As just two of the 65 million Baby Boomers that were raised by parents that grew up during the depression 1929 – 1935 we were taught to save part of what we made during the years we worked. My wife and I as I think many other Baby Boomers did save during the years we worked. Now retired at ages 61 and 62 we are dependent on our savings to make extra income from the interest on our money. I have a retirement from the company I worked for plus the interest our CD’s, Stocks, Bonds make. If the interest rate drops below 4 percent our standard of living goes down. We are forced to live on less and therefore spend less. We are not going to spend our principal and have even less to live on so until the feds raise the interest rates we spend less. If enough of us are not spending because we are not making a decent return on our savings the economy is going to have to get alone without us buying a new TV or PC, or car or truck or anything else beyond just what it takes to get by another month. My wife and I have stopped travling for pleasure over a year ago and will not plan on going anywhere until our saving start making better than 5 or 6 percent per year. The way things are now we have a tough time getting better than 4 percent and have to shop around to get even that. If things don’t improve soon my wife and I both may be forced into drawing our social security 3 or 4 years sooner than we had originally planned just to make ends meet. I would like to wait until age 66 to draw it but may be forced to draw on it early and take less just to get by and still have some savings. We currently have 90 percent of our savings in fixed assets and 10 percent in stocks, bonds and mutual funds, all of which are not breaking any records earning anything.
Fed rate cuts will not work and here is why. credit has tightened with “A” paper mortgage money now requiring a 740 score with 20% down where a 560 score used to suffice with 0-5% down. home equity lines for many folks have been exhausted or outright pulled as the banks cancel HELOC’S to avoid plunging real estate values. credit card companies are scaling back high balances because they are scared that the average homeowner who existed on home equity, HELOC’S and easy money will charge up their cards to the limit and file bankruptcy (the next crisis for the banks). jobs, if you believe the fed #’s are soaring and anecdotal evidence shows folks cannot get work. companies continue to downsize and squeeze more work out of less folks or throw up their hands and offshore source. in the meantime, the government continues to spend like its Kansas while all the signs show fiscal need. not to mention, our unwinnable involvement in two wars and runaway defecits. so, no, rate cuts mean nothing and if we continue to ignore these important issues while our two best candidates trade school yard barbs, we are in for some serious trouble, the likes which we have never seen
No Andy,you astound us.From 2002 to 2007 was a big fat bubble.Kenndy at the Fed said that between those years 500 billion per year was taken out of home equity.Now Andy, how much a year do you think is being taken out of home equity and where do you think the difference is going to be made up from to keep the GDP growing? And since the historical average for home ownership was around 62% and during the bubble went to around 68% where do you think the buyers are going to come from to buy all the excess houses.Please respond Andy,I’m dying to find out if you’re dumb or just stupid!
The rate cuts have already worked, Paul. The sky never fell (like you predicted it would).
You people astound me.
Correct me if I’m wrong. With the dollar soaring and other currencies going lower, who is it that will recover first the US or them.
Our exports were doing well with a lower dollar and now most believe will not do as well. Most say that a strong economy translates into a strong currency, am I missing something.
So I ask the question, why is the dollar going higher now? Now that every other country is doing as poorly as we are now why does the dollar rally and we suffer.
OK, with higher currencies abroad they were effectly exporting their inflation back overseas. But at the same time they were buying more of our goods and services. Exports were up and companies were doing better.
I thought the dollar was to flat freely with other currencies. Now it seems that with lower oil prices that we all screamed for, the dollar has been driven back up hurting our economy. Why does the dollar have to be tied to oil. We can’t win, oil goes up we suffer, oil goes down we suffer. Its the “Best of Times and the Worst of Times”. Tale of Two Cities.
I think it is time the Fed starts on a campain of selling dollars to push the currency back to netural and get back our competitive edge.
If you want to learn how our money is REALLY created, watch ‘Money as Debt’ at Google.
Although the Fed prints money, it actually stimulates a lot more than that.
In my opinion, fed interest rate policy can only help or hurt the US economy to the extent tht it affects the value of our currency. To oversimplify, rate cuts = weaker dollar = higher exports (and hence employment) but also higher inflation. And vice versa.
I see preference for fed acion breaking into two camps:
(i) working age folks – the would benefit from lower rates/inflation. Wages will eventually rise over time with inflation and they’d at least have jobs because of strong exports. Also, the true value of their debt will decrease. Will wage increases match inflation? Probably not, unless we rebuild the productive (non-financial/real estate/service) parts of our economy. But working people would be better off than under the other scenario (esp. the younger ones).
