Stephen in MA:
Keep rates low, including income taxes. Works for me. Part two of that equation had better be, work off the debt with actual work and productivity. Rather than save a dollar by cutting production, find some field which needs MORE work–preferably not outsourced,either,as that negates the function we seek. My boss just loves to say, “Do more with less.” While I grit my teeth (more like gnash) at that statement,I can see the necessity of it. Problem is, every time this economy shows just a bit of progress, someone cries, “more!” As in, more money (Fed bailouts, ahem), more pay, more outsourcing to “contain costs” (I don’t know when I became a “cost” instead of an employee). Every time a tentative progress is made in one area, someone leaks it out of another. That’s why there’s no valid solution. Read my other blog of July 15 (”Scared yet?”) for more.
So if the Fed does not raises the rates, all prices go up; but if the Fed holds rates steady a little longer than only housing prices rise.
Inflation focus is paramount. The main reason we are in this mess is a direct result of easy Fed policy.
There were a tremendous number of successful small business startups in the Carter years.
Carter nominated Paul Voelker specifically to create interest rate drops that are falsely credited to Reagan.
But the real magic DURING Carter’s financial program was the ITC, the investment tax credit.
Sometimes, as under Voelker, the Fed can move mountains. But it’s a mistake to look for that from them today.
We need to clean house in Washington, replacing the Bush deadwood, apologists and hangers-on (especially including McCain, of course).
Virtually any replacement for this sad gang will fire up our economy again.
A crucial and obvious step will be restoration of investment tax credits. The automaic small business startups and expansions will directly and immediately create huge numbers of jobs in the only important sector.
Lower interest Rates? You’re joking right.
How come savers get the shaft but debtors get forgiveness?
The rates should have never been dropped below the STANDARD of 5%.
Low interest rates got us into this mess, that and unregulated creative mortgage banks.
Housing is STILL OVERPRICED AND THIS CORRECTION NEEDS TO HAPPEN.
Greed of homeowners and greed of banks=
ruining it for the average person.
Hey Paul,
I don’t blame you — because this TRULY is such a bizarre situation, a real riddle — a once-in-a-generation situation. But you do seem to be repeatedly visiting the same ‘conundrum’ and its putative solutions — but then this is same trip the FED takes each day whenever Ben Bernanke stumbles into his office.
The FED is between a rock and a hard place — of its own making, IMHO.
Whether it fights inflation or fights the current economic contraction caused by the ongoing debt-credit Bubble implosion amounts to the same thing — six of one equals a half dozen of the other.
The question the FED is asking and you are repeating to us is “How do you want your poison?”
What’s the logical “best” answer? There is none. We naturally would have preferred to AVOID the poison in the first place, assuming that we have a desire to live. Today there is NO CHOICE.
When you have thrown your economic baby off the bridge the answer to the question “How do we save the baby?” does not have a very reassuring reply. The realistic response is that the ‘problem’ does not have a ’solution’ — as much as our individual experience and education and naturally optimistic predispositions might have otherwise suggested — that is, that every problem necessarily MUST have a corresponding ’solution’.
The only correct response is “that we should NEVER have gotten into this situation in the first place”. And since we have gotten into it, let’s at the very least learn enough from this pain so that we don’t do it again, so as to unnecessarily REPEAT the pain!
Look, IMHO, this is a False Dichotomy. The FED has only so many “kicks at the can” before its monetary ’stimulation’ loses its kick, its juice, its ability to stimulate, etc. As the old saying goes, the FED will be “pushing on a string”. It has visited this well just one time too many in ’solving’ previous bursting bubbles (of its own making).
You can destroy the economy by allowing the current unsustainable Monstrous Credit Bubble to collapse. Alternatively, you can destroy the currency and the discretionary purchasing power of middleclass consumers by letting inflation become unmanageable.
People’s incomes are not going to keep pace with rising core prices. The result? — so-called discretionary income left over from the consumers’ “core” purchases will continually diminish and those employed in non-core parts of the economy will HURT as those non-core parts contract. As a reaction, those non-core parts will desperately COMPETE with each other by lowering their prices — actually activating temporary relative price deflation in THOSE non-core segments as they try to hang on with their fingernails to dear economic survival — but some of them will succumb.
What I am saying is that the economic contraction you are trying to avoid by INITIALLY only addressing the “credit crunch” by ignoring the fight against inflation WILL lead directly to that same CONTRACTION regardless of which poison you drink.
