This nonsense of playing with interest rates going up and down like a yoyo needs to be put to a stop.
By Daniel at 21 October, 2009, 10:41 pm
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Interest rates at the Federal Funds interbank level should be set and held at a 4.25% to 5.25% and banks should again be required as they were under the Glass Steagall Act’s Regulation Q to pay savers 5.25% on all savings account.
Lowering interest rates at the Federal Funds was what created the credit bubble in the first place and caused the whole economic mess by making credit far to cheap and easy. That easy cheap credit was used to speculate all over the place in leveraged buyouts, housing, commercial real estate, commodities and all sorts of things. It resulted in a gross misallocation of resources and massive debt which now cannot be repaid as the value of underlying assets that were purchased with this too easy credit collapse.
The Federal Reserve did the right thing starting in 2004 getting interest rates back to 5.25% at the Federal Funds level which was reached in August 2007. At that stage the dollar was strong, savers were getting satisfactory interest rates, and all interest rates throughout the economy were at “normal” historical levels. Instead of doing that starting in August 2007.the Federal Reserve panicked because the stock market started declining and started doing .50% rate cuts, first with the Federal Discount (bank to Fed direct rate) and then with the Federal Funds rate.
By early this year, the Fed had cut interest rates to 0% to 0.25% resulting in complete destruction of income for savers and once again causing bubbles in commodities and equities, although they have been unable to reinflate the biggest bubble of all - real estate, which was their primary goal in jacking around with cutting interest rates to near zero. The Federal Reserve through its grossly misguided policies has once again caused massive misallocation of resources and has weakened the US dollar and has increased commodity prices, all to achieve absolutely nothing of substance except to give the banks huge short term profits.
The purpose of the Federal Reserve is to create monetary stability - and it has not only not achieved that, it has done exactly the opposite and created complete chaos in the economic system in the US and abroad. It is time for this nonsense to stop and for the Federal Reserve to start using some common sense and setting interest rates at historical levels of a 3% real interest rate plus factors for inflationary expectations and risk. Not until we start seeing stability will the economy have any real chance of recovery as businesses and consumers right now are so shell shocked that they will continuing pulling back waiting for the next shoe to drop.
- AmericanPatriot
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