(ii) retirees and near-retirees who have accumulated assets and would suffer from lower purchasing power due to inflation, essentially a devaluation of their assets. Unfortunately, these folks are the baby boomers. If they vote en mass to pursue a strong dollar policy to preserve their assets, we’re in for a long, slow slide into depression, which they can watch on CNN from the comfort of their golf course homes. Of course, the baby boomers have never shown any capacity to act in any manner other than their crass self-interest.
The country has gone stray and we’re in for difficult times one way or the other. To wax poetic, the US economy will end in fire (inflation) or in ice (deflation/depression). If in ice, it will be a fitting capstone on the legacy of the most destructive and self-congratulatory cohort of Americans to have ever existed.
Just like with an addict, Ben the friendly Government pusher wants to keep shoving the syringe in! Pretty soon, the Fed will be paying us to take money! It’s turning into an Easydemic!
There certainly seems to be a lot of confusion among readers about the role and function of the FED and monetary policy. Readers aver that any one factor is the cause of our current problems based on a sound byte they heard somewhere, looking for simple solutions. But none seem to look at the root cause – the monetary system itself – how money is created, and the factors that limit it.
Money is created not by the FED, but by banks (although the FED can have some influence on the process, it does not actually fine tune it.) And the banks are limited not so much by reserve ratios but by capital ratios. If they need to borrow money for reserves that is never a problem, but if their capital falls short they risk having to fold up shop.
WIth a system based on loaning out money from private banks at interest, creating only the principal for the loans, unless additional new money is continually created (by loaning to other borrowers) to enable borrowers to repay their loans the resulting credit contraction (or even a period of money supply growth at a rate smaller than the cost of capital) over time will cause borrowers to default in aggregate across the economy, causing banks to tighten lending.
If borrowers default, the bank that created the money loaned to them must shrink loans by an amount equal to 1/the bank’s reserve ratio (about 19x the loan amount) in order to maintain its capital ratio. After the excess capital margin is gone, the bank has to stop lending to all but its best customers and will generally do so long before that.
So the FED rate cuts have at best a second-order impact on stimulating the economy because the banks really control the money supply and if their capital ratios are endangered lowering rates will have no impact.
The issue is really one of system design – a fractional reserve system in which banks are allowed to create money and loan out much more than they have on deposit is fundamentally unstable and prone to credit bubbles on the upside and similar positive feedback on the downside, hence we are told the ‘business cycle’ is a natural part of our economy.
The rate cuts didn’t work because the lack of liquidity in the system was due to banks not having enough capital – it had nothing to do with the actual price of money, but lack of supply…
“The federal funds rate is an overnight bank lending rate that banks charge each other to borrow money. But Rosengren argues that just because banks are charging each other a relatively low rate, this does “not necessarily translate into lower costs to the vast majority of borrowers.”
In other words, even though the Fed has slashed the federal funds rate from 5.25% to 2%, many beaten-up banks have nevertheless substantially tightened credit standards for businesses and consumers.”
The Fed cuts were for the banks, not for we common people. Don’t be fooled.
Lower interest rates can make the dollar weaker. For those of you who have forgotten your basic economics that means US goods are cheaoer abroad and imported goods are more expensive here. That means more good jobs and in the end a better economy.
A weaker dollar also gives business a big incentive to develop alternate energy sources and reduces our demand for foreign oil. That all might mean short term pain, but long term gain.
Fed rate cuts worked during the 2001 recession because the US had a very large budget surplus, low defense expenditures, and cheap energy.
Today, we are bogged down in two wars, we have a $500 billion budget deficit, exploding defense expenditures, and ridiculously high energy prices. With the government borrowing so much money, they directly compete for capital in the markets, which raises interest rates. If you’re an investor looking for an ultra safe investment, do you buy a US Government T-Bill or a Fannie Mae Mortgage Bond? The answer is pretty obvious.
The situation today is much like the early 1980’s when the budget deficit ballooned. Any rate cuts go directly into gas tanks or to bank profits, which really only keep the banks from outright failing and making the situation worse.
The current economic situation will only be resolved when the US government brings it’s fiscal house in order. The 2001 tax cuts, which were predicated on a “peace dividend”, need to be repealed or expired and the government needs to stop spending money. The government needs to get out of the capital markets for the situation to get better.
Additionally, the energy cost situation needs to improved. We need to be looking for ways to keep the currency spent on energy at home, through US based alternative fuels *and* domestic oil production.
Basically, the rate cuts aren’t working because of the US budget deficit, high oil prices, and high defense spending.
They just don’t get it. First, when, as a nation, you stop making anything (production) the money gets recycled until it is worthless. Second, American’s are broke and in too much debt, it’s that simple. The politicians need to realize it and stop the spending (at all levels). Taxes need to be flat, fair and uniform. Corporate taxes need to be flat, fair and uniform (like a VAT).