This current slowly-imploding Bubble is the Mother of all (the other) Bubbles. It is the result of the FED’s previously applied ’solutions’. Each time the FED — in order to “solve” the previous problem — has inflated a new Bubble to mitigate the painful contraction of the preceding Bubble. It got accustomed to so doing — hey, it always worked before, why not again and again?
Thereby the FED has necessarily caused our Society to take on ever-increasing amounts of Accumulated Debt (i.e. “Credit”). This debt is personal, corporate, and governmental. Its growth can no longer be sustained. Ultimately that is what this whole mess is all about. By one measure I read, it now takes more than $4 of new debt to create $1 of new GNP growth.
As your next article, please consider asking your Readership if We Have Just Reached The Ultimate Societal Debt Limit. Have we gone to a bridge too far?
IMO, there is no ‘easy’ way out this time — no light at the end of the tunnel — unless that light is coming from the proverbial onrushing train itself.
I am not suggesting that a ‘FED holding action’ which helps Fannie and Freddie and other financial institutions has no merit. But we need to be realistic. There is no magic bullet. The monetary vampires have been unleashed and they will live for many a day, wreaking damage wherever they go, before they are once again harmlessly sequestered in their coffins.
Your other contributors are right IMHO in trying to assess which specific courses of action cause the least pain to the least number. They are correct to examine the social costs. Whither goes the middle class goes our Western society.
Concurrent with such ‘holding actions’ (which IMHO can only be characterized as such) we should be examining what some other writers have alluded to.
How much socialization of our housing do we want? Freddie and Fannie may have been initially founded on a false premise — owner-occupied housing for everyone sounds all-inclusive, very Obama-esque, very statesmanlike, very American, but is it realistic? At what cost? Are we our Brother’s Keeper as far as owner-occupied housing goes? Can we afford it today? Can we really afford ANYTHING we want?
I have no sympathy for those who blame the current mess on only those misguided or ‘greedy’ souls who bought homes they could not afford. Or were ‘duped’ into buying. Please.
When the FED manipulates the money supply and lowers interest rates to obscenely low levels, then it directly pulls the puppet strings of Everyman, of every consumer, of every industrialist, every work-giver (employer) and employee, of every startup and small business, of every investor, of every borrower and lender. The FED does this because it directly causes the system to send out false signals and false information upon which we base our economic decision-making.
Paul, I don’t think the personal dilemma you have in your writing about whether to fight inflation or instead to fight the ‘credit crunch’ is misguided or intentionally wrong as such. IMHO you show respect for those many amongst us who struggle. You show empathy. And you show that you, like many of us, are confused about ‘where to go’ next.
What I suggest is that while well-meaning, your question is misdirecting our attention from the actual problem or actual solution. It is not one or the other. In one sense it is neither.
When we design a system that is itself faulty — but where the faultiness does not make itself apparent for more than the average person’s historical perspective — is it right to ask about a symptom of that faulty system?
Is it right to focus on the symptom of someone’s disease — like fever — and try to only fight that without examining the underlying disease?
No — we need to examine the whole patient.
And in “trashing about” and in trying to fight the fever with no attention given to the whole — by asking whether we should we cool inflation by fighting that first, or by asking if we should fight the crunch first, by ‘feeding’ the patient more ‘nutrition’ — we may be treating the symptoms, and doing nothing with respect to the underlying pathology.
Thanks for all the good work! Please keep on truckin’!
Laws are being passed to try to prevent banks from lending money to people who obviously can’t afford it. (Both for mortgages and credit cards) Will someone please tell me why there needs to be a law against this?
Oh, yeah, I know, because of the twin conditions that they can charge high rates and assume no risk.
What about this for solutions.
Solve the problem of credit card companies giving cards to college students and unemployed (and the like) by not allowing them to charge more then a couple of points over inflation. If they can’t afford very many defaults, they wont lend to people who can’t pay.
Solve the problem with mortgages to people who can’t pay them by making who ever writes the loans carry them. (no bailouts either)
More easy money is not what is needed. Credit in a society is like Goldilock’s bed. Not to soft, not to hard. It has been mighty mighty soft for a long time.
I guess Joseph didn’t notice that the wealth in this nation left a while ago. We have been trading it for consumable stuff (that we, oh yeah, consumed,) leaving us with no wealth, just debt. “Cheap money” wont give us wealth. Only production will.
