Wednesday, December 17, 2008

Negative interest rates or bust

The Federal Reserve has cut interest rates "to their lowest level on record," according to the Associated Press, with overnight loans to banks now as low as zero percent. That means the money is essentially being printed and then given away to major financial insititutions, as the money the Fed receives in return for the loans will not have kept pace with inflation (which can be expected to greatly increase). Though the move has been hailed by Wall Street, naturally, something about the Fed's latest gives me a strong case of deja vu:
"Not only does [the lowering of interest rates] help in reducing the actual borrowing costs — home equity loans, credit cards or your auto loan — but it improves the affordability, so more people are eligible for credit because their interest payments are lower," said Brian Bethune, chief financial economist for Global Insight, a Lexington, Mass.-based forecasting service.

He said that will help improve chances that borrowers with borderline eligibility will qualify for loans.
Now I know I'm not a highly respected economist regularly quoted in the Washington Post or anything, but isn't a policy of encouraging banks to give loans to people of questionable qualifications exactly what led the U.S. into its current economic malaise?

But it would appear Fed Chairman Ben Bernanke has decided to more or less repeate the Greenspan policy of providing easy money to banks (also tried during the 1920s before another calamitous economic period) that will then try to make a quick buck by lending it to people they probably shouldn't, all in an attempt to inflate the economy back to its previous unrealistic heights. In the short-term, this may indeed spur another artificial boom and the appearance of prosperity -- maybe. But when the inevitable bust comes, it won't be pretty, especially for those on fixed incomes who will have to deal with the likely prospect of significant inflation.

Yet this is the serious monetary policy backed by everyone from George W. Bush to Paul Krugman, which means whenever the blowback of the Fed's actions finally hits nobody will be to blame, except those Americans not patriotic enough to go out and buy a new high-definition television they can't afford.

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