I have been syaing that the data is totally off base for a while.
Here is prove:
“The Wall Street Journal reported on Thursday that the Commodity Futures Exchange Commission is investigating whether companies are reporting false oil inventory levels to benefit their trading positions.
However, EIA spokesman Jonathan Cogan said the agency is unaware of any such probe.”
I doubt the cuts mean much any more and haven’t for a while. They have nothing to do with the individuals loans, and barely any thing to do with business loans. They are more of a feel good thing. As long as banks are hurting for profits, and they are, they won’t be relaxing their loan rules any time soon. And since the big ATM (your house) is on the fritz, the economy will continue to tank. And wages will not go up, since we are competing with the 3rd world. So when the current commodities boom crashes, we will probably be in for deflation.
“Do we need a solid $ that stays stable relative to life, commodities and other nations? Yes, we really really do. But how to do it is the trick. Finding some “thing” to tie it to that stays stable relative to those things is proving to be problematic.”
It’s pretty much impossible given today’s economy. When the “value” of your country is tied strongly to hard goods, natural resources, manufacturing capacity, etc., everyone can mostly agree on what it’s actually worth. Up until the middle of the 20th century, that still worked, at least sort of.
But when a big chunk of “the economy” is information technology, financial services, etc., it’s nearly impossible to put a price tag on what your currency should actually be valued at. It’s sort of like how the market capitalization of a company can sometimes have little correlation to its actual hard assets. (e.g. How much is Google really “worth” versus their market cap?) Floating currencies have their issues, but non-floating currencies are pretty much untenable these days.
As far as inflation… the Fed has less control over real rates than you might think. They can put a floor on interest rates to some extent, but what consumers and small businesses are going to pay depends on how willing banks are to make the loans — and, increasingly, on how willing private investors are to back them. The worse the overall economic situation, the more of a safety cushion lenders/investors will want on top of the fed rates.
“I like the fact they say they need to raise rates to fight inflation and everyone goes along with the myth. When they say they are fighting inflation and rise (sic) rates they mean they are fighting to keep inflation alive.”
One of the economic theories guiding the US since WWII has been that low levels of inflation are safer and easier to maintain than either trying to keep no inflation or flipping back and forth between inflation and deflation, so I guess that in some sense they are always “trying to keep inflation alive”. Right now it may be impossible, since it seems like so many investments were overvalued by so much over the last few years.
Raising interest rates DOES tend to reduce overall inflation, because it reduces the incentive to borrow money. The cheaper it is to borrow money, the more leveraged most financial institutions will get, and the more total money will be in circulation. Of course, some of the effects depend on how you define “inflation”, and that is far from the only factor.
The fed rate cut worked exactly like it should have. It was a textbook manuveur. It created the expected inflation, which followed by the expected wage demand. The wage demand in turn made it easier to pay those rediculous mortgages and high credit card payments. They should do more of them. Personally, we’d like another raise.
The economy is in the tank, and going further into it, because “we” borrowed up to our eyeballs to buy goodies in the short run that should have been spread over a few decades. Now it is finally time to pay back those loans and that cuts seriously into current spending. Lower interest rates do nothing to help pay back debt – but they do help those of us who aren’t in the “we” group above, thank you very much Fed!!
Ever heard of someone dying of drinking too much water? The reason the rate cuts have not worked is because the Americans are already in too much debt, housing bubble is bursting and the fake jobs created by our service economy/ federal deficit are disappearing. The wealth is concentrated in few hands, and the RICH DO NOT CREATE JOBS JUST FOR THE BENEFIT OF THE WORKERS, GET IT RIGHT! They only create jobs when they can exploit both the labor and the consumer, no matter teh tax cuts or tax adavntages, any one who tells you that tax cuts create jobs is a liar and a stupid both.
The Fed will do whatever it needs to keep US Treasuries attractive to foreign investors. If foreginers see us washing out the dollar’s value while bailing out the big 3, financial institutions and the Fannie/Freddie, the Fed may have to raise rates to make the return on treasuries attract more bond buyers. Then watch the resulting hyperdeflation, economy slow down and maybe even a depression.
The GDP numbers are fudged to make our debt to GDP ratio not as bad. However, if you consider the countries liabilites (deficit + social security + medicare + infrastructure/bridges) at around $55,000,000,000,000 (debt) the GDP is only around $13,000,000,000,000. That means this country is INSOLVENT and on track for bankrupcy.