Right now the patient needs some cheap money. Wealth is disappearing from this country faster than you can say “bankruptcy”. Seems to me that everyone is missing the real driver of inflation and the current mess. Rising oil prices are what’s creating a deeper issue than the mortgage mess or any other thing. We are in a perfect storm, low income growth, high commodities prices, a stunted housing industry, and consumer meltdown. To boost interest rates at this time would be the straw that breaks the camels back. And, what we haven’t seen is what will come next, higher taxes, which will really be the straw that breaks the back. Prolonged war, high resource costs, high taxes, and corruption in leadership. Next will be social unrest and the withdrawal of American influence throughout the World. We may have the biggest market today, but that will not last through the next 10 years, unless we release ourselves from oil, begin to believe in the value of the middle class as the biggest stabilizing force in any society and economy. As the middle class goes, so does the economy and right now this middle class is debt laden, and slightly peeved that the so called leaders of this country that have the positions to see the trends, did not make decisions that would put us in the best position to weather the trends. Wall Street…are you listening?
Everyone needs a history lesson on how the federal reserve and the banking system works. It is a scheme that has put American’s further into debt. Bernanke and Paulson will side with the bankers on Wall street and socialize the losses from bankruptcy and defaults among the taxpayers. Since 1910, they have total
control over monetary policy and Paulson is trying to expand this authority. The central bank has jeopardize the viability of the banking system with their greed for power and wealth. The majority of Americans are too ignorant or distracted to notice anything unusual.
We need to focus on what affects the largest amount of people. Inflation affects everyone since everyone has to eat and therefore has to go to the grocery store at some point in time. Not everyone is affected by the credit crunch and failing lenders so bailing out these firms should be taking a back seat here.
We need a two pronged approach to combat inflation. First, interest rates need to go up to help stamp out rising inflation. Second, all bans on oil drilling should be retired so that additional oil supply can lower prices across the board for everyone.
What the government is doing right now isn’t working, and hasn’t worked for years. We need to stop acting like this is a little league game where score isn’t kept and everybody wins. The real world isn’t fair and is full of failure. It’s time to let these lenders fail, stop inflation, and reinstate all the safeguards on lending that have been relaxed or removed since the great depression. Had those safeguards been bolstered and left in place, we wouldn’t be in the mess we’re in today.
Raise the rates. It was low interest rates/easy credit that got us into this mess to start with. Inflation is the real destroyer of wealth. Let some banks go under. The economy will be fine if interest rates reflected reality and not some Greenspan/Bernanake dream of dropping money from helicopters.
The feds bail out the banks and the brokers and inflation becomes a permanent tax on all of us.
most of if not all comments are moot.the fed’s main job is to keep the rich richer and keep us lower class in line.
Just saw the clip on cnn where Senator Dodd talks about IndyMac bankruptcy. He said it was not on the watch list and he wanted people not to make a run on their banks.
WOW this means the entire banking system is about to collapse and if you do not move your money out of American banks by this Wednesday you will lose all your money. The FDIC is itself bankrupt.
The Republicans are going to be blamed for all the economic turmoil in this country and also the entire world but this is all just surfacing now due to a presidential election year coming up in November and the liberal press is leading the chairleading for gloom and doom which they think will help the Democrats. However, the Democrats policies are the problem and will never be part of the solution. The Feds should keep interest rates low and this country should be finding more domestic oil to control oil prices by drilling more and developing new sources of energy and not simply blaming the drop in the dollar as the only cause of oil price spikes. Actually old sources such as nuclear, wind and solar should be hurried into production as quickly as possible. However, we common folks know that is not going to happen as long as Congress has a 9% approval rate. We are capitalist not socialists.
The Fed, which regulates fiscal policy, should consentrate on controling inflation. The long-term costs to the economy are much higher than the current pain that would be causeed by higher rates now. Except for continuing to provide liquidity in the financial markets where justified, it has done about all it can be asked to do.
The Administration and Congress are responsible for fiscal policy and have let the Fed “carry the ball” , so to speak, ande have avoided addressing tough fiscal decisions. They have failed miserably and need to quit “passing the buck” to the Fed
While the Administration and Congress fiddle, our Economy burns.
The Fed is primarily concerned with the economic well being of the Wall Street executives. What is needed is stringent regulation of the financial cowboys on Wall Street who precipitated this mess in the first place. How many times are the American people to be sacrificed for the profits of Wall Street?
