Federal Reserve goes deep

I'm waiting for Frank james to come up with another hit job on Prez-elect Obama, we can't have enough of those. How dare Obama act like he's going to fix things when the last eight years of Republican leadership under the great Prez Bush have been such a smashing success.
I'm offended, Obama and the Dems have fooled everyone. Republicans should never have to give up leadership because we always have all the answers.
I'm going to file a court case tomorrow asking that Presidential term limits be lifted so that George Bush and Dick Cheney can lead us for the rest of time. Everyone loved those two and they love Republican leadership. The last two election are just a myth made up by the liberal media. The Dems didn't really win.

This is a terrible mistake. It was because the FRB kept the lending rates low for so many years after 9/11 that it created the moral hazard for banks to make an incredible number of staggeringly bad loans. Keeping the money supply essentially free to banks has had the added disadvantage of discouraging savings. That, too, induced people earlier in the century to seek investments in the stock market to earn a better rate of return. I can’t help but believe that the FRB is attempting to cure the illness by a repeated dosage of the same poison.

John W, we can't think about saving or investing until we have incomes. If small business can get cheap money (if anyone will ever start lending) maybe they will stay in business and hire people. And maybe low rates will help the foreclosure mess.

John W,
I agree.
We are the addicts and the FRB is the pusher.

They are in effect saying that the solution to a debt problem is more debt.

Plus they are running off a trillion $$ on the printing presses.
Plus the lower interest rates discourage saving.
Plus it won't really help the folks going into default.
Plus it won't really reduce credit card rates.

Basically the debt industry has been given everything it has asked for in the last 28 years. There are no gifts left to give to them.

Will there be a "peace dividend"?

Under Obama, I mean.

Maybe some oversight and regulation of the Madoffs of the world?

Just wait for the next wave of ARMS foreclosures to hit.

We haven't begun to see the bottom here.

John W., I see your points, and agree that the FRB needs a drastic overhaul. I'm not sure if I can go along with the puppet show you purport, as I really think that it is a cultural problem that we do not save, as well as the plateaud wages and stagflation. It is the deregulations that have opened up the flood gates for corruption. I think the banks made the bad loans because they are owned by stockholders who want quick dividends, and not by bank owners who want to build a long term business.

Another story of American wisdom: When I was building custom homes, I was able to make the most ennergy efficient homes in the county for a mere 2% of total house costs ($5K or so upcharge), and many people would not go with it, even though I would tell them that they would recoup their investment in about 5 years from there energy savings. The reason for their decisions, was that energy efficiency does not impress the neighbors. A nice granite countertop in a cold house does though. We have a problem of culture in this country, and that is why we are generally the laughing stock of the world over. The world told us that we were greedy, wasteful, arogant, ignorant, and loved money too much....I guess them chickens are coming home to roost now.

I guess nobody told Mr. Bernanke that preferred loans go to preferred people not to the rest of us. The loans will not be to revive the economy but to build more Trump Towers and Hearst Castles. It makes you wonder what Mr. Bernanke's education and experience did for him. How is the money supposed to circulate, if ordinary people can't hold any part of it even for one brief moment BEFORE they go off to McDonald's as the only place that sells food they can afford to buy? But, what the heck! It's only money.

If they really wanted to solve the mortgage mess all existing loans would be re-written at a 2% rate and forclosed ex-owners would be given the opportunity to re-finance on their homes, credit cards would be reduced to 5%, and companies speculating in home-building that purchase open land would be sur-charged 200% of the purchase price of the land and that money used to retire farm debt or finance loans for those who wish to acquire and work farmland. That would force 'developers' to reclaim land already in use for substandard or dilapidated housing or old industrial sites rather than reducing our ability to produce our own food. I'm tired of eating Chinese and Mexican-grown vegetables and South American beef.

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Posted by: gord | December 16, 2008 6:43 PM
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gord,
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Assuming that banks aren’t willing to lend money to help out small businesses (which is now becoming a hotly debated question. See: http://www.celent.com/PressReleases/20081210/WhatCreditCrisis.asp ), it isn’t the unavailability of cheap money that makes them that way. The previous 1% lending rate made money plenty cheap. Something else is afoot.
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Right now, if there is a problem, it is due to kind of panic that sets in after serious bank failures - like those we have already seen. Banks are still losing money through mortgage defaults and the inability to sell the defaulted properties. In short, they are still worried about their balance sheets. That’s why even inter-bank lending has been minimal despite the hundreds of billions of dollars the Treasury Department has injected into the system. High interbank lending rates make getting loans difficult, if not impossible, for many consumers and businesses. If we are to believe half of what we are told, banks are still too panic stricken to function as banks despite the federal government’s financial support.
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But, if what we are hearing is true, and the lack of cheap money hasn’t been the problem, then lowering the basic lending rate isn’t the cure either. As such, the gratuitous lowering of the basic lending rates was a mistake. Doing so unnecessarily risks too many negative consequences when it isn’t needed.

