In the past week or so, the Federal Reserve has lowered the interest rates 1.25%. Today they’ve announced that they’re going to lend out $60 Billion to cash-strapped banks to prevent a credit crunch and to maintain liquidity in the economy.
By lending out money below the real rate of inflation, the bank is essentially handing out free money. Basically, Ben Bernanke is giving away a truckload of money to anyone who asks for it!
My guess is he’s going to keep lowering the interest rates for the remainder of 2008 until we’re at a 1% Federal Funds rate.
Since the US consumer can no longer refinance his house to fulfill his appetitive for consumption, Bernanke’s hoping that low interest rate consumer loans will continue to fuel consumption. After all, we’re a consumption based economy (as opposed to other countries, who actually make goods). Evidence of this is provided by the Economic Stimulus package worth $150 Billion. Since our economy is $15 Trillion, I guess $150 Billion will make 1-2 months look good, long enough for President Bush to claim that the economy has turned around as he gracefully exits office.
By lowering the interest rates after the dot-com bust in order to prevent a major recession, Greenspan caused the housing bubble. And now, Bernanke in trying to prevent the recession that should’ve occurred in a few years ago, is probably going to create a credit card/personal loan bubble.
I’m sure Wall Street will come up with a novel way to bundle $100 million portfolios of unsecured personal loans and palm them off to some unsuspecting foreign country. Of course, they’ll make a quick buck without assuming any risk, but more importantly, they’ll provide a risk-adjusted yield for their clients and provide necessary liquidity for the banks. Standard & Poors will issue AAA credit ratings to products they can barely understand. As usual, Goldman Sachs will start shorting the very products its selling to its clients and make even more money!
Meanwhile, the government has dis-incentivized savings, which it doesn’t believe in anyway. Why else would we have a budget that’s only $400 Billion in deficit (excluding the cost of the Iraqi War and future debt obligations)?
The government is funding its growth (yes, the government never has a recession – its always growing) through the sale of US Treasury bills and has no intention of ever becoming debt-free. As the world’s largest debtor nation, we don’t even have a plan towards economic recovery or paying off our debts.
I think the government and Federal Reserve are leading the US down the path of bankruptcy. Of course by the time we all realize it, it’ll be too late.