Rate Cuts… AGAIN?

Well, the Dow and the markets had a nice up day today.  However, the buying came on the expectation of a big rate cut coming from the Federal Reserve, perhaps to an all time low under 1%.  This is like fighting fire with fire.

As I’ve stated in previous posts, the 1% rate will encourage BORROWING, but will not encourage LENDING.  We need lenders to regain confidence in the people or entities they are lending to.  You can have borrowers lined up around the block, but if you aren’t getting a sufficient interest rate for the risk you are taking, you aren’t going to lend the money.

What we really need right now is for the market to set interest rates higher.  Once again, the Federal Reserve is artificially setting interest rates way too low.  If lenders could get 10% on their money, I bet a whole lot more of them would be making loans.  Right now though, prime is 4.5%.  That is not enough of a return for a lender to make a loan.

We keep hearing about how the free market and capitalism has failed.  We haven’t had capitalism and a free market since 1913 when the Federal Reserve was created.  What has failed is the inflationary policies of the Fed.  Their constant intervention and recent philosophy of low rates as a “cure all” is going to destroy this country’s economy.

Also, I read today that the Federal Government is strongly urging banks to lend money.  Banks have been injected with capital from the Federal Reserve, but instead of lending, the banks are using this money to help their balance sheets.

We need healthy financial institutions.  We do not need ones that are not healthy lending money because the government says so.  Again, the government is intervening, trying to fix things for tomorrow, while not thinking about next week.

This is the hazard of the government indiscriminately throwing money around to any financial institution.  They gave money to the good and the bad, and now they want them to start lending this money.  Rather than taking equity stakes, the government needed to let the bad banks get weeded out before they starting handing out funds.  Then, only the ones with strong balance sheets, that were well managed, and had sufficient funds would have survived.  They could have given the funds to these companies, and they would have been able to lend, rather than padding their balance sheets.

The actions of the Federal Reserve and Treasury Department have been a complete, unorganized failure.  Nothing they have done has worked, and rather than recognizing their failures and changing course, they have decided to start intervening more and throwing even more money at the problem.   At a time when we need leadership from the leaders of our economy, we have a reactionary policy that just compounds the problems, rather than fixing them.


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One Response to “Rate Cuts… AGAIN?”

  1. Stacey Derbinshire Says:

    I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!

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