Why are we impeaching Blago?
Nancy "Impeachment is off the table" Pelosi and Patrick "Why go after Karl Rove for the treason of releasing Valerie Plame's name so that she might be killed cuz her husband countered the WMD LIE" Fitzpatrick--why isn't he going after the 100 billion dollars stolen.

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Posted by: Xcellentform | December 16, 2008 10:56 PM
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I will be the first to agree that we have severe cultural problems in this country, especially when it comes to consumption and money matters. However, there are still a substantial number of people who try to live within their means and save money. The FRB’s actions have made it difficult for them to save money and hedge against inflation. I mean, when a bank pays 1 to 2% for money from the FRB, it has no reason to pay its depositors very much. And when banks don’t have a reason to pay, they don’t. In any event, the problem isn’t entirely that it discourages saving as much as it doesn’t encourage it. This is a bad thing because money from the FRB is made out of thin air. Money from depositors, on the other hand, normally represents wealth created by real labor (to some degree). The net effect is that the banks’ resort to the FRB’s money supply causes “monetary inflation.” (I hope you’re satisfied now.)
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I have heard many claims that deregulation was the cause of the problem, but these arguments paint with too broad a brush. The removal of regulations prior in time to the onset of a problem does not, in itself, adequately establish cause and effect. I have yet to hear a single, cogent explanation regarding how or why the removal of any particular regulation can be traced to the foot of the crisis. In fact, the FDIC had regulations prohibiting lending solely on the basis of property value - which was the essential vice in many of the sub-prime “John Doe” loans. The same regulation required lenders to consider a borrower’s ability to repay the loan, which many sub-prime lenders also failed to do adequately. Regulations are fine as long as people follow them or the government is willing to enforce them. They are otherwise just so many words.
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In addition, one has to ask: How could banks have made all of those bad sub-prime loans if they didn’t have the money? Obviously, they couldn’t have - regulations or no regulations. The banks were able to make the loans only because the FRB made money available so plentifully and cheaply. Furthermore, since banks are always anxious to make money (as you pointed out), all that cheap money made the temptation to take unwise risks too great. That was the moral hazard created by the FRB. It is a fact that banks, as a class of business, haven’t been able to control themselves in the face of such temptations. This isn’t the first time it has happened. It was a major part of the cause of the Great Depression; only then the money was spent on stocks rather than real estate.
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You wrote, “The world told us that we were greedy, wasteful, arrogant, ignorant, and loved money too much....” Let me add a few words. Undisciplined, unreflecting, self-indulgent, impatient, nearsighted and materialistic - are all good candidates for the list. We want it now, we don’t care how our priorities affect other people, and we don’t care what the long term consequences may be. And this is a governable people?

John,

Your views come from a position that has many more zeros in than mine does. People have always had an incentive to save, and an outlet to do so. With banks, mutual funds, stocks, CD’s, foreign investments, angel investing, and many other options too. People are just plain greedy, and as painful as it is to watch this country go down the tubes, it is a cultural correction that needs to take place. Right now, people do not have the money to save: That is why all the tax cuts that the pugs want are such a slap in the face to the rest of us.

Banks are pigs in my books. Absolute greedy pigs. Yes, thanks for the “monetary inflation” bone!

If you could pinpoint this depression on a single event, get you pen out and write a book. You’d be able to retire in a year or two. You and I both know there is not a single event that started this whole thing, so no, I don’t think deregulation is the sole culprit. If I had to guess at the largest culprit, I would say it is the said Cultural Degradation. This coming from a point in history when the USA has its highest percentage of “believers”. I know that is an ambiguous boogie man to blame, but it is probably the truth of the matter.

Your answer to how the banks had so much money, is a little off. I might go along with you partly, but the largest problem was the fact that the banks could originate the loans, and then sell the risk off to 3rd parties….thus using other people’s money, and not the FRB money. Like I said, I’m sure your point is valid, but only for about 15% of the glut though.

Yes, your adjectives on American behavior are spot on as well. Let’s take that whole list of adjectives and juxtapose that against the fact that we are the most religious we have ever been as a nation. I honestly believe we are on the brink of national dissolution myself. We will be going the way of the Romans, Russians, and the English. Canada is damn close to dissolution right now too with QC. I guess I am a firm believer that when things get too big, they get messed up in a hurry. That is why communism works well for a small town, but does not work for a country.