Posts Tagged ‘Bernake’

Rate Cuts… AGAIN?

October 29, 2008

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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Don’t Lower Rates Again!

October 25, 2008

I read today that Bernake is expected to lower rates to historically low levels, perhaps as soon as next week.  This time though, rates might drop below 1%, to perhaps 0.75%.

Seriously, does anyone in Washington have a history book?  Or maybe even an economics book?  The Japanese did the same thing trying to encourage lending.  They actually lowered rates to ZERO and they stayed in an economic downturn for over ten years!

Bernake’s logic: Lower interest rates will encourage borrowing.  He’s exactly right there.

But lower interest rates will NOT encourage LENDING!  It actually gives lenders no incentive to lend money.  What we really need is much higher interest rates!

Think about it for a second. Right now, lenders have no confidence that they will be paid back.  Normally, if you are a risky borrower, you get charged a higher interest rate.  This way, the lender is compensated for the risk they are taking.  Instead, the Government is intervening in the system and trying to encourage lending by lowering rates.  This will encourage borrowers, but it does nothing to encourage lenders.

We need to let the market set interest rates, not the Federal Reserve.  The more intervention, the worse the problem is going to get.

Sure, the higher rates might be a crimp on our credit based economy, but in the short term, it will encourage lending.  In the long term, it will increase the reliance on savings and paying cash and discourage the use of credit for funding everyday expenses and paying the bills.

Don’t Do It Ben! An Open Letter to Ben Bernake

October 7, 2008

Dear Ben,

So, you and your buddy Hank have thrown everything you have at this economic crisis of yours so far and nothing has worked.  Short term loans?  Nope.  $600 billion?  Nope.  The $750 billion bailout?  Probably not.  A rate cut?  Won’t work.  

First of all, you need to realize that this “crisis” is called a recession.  It was partially fueled by your great predacessor, Alan Greenspan, who lowered rates to 1%.  He created this monster by not letting a recession happen after the tech bubble burst and 9/11.  Have you not learned anything in all your years as a professor?  The longer we try to inflate our way out of a recession, the worse it’s going to get!  Read your economics books!

Now you think buying billions of dollars of short term commercial loans is the solution?  You want to lower the Fed Rate again?  Is that the solution?

NO!  There is no “solution” to the recession except to let it play out.  Sure, this sucks for everyone right now.  Well, everyone except the politically well connected and all the Wall Street fat cats you’re helping to bailout.  

All of this bad debt needs to be liquidated and unwound, not bought up for hundreds of billions of dollars.  You can’t keep pouring more grease on a grease fire.  That is exactly what you are doing now.

Also, you can stop warning us that we’re going to be in a recession too because we already are in one.  You probably don’t feel it like most normal Americans though, but you can trust me on this.

We can suffer a little bit more, probably as long as it will take for the recession to run it’s course.  Then when it’s over, we’ll come out of it a stronger nation, who will save and not spend ourselves into massive amounts of debt.

So please, stop trying to fix the problem.  You’re only making it worse.

Thanks.

We Need to Act Now!

September 24, 2008

Why do you think Henry Paulson, Ben Bernake, and the Bush Administration keep saying, “We must act now!” and “We must act quickly!”?

It is because in times of crisis, the administration sees a chance to strip more freedoms and liberties from the American people.  

They use a “trust us, we know what we’re doing, now get out of our way” mentality and it has worked so far.

Finally, Congress is putting pressure on them and fighting back.

We’ll see though, when it comes to a vote, how many of our leaders will actually back up their talk and how many will cave and vote the bailout through.

Welcome to the New Financial Order

September 22, 2008

So, now we know.  Seven Hundred BILLION taxpayer dollars.  Wow.

The Federal Government, led by Treasury Secretary Henry Paulson, is going to spend that amount to buy up bad debt and illiquid securities from banks and financial institutions.

The first question that pops into my head, is that if this debt is so bad and so “toxic” that banks can’t give it away, why the heck is the government buying it for $700 billion?  That just doesn’t make any sense at all.

Also, along with this new, at least somewhat thought out, bail out scheme, the Treasury Secretary and only the Treasury Secretary will have the power to allocate and spend the money.  This power will have no checks and balances, and the plan spells out that the Treasury can not be reviewed or have any legal action taken against it.

With these new powers, our entire economic future rests in the hands of two unelected officials, the head of the Federal Reserve, and the head of the Treasury.

The Federal Reserve already has an exempt status from any checks and balances.  It can not be audited, and has absolutely zero transparency.  In fact, they do not even report how much money is in the financial system any more.  So nobody knows how much of an impact their printing of hundreds of billions dollars is really having on the overall money supply.  How much sense does this make?

Also, the Treasury Secretary Henry Paulson was the COO of Goldman Sachs before taking the public job.  Who do you think his allegiance is to?  How can he bail out big Wall Street banks without any regulation?  He’s a Wall Street insider with unbridled power to give our tax dollars away to his buddies at Goldman and other firms!

I’m not an economist in any way, but it seems that things are broken.  And all I hear is that Wall Street needs more oversight.  This is a diversion so the Fed and now Treasury Department can run our financial system like a dictatorship.

It was not Wall Street’s fault for the mess we’re in.  The Federal Reserve is the biggest culprit.

Former Fed Chair Alan Greenspan artificially lowered interest rates to 1% at a time when borrowing should have gotten more costly.  This led to easy credit and increased borrowing by everyone, from home owners to banks.  The entire system got flooded with so much debt that when they had to finally pay the bills, they couldn’t.  People are losing their homes to foreclosure and banks are failing or being bought out.

Then to make matters worse, rather than letting the market take it’s course, the Fed has been printing billions and billions of dollars trying to put a band aid on a huge problem.

Here’s what needs to happen:

1.  Take the money printing power away from the Federal Reserve.  Only Congress can print money, according the Constitution.  That money is supposed to be based on gold or silver as well, but that is probably impossible to go back to at this point.  Congress granted the power of creating money to the Fed, but that does not mean that Congress isn’t still responsible.

If bills come to my house in my name, but I tell my wife to pay them and she forgets, it still effects me.  Just because I passed responsiblity doesn’t mean I’m off the hook.  Congress shouldn’t be given a free pass either.  There needs to be more accountablity.

2.  Make the Fed more transparent.  We need to know how much money is in the system at least once a year.  Then we will know how much of an effect their printing of billions of dollars has on the money supply.

Every dollar the Fed prints makes the money in our bank accounts worth less.

As American citizens and taxpayers, we should be allowed to know exactly what the Fed is doing.

3.  Cap the amount of money that can be printed every year.  Once we know how much money is out there, Congress should impose a cap on how much money can be created.  Maybe it’s nothing.  Maybe it’s 1%.  But we need a limit.

How is anyone around the world going to have faith in the dollar if we keep creating more out of thin air.  If they knew that no more dollars were going to be printed, they would have faith that their money would increase in value over time.

This would be a great start to re-establishing the dollar in the eyes of the rest of the world.  It would also put more buying power in the bank accounts of every American.  Sure, there are more problems with the system that I will address in later posts.  But this is a start.  What do you think?