Have low interest rates done us any good? No. Don’t low rates increase a bank’s profit margins? Well, apparently not this time. The Fed should raise interest rates, but they won’t. They don’t seem to be interested in monetary stability. Too many worries about housing and banking. Oh well.
LOL the Federal Government is bankrupt and nobody wants to hold US Treasuary Bills. That is what is causing the credit crisis and the Fed taking on 5 trillion dollars from Freddie and Fannie will only make things worse.
The Fed is lying to everyone like a spend thrift sponse who doesn’t let his/her partner know what is going on.
Last year Congress raised the national debt from 8.9 trillion to 9.8 trillion. They report a deifict of 258 billion yet the national debt is now 9.48 trillion dollars. How did the Feds fail to report almost 300 billion in the deficit???
The Fed is broke and once everyone realizes it no one will want U.S. stocks or bonds or T-bills.
Back to Ron Paul, abolish the Federal Reserve system as they drive all inflation of the money supplies. The Federal Reserve system is nothing short of a cartel of banks and print “money” in the form of reserve notes from nothing of value – air. Take us back to the gold standard and get the government out of the money production game.
Also, close Freddie and Fannie, all government subsidies destroy true wealth due to the redistribution of wealth from the earners to “those who are in most need”.
HMMM. ANOTHER INTEREST RATE CUT. THATS JUST SWELL MORE OF THE SAME POISON THAT GOT US INTO THIS MESS. WE NOW STAND AT 2% ALMOST OUT OF ROPE. KEEP GOING AND WE WILL END UP JUST LIKE THE JAPANESE, OF COURSE OIL WHICH IS PRICED IN DOLLARS WILL STAND AT AROUND TWO HUNDRED A BARREL AND THAT WILL BE JUST GREAT FOR EVERYONE.
The issue is confidance. Plain and simple. Lower interest rates and the dollar will fall, oil and commodities will skyrocket and then you tell me about confidance.
LaMonica, the hypocrite. For months he has been waving the red flag over the Fed’s lack of attention to inflation. Now he is backtracking and saying the Fed should be more worried about the Credit Crunch.
It is not as if we have not seen the credit crunch coming for some time. Months, if not years, before. The fed needs to raise the prime to 2.25% to at the very least combat the issue of a weak dollar and rising inflation. Yes, the credit crunch is a massive problem and, given the fact that the American consumer is more than $2 TRILLION in credit card debt, we have only seen the tip of the credit crunch problem. It will get worse, but without a stronger dollar, we could see even worse inflation and even greater economic problems.
Since real inflation is about 6 or 7% despite the phony numbers the government reports, interest rates should be at least 5% if not higher. It’s cheap credit that caused this mess in the first place (just like the depression), so keeping rates low is stupid.
Keep the Fed funds rate at 2%, which is the core rate of inflation. This makes money available ‘at cost’, but not ‘free’, to large banks.
Ignore oil prices, as the Fed has very little influence on the pricing of products that are controlled by a cartel: OPEC.
Raising margin requirements on oil futures from the current 7% to 25% or 50% (like stocks and bonds) will help a lot more here by driving out the speculators with uncovered positions.
The Fed should worry about monetary stability, period. Too bad the mainstream media didn’t report on the exchanges in Congress between Ron Paul and Bernanke and between Ron Paul and Paulson. What the Fed is doing is socialist nonsense!
Since the fed can’t fix either inflation or the credit thingie, they should stop trying to. Their job now should be to set up the criteria for a stable and strong out come after the corrections.
I don’t know nothin’, but it seems to me that our government loaning out money at half the rate of inflation (using the government number which most of us down here don’t even buy) is stupid.
How about they sit down and decide what a fair and reasonable rate of interest on the American Dollar would be, set it there, and leave it there.
I’m sorry, I know that is a silly concept. I obviously don’t understand how this stuff works.
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Man…I can’t believe that nobody here even mentions a hint of why the Fed “can’t” raise rates now…
Ever hear of the $62 Trillion (Current + S.S. deficit) U.S. debt?
Got any idea what the “interest” payments on that is daily…monthly…annually?
One small basis point = $Billions….
Every increase in the Funds or Discount rates must be weighed against the amount of “dilution” it will add to the money supply…which will not help the current “collapse”, but rather accelerate it….
Hang on to your hats, gents…we ain’t seen nuthin’ yet….!