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The Fed Doubles Down
First, it has created a "positive yield curve": short-term interest rates are lower than long-term rates. On Wednesday the rate on 10-year Treasury bonds was 3.7 percent, compared with the 3.0 percent Fed funds rate. Banks can borrow at the lower rate, buy T-bonds at the higher rate and profit from the "spread" between the two. The profits help replace lost bank capital. In December the yield curve was inverted. The rate of the 10-year Treasury (4.1 percent) was lower than the Fed funds rate (4.25 percent). Economist Brian Bethune of Global Insight estimates that major banks and investment banks have lost $130 billion on subprime mortgages and that only $30 billion has been replaced by new investment.
Second, the lower Fed funds rate automatically reduces rates on many bank loans—home equity loans, small business loans—that are tied to banks' "prime rate," which usually floats three percentage points above the Fed funds rate. Banks yesterday cut the prime to 6 percent; as recently as mid-September it was 8.25 percent. Lower interest rates ought to reduce future defaults and delinquencies; that would strengthen banks' financial condition and encourage them to make new loans. Lower short-term rates would also cut rates on some adjustable rate mortgages (ARMs) and thereby aid the depressed housing market.
It all sounds logical, but there's one rub. It presupposes that inflation will quietly settle back into the Fed's comfort zone. Perhaps it will. But there's a possible contradiction embedded in Bernanke's game plan: the more successful the Fed is in reviving economic growth, the weaker the anti-inflationary pressures of a sluggish economy will be. The Fed might find itself in the awkward position of having flooded the economy with inflationary amounts of credit. There is at least some skepticism within the Fed itself. Richard Fisher, head of the Federal Reserve Bank of Dallas, dissented from the interest rate reduction. Now it's waiting time. Bernanke has doubled down on his bet. If he succeeds, his reputation should soar. If not, his bad gamble could cost the American economy for years.
© 2008
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Member Comments
Posted By: eddiewhere @ 02/01/2008 1:58:25 AM
Comment: I hate to break it to you but INFLATION is alredy taken its grip on the economy. IF YOU NOTICE even fast food has gone up. THERE WAS NO NEED TO LOWER INTEREST RATES FURTHER.
AS Prices rise demand will decrese ADAM SMITH. BY lowering interest rate you are hindering the recovery Process. THE FED ALREADY LOWERED INTEREST RATEs. WHAT THE ECONOMY NEEDS NOW IS A BAIL OUT Plan for the mortgage crisis. THE middle class just needs targeted tax cuts and you will see the economy turn around in six months. THE FED IS ENCOURAGING SPENDING INSTEAD OF SAVING. WE NEED TO LET THE CYCLE TAKE IT"S COURSE IF NOT THE COLLAPSE WILL BE DEVESTATING.
Posted By: eddiewhere @ 02/01/2008 1:53:06 AM
Comment: By: eddiewhere @ 01/23/2008 1:24:23 AM
Comment: : Sometimes we have to let PRICES RISE it is a healthy thing. A Person who never gets sick can never build up an immune system to fight future more devestating viruses. It is not good to get sick all the time but it part of our biological developmet. PRICE CONTROLS ARE BAD WHY? Any price control below market rates and/or the expenditure of national savings (financial reserves) to hold down monetary devaluation are inflationary. Price controls and the expenditure of financial reserves subsidize inflationary levels of demand and prevent increases in supply. They make it much more difficult - much more painful - to bring inflation to a halt and restore healthy and sustainable economic growth.
Monetary inflation is a TAX used by governments to expand the money supply and transfers wealth from its people to itself.
Even when there is little "price" inflation, stable prices just mean that governments, by printing more money or otherwise expanding the money supply ("monetary inflation"), has appropriated for itself all the benefits of each year's increase in productive efficiency.Therefore the measures used to hold down price increases are actually additional forces or causes behind inflation, that will cause even further price increases in the future.
"Our country is too large to have all its affairs directed by a single government. Public servants at such a distance, and from under the eye of their constituents, must, from the circumstance of distance, be unable to administer and overlook all the details necessary for the good government of the citizens; and the same circumstance, by rendering detection impossible to their constituents, will invite public agents to corruption, plunder and waste." --Thomas Jefferson to Gideon Granger, 1800. ME 10:167
"I consider the foundation of the Constitution as laid on this ground: That "all powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people." [X Amendment] To take a single step beyond the boundaries thus specifically drawn around the powers of Congress, is to take possession of a boundless field of power
Posted By: eddiewhere @ 02/01/2008 1:24:07 AM
Comment: I hate to break it to you but INFLATION is alredy taken its grip on the economy. IF YOU NOTICE even fast food has gone up. THERE WAS NO NEED TO LOWER INTEREST RATES FURTHER.
Sometimes we have to let PRICES RISE it is a healthy thing. A Person who never gets sick can never build up an immune system to fight future more devestating viruses. It is not good to get sick all the time but it part of our biological developmet. PRICE CONTROLS ARE BAD WHY? Any price control below market rates and/or the expenditure of national savings (financial reserves) to hold down monetary devaluation are inflationary. Price controls and the expenditure of financial reserves subsidize inflationary levels of demand and prevent increases in supply. They make it much more difficult - much more painful - to bring inflation to a halt and restore healthy and sustainable economic growth.
Monetary inflation is a TAX used by governments to expand the money supply and transfers wealth from its people to itself.
Even when there is little "price" inflation, stable prices just mean that governments, by printing more money or otherwise expanding the money supply ("monetary inflation"), has appropriated for itself all the benefits of each year's increase in productive efficiency.Therefore the measures used to hold down price increases are actually additional forces or causes behind inflation, that will cause even further price increases in the future.
"Our country is too large to have all its affairs directed by a single government. Public servants at such a distance, and from under the eye of their constituents, must, from the circumstance of distance, be unable to administer and overlook all the details necessary for the good government of the citizens; and the same circumstance, by rendering detection impossible to their constituents, will invite public agents to corruption, plunder and waste." --Thomas Jefferson to Gideon Granger, 1800. ME 10:167
"I consider the foundation of the Constitution as laid on this ground: That "all powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people." [X Amendment] To take a single step beyond the boundaries thus specifically drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition." --Thomas Jefferson: National Bank Opinion, 1791. ME 3:146