinely curious.


I was very surprised that the Fed cut the Federal Funds Rate by 0.75 points today. According to an article I read about it, this is the first time they've cut the rate by more than 0.50 points since 1984. They must be real scared of what might happen if they were too timid.

[opebo]

This is what capitalist States do - they raise and lower interest rates in a vague attempt to control the economy.  Of course lowering rates right now is reasonable for the system, which is in  rapid decline.

That said, expecting interest rates alone to create a 'good economy' is quite silly - income redistribution is key to a growing, stable economy.

[Grumpier Than Uncle Joe]

income redistribution is key to a growing, stable economy.

Through communism or capitalism?

[opebo]

income redistribution is key to a growing, stable economy.

Through communism or capitalism?

Keynesian Capitalism, but you can call it whatever you like.

[Person Man]

income redistribution is key to a growing, stable economy.

Through communism or capitalism?

Keynesian Capitalism, but you can call it whatever you like.

More or less... though the income redistribution shouldn't be the key. The key is good infrastructure that provides an oppurtunity for the search of talent as well as low transaction costs and the oppurtunity to build new markets.

[opebo]

No, the key is redistribution.  Keynes wanted to save capitalism (and the controlling capitalist class) from itself.  Their normal tendency is to hoard all income to themselves.  Redistribution creates enormously greater and more reliable consumption, as well as eliminating much of the need for penal abuse to keep the worker in line (which can be expensive).  Of course there is no reason the more extreme unequal/penal model can't work, as we see all around us, it just has some inherent instabilities not to mention the profound human suffering that is its lifeblood.

[Person Man]

No, the key is redistribution.  Keynes wanted to save capitalism (and the controlling capitalist class) from itself.  Their normal tendency is to hoard all income to themselves.  Redistribution creates enormously greater and more reliable consumption, as well as eliminating much of the need for penal abuse to keep the worker in line (which can be expensive).  Of course there is no reason the more extreme unequal/penal model can't work, as we see all around us, it just has some inherent instabilities not to mention the profound human suffering that is its lifeblood.

I am guessing if people REALLY want their money, they will do anything to make this current system work. I guess we will have to wait untill its fall...how and when could that happen?

[Bono]

No, the key is redistribution.  Keynes wanted to save capitalism (and the controlling capitalist class) from itself.  Their normal tendency is to hoard all income to themselves.  Redistribution creates enormously greater and more reliable consumption, as well as eliminating much of the need for penal abuse to keep the worker in line (which can be expensive).  Of course there is no reason the more extreme unequal/penal model can't work, as we see all around us, it just has some inherent instabilities not to mention the profound human suffering that is its lifeblood.

I am guessing if people REALLY want their money, they will do anything to make this current system work. I guess we will have to wait untill its fall...how and when could that happen?

LOL at the matter of fact way that is stated in. Way to assume controversial points without any justification...

[Person Man]

No, the key is redistribution.  Keynes wanted to save capitalism (and the controlling capitalist class) from itself.  Their normal tendency is to hoard all income to themselves.  Redistribution creates enormously greater and more reliable consumption, as well as eliminating much of the need for penal abuse to keep the worker in line (which can be expensive).  Of course there is no reason the more extreme unequal/penal model can't work, as we see all around us, it just has some inherent instabilities not to mention the profound human suffering that is its lifeblood.

I am guessing if people REALLY want their money, they will do anything to make this current system work. I guess we will have to wait untill its fall...how and when could that happen?

LOL at the matter of fact way that is stated in. Way to assume controversial points without any justification...

I mean, what can be done about it if it is true....and how would it run its course. Its assumptive, but still begs to be answered.