If you think that we can carry this debt because of our assets then think again. The Fed considers bubble housing equity as wealth, which it is not. And if it were wealth then it’s now gone with the bubble burst. Also, the Fed doesn’t account for the fact that 85% of the nation’s wealth is owned by 20% of the people. The Fed assumes all the wealth is divided equally among all the citizens and then compares the overall debt per citizen to wealth. Beause 80% of people only own 15% of the wealth this comparision is false and will suggest the nation is broke. I wonder how the Fed will fudge the GDP numbers in a couple years after realestate prices return to 1999 prices while the debt will be even higher? They will have to write off all the debt, which is the growth over the past 8 years, in order for the country to appear as not bankrupt.
More rate cuts will do nothing but drive up inflation and prolong the pain. Things will get better when all of the boom that resulted from the 10 year credit bubble is undone.
If any headline or politician can tell you that this mess can be fixed in a couple years with an interest rate adjustment they are just plain lying. This country is broke and the only way to fix it is to end the war and raise taxes. That or to write off its debts, which I’m sure China won’t be very pleased about.
The Fed needs to raise rates to slow inflation and boost the dollar. This helps consumers but perhaps not banks and hedge fund managers who dug their own hole and expect taxpayers (consumers)to help them get out of that hole.
As was mentioned by many when this ‘crisis’ became apparent, rising interest rates did not cause the credit market issues we face and cutting rates will not solve them. The deleveraging that is taking place will take years to work through and if anybody thinks banks/lending institutions are going to return to business practices as they have been the past 5 years, they are going to be in for a big surprise. The easy credit economy is gone;the economy will continue to contract as the consumer is squeezed and demand continues to soften. Hang on folks, it is going to be a tough period and we are not even into the 3rd inning yet.
Wow, but everyone seems to forget the basics anymore. By lowering rates, the Fed has only made matters worse – or did we learn nothing from the 1970s? Look, the cuts didn’t work because the entire enconomy is flawed. It needs a major correction, which will mean a recession. It can’t be stopped, but it can be limited. All the Fed is doing is staving off the inevitable. The longer they do this, the deeper the recession will be and they significantly increase the risk of “stagflation.”
The long term plan should be to bring jobs back onshore and for America to chaulk globalism up to being nothing more than an another failed economic theory.
If they go lower watch out for inflation? What the hell do you call what we have right now? How about, if they go lower, watch the current decline of oil prices to stop, and watch the price jump back up. I wouldn’t be surprised if the fed does lower rates again. Oil prices are declining, and McCain picked a VP for one reason only, he wants to drill in Alaska. If oil continues to drop, this will be a non issue come election time. In order for this move to pay off, he needs oil prices to remain high. So lets see it, you crooked Federal Reserve, lower interest rates, devalue the dollar, and watch our imports, and oil, jump up again.
in reality low interest rates really keep a lid on inflation. How is that when everyone says otherwise?? With low rates businesses do not need to raise the price of their goods to off set the higher interest rates they have to pay for borrowing money. You can see how during the low interest rates of the Greenspan era we had very low inflation. As soon as he was gone and the Fed started to raise rates to 5 percent inflation rose with the rate increases to 5.7 percent last month as business were trying to stay ahead of the increased cost of doing business.
Now that interest rates have fallen the inflation rate after peaking this month or next will head back down. There is about a six month led time bewteen interst rates and inflation due to businesses getting short term loans to pay for their inventory. So when the Feds started to raise rates businesses had already had loans secured for the next year or so.
I feel sorry for the poor Europeans as they are keeping their interest rates at like 4.5 which caused them to have like 5 to 6 percent inflation.
The only reason the Fed raises rates is to trash the economy. Why they raised rates last year is a big question mark. Did they do it to mess with the election this year? Probably. Or what is more likely they were after a repeat of the inflation of the 1980’s that basically wiped out the hugh deficits that Reagan built up.
I like the fact they say they need to raise rates to fight inflation and everyone goes along with the myth. When they say they are fighting inflation and rise rates they mean they are fighting to keep inflation alive.
If you owe 4 trillion dollars and have a GDP of say 8 trillion and inflate your money so you have a GDP of 8 trillion and keep your deficit at 4 trillion you have reduced the debt through inflation. That is what they were trying to do unfortunately they destoryed the little bit of economy we hasd doing it this time around.
The rate cuts aren’t stimulating the economy but they are making it impossible for me to save money that inflation is stealing from me. Worst of both worlds.
The election can’t come soon enough.
While I agree with Ann of Louisiana in theory, in reality, going to a gold standard is not possible.
It seems everyone agrees that inflation if caused by too much money in the system. How much is “too much”? More then the minimum needed to run the economy.
But too little money hampers trade. How much is too little? Less then what is needed to keep all transactions going at any given time.
Not enough gold exists in the world to back all the trade that happens at any given time.
Do we need a solid $ that stays stable relative to life, commodities and other nations? Yes, we really really do. But how to do it is the trick. Finding some “thing” to tie it to that stays stable relative to those things is proving to be problematic.
No, the Fed could cut the rate to zero and it would have little effect at this point. The damage has been already been done. The fallout from the credit debacle, CDO’s, CMO’s, CDS’s, et al has yet to be completely realized. Globally, their is still approximately five trillion in bad paper.
The consumer, who is responsible for roughly 70 percent of US GDP, remains over leveraged and largely absent. A rate cut here would only be of value if it were passed on to the consumer. If history teaches us anything, this is not likely to happen.
Finally, the positive export picture that has been carrying the US economy as of late, is now starting to fad.
If they go lower, watch out for inflation. I know that most people draw a correlation between comodity prices and inflation, but remember correlation is not causation. Inflation is cause merely by adding money to the stock of existing money through the lowering of interest rates or simply firing up the printing presses. This thing is long from over…..
The whole Federal Reserve system of fiat money and artificial interest rates are what cause the boom and bust cycle to begin with. The interest rate is supposed to reflect people’s time preferences- but when the Fed arbitrarily decides what THEY think it should be, it sends businesses wrong signals about what types of goods consumers want to buy. If the interest rate is low, businesses tend to borrow to produce long term, durable goods, ie housing. This is fine if the interest rate is low because a lot of people have been saving and will be able to afford the housing when it is finished, but if it is low because of the Fed, it creates a bubble, which will of course eventually burst. Before the creation of the Fed, we experienced ups and downs in the economy, but they were much shorter and more moderate. The Fed’s artificially low interest rates in the 20’s are what caused the Great Depression, and it was prolonged by the massive government programs and dramatically high business taxes that did not allow the market to adjust and correct the mistakes that had been made. The only way that we can avoid something like this happening in the future is to completely abolish the Fed and go back to a gold standard. For more information about the problems of a fiat money system, I would like to refer you to anything written by Ludwig von Mises or Murray Rothbard, particularly Rothbard’s “The Case Against the Fed”, which can be found at http://www.mises.org for $7.00 plus S&H.
LOL Japan still has not recovered from it’s slump so even if you are right and we take half the time Japan did to turn things around this means 12 years divided by two means we have 6 more years of going no where.
Anyway the US economy is total gone now and no amount of government lying about productivity rates and decreased wages will give us a positive GDP growth of 3 percent they are claiming for this past quarter up from 1.9 percent.
Truth is the Dow Jones which was at 11,474 DEC 1999 should be at 15,494 adjusted for inflation or at 25,959 given 10 percent return on investments according to everybody.
So by any measure we are down 25 to 50 percent where we should be. Also how people expect a 10 percent return on investment when the economy is growing at a real minus 5 percent is beyond me.
Yes. The Fed’s rate cuts will stimulate the economy, and they already have done so.
Also, and this is one of the keys: the Fed rate cuts probably saved a large number of marginal banks by allowing them to borrow more cheaply while they were lending at higher rates (as the article acknowledges). This allowed the marginal banks to avoid failure. There will still be many bank failures, just not nearly as many as there would have been otherwise.
The reason the cuts have not worked is because our wise government and FED cannot grasp the real reason behind the bad economy. It’s the fact that wages has not risen and that affordability for housing was out of whack.
Cut all the rates you want but houses in the desert outside of Los Angeles and in South LA are not worth $500,000. Fundamentals are taking over and we are having a normal price correction, not a crisis like the politicians and media like to create.
And we all know what the mortgage defaults are doing to the global credit markets.
The FED should have been raising rates to expedite the economic fundamentals to correct the bad economy.
The Fed Rate cuts will help, but they will probably have to go lower. The ARMs are going to continue to reset at a much more rapid rate. I believe many who say the credit crunch is only BEGINNING. Our banking system currently resembles Japan in the early 90s. Even though the Japanese were slow to write off bad debt, the U$ is not.
Thus, even though our economy may resemble a Japan-like slump, I think we will work our way out in half the time. So yes, the rate cuts will work. It will take some time.
Well “Mike” … apparently you’re 7 years old. Either that or you have a REALLY bad memory because this cycle has been rinsing and repeating for 70 years.
We’ve seen it specifically in housing in the 80’s … and with the dot-coms of the late 90’s.
I *really* hope that you’re ignorant enough to think that our housing market will never recover. Because I’d be happy to buy the property you missed out at to the tune of 30% gains in 2011.