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mirza's avatar

Do you think the Fed did the right thing by lowering interest rates ?

Asked by mirza (5042points) December 11th, 2007

The Federal Reserve just cut the interest rates by a quarter point – lowering it to 4.25 % . The central bank also cut its discount rate, which is what banks pay to borrow directly from the Fed, by a quarter-point to 4.75 percent on Tuesday. Some people speculate that it was due to pressure from the mortgage and housing industry.

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12 Answers

SquirrelEStuff's avatar

http://www.lewrockwell.com/paul/paul166.html
The Folly of Fed Interest Rates

by Rep. Ron Paul, MD
March 18, 2004

The Federal Reserve, acting through its rate-setting Federal Open Market Committee, announced Tuesday that it would leave interest rates unchanged. The financial press dutifully reported this latest development, never questioning why, in a supposedly free, capitalist country, centralized economic planners set interest rates at all.

The problem for Mr. Greenspan and company is that the Fed simply has run out of room to cut rates. The federal funds rate already stands at 1%, a 46-year low. Greenspan has cut interest rates 13 times just since 2000, but Wall Street’s thirst for cheap money cannot be satisfied. However, the markets have not responded. The trend that developed steadily throughout the 1990’s, with the Fed cutting rates each time the economy showed signs of a downturn, has run its course.

The Japanese economy provides a vivid example of the futility of manipulating interest rates. Japan’s central bank began cutting rates more than a decade ago, but the country remains mired in a stagnant economy. Ultimately, interest rates were cut to zero, where they have remained for several years. This rate cutting has failed to stimulate the economy, however. The Nikkei stock market index remains at 1980s levels, while Japanese unemployment recently exceeded 5%, the highest rate in decades. The Japanese experience should tell us that prosperity cannot be created out of thin air by a central bank.

In a truly free economy, interest rates are determined by market forces rather than central economic planners. The availability of investment capital, and the interest rate at which it is available, depends on savings, not fiat money and credit. The Fed’s easy credit policies simply have made the cost of borrowing money artificially low. With lots of cheap money available, businesses and individuals spend with less discipline and incur more debt. Cheap credit created a wildly overvalued stock market, with many companies trading at outrageous prices. Eventually the bubble had to burst, resulting in record numbers of both personal and business bankruptcies.

The laws of supply and demand work better than any central bank bureaucrat in determining the correct cost of money, without the political favoritism and secrecy that characterize central banks. Americans should not tolerate the manipulation of our economy and the inflation of our currency by an unaccountable institution. The turbulent period we have entered may serve to remind Americans that the Fed cannot suspend the laws of economics. The key to lasting prosperity is a return to true private banking, where interest rates are set by the free market and dollars are backed by gold.

SquirrelEStuff's avatar

December 11, 2007 2:24 pm EST

Average Americans pay the price for the Federal Reserve’s inflationary policies

ARLINGTON, VIRGINIA – Congressman Ron Paul, ranking member of the Subcommittee on Domestic and International Monetary Policy, Trade and Technology, and a nationally recognized expert on monetary policy, issued the following statement regarding the Federal Reserve’s decision to cut interest rates by 25 basis points:

“America ’s economic difficulties, especially the problems in the housing market, are the direct result of the Federal Reserve’s inflationary policies. While prices for gold, oil, and commodities continue to rise, the purchasing power of the dollar for all Americans continues to fall.

“Inflationary monetary policies created the problems in the economy we are seeing, and these problems will be made worse, not better, by more inflation. And today’s action by the Fed is very bad news for American workers and retirees who are about to get hit with yet another jump in prices.

“Make no mistake, the problems faced by the American people are not caused by unscrupulous mortgage brokers or the rising price of oil. These are symptoms of an economic disease caused by a spendthrift Congress enabled by loose monetary policy. Too many pundits praise the weak dollar as benefiting exporters, but they fail to see the harm done to thrifty, hard-working Americans.

“Rather than continuing to pursue a policy of easy credit and increasing debt, we need to return to a sound monetary system.”

jrpowell's avatar

I think it was the wrong decision.. Things are in a weird state right now and need some time for self-correction. It will hurt for a little while but the executive branch should not be controlling monetary policy. The FED is not really a branch of the government for a reason.

Basically, I think that the move was politically motivated and not based on sound economic principles.

And Jesus Fuck. Leave the Ron Paul spam at Digg.

SquirrelEStuff's avatar

Self-correction? Spam?!?!? I can barely afford to drive to work and heat my house. Who is going to save us?!?!? Maybe Ron Paul might not be able to save us, but at least he admits there is something wrong going on with our economy, rather than settling for a quick fix. He doesnt want to control monetary policy. He wants a SOUND monetary policy. I have not heard any other candidate even admit there is something going on. You have to remember that the Fed has been around for less than 100 years. My great grandmother is older than the fed. Do you really think the price of things are going to go down without a depression??

ironhiway's avatar

Yes it was the right thing to do in regards to what the Fed reserve was designed for.
Their job is to monitor growth and apply the brakes if it appears to be growing to fast, also stimulate growth should it appear to be stagnant.

Although this problem has stemmed from mortgage lending practices, lending money to those who can not afford to pay it back. These loan paid the highest commissions to the originator. Greed ruled and people got those loans often when a better loan fit was available. Such as a fixed rate or even a better rate with more documentation required.
These loans are now at risk in several different areas. the owners of the loans some were sold as investment packages so banks could have even more money to lend.

Now that these loans are starting to effect people other than those who generated them or borrowed the money. Action is being taken to change lending practices, Protect those who might lose their homes, and a slowing of the inevitable outcome of foreclosures and bankruptcies.

The lowering of the interest rate should help to keep variable rates down and give people time to refinance into a fixed rate or sell their homes to someone who can.

Fed lowering of the rate is not the solution, but rather the stall to allow time for the solutions to take effect. It was the raising of the rates that started the pinch on those who borrowed adjustable rates in the first place.

NOW as for anyone that thinks the president, any president is going to save you, your wrong. At 25 you still have a lot time to recover from mistakes in life yours and the mistakes of others. But learn this now whoever ends up as president is not going to protect any one individual. They will make changes or perceived improvements to the basic system, which will help some and hurt others. Your job is to figure out how they apply to you and adjust your life to best benefit from the system While continuing to be involved to effect change of the system local and national to your perceived idea of perfect.

As far as posting a article over 4 years old that refers to Japan’s use of interest rate cuts as stalling the Nikkei stock market index, which has now experienced over 50% growth since that article which seems to show that their (Japan’s) method was successful rather than not.

Additionally there are many factors and changes that will be necessary to overcome the mistakes made in the mortgage process. The Fed Reserve appears to have acted appropriately to the part of the challenge that is theirs to face.

mirza's avatar

@ironhiway: i totally agree with your answer.

My take is that lowering the interest rates will help increase people’s spending power (since they’ll be saving less and with low credit card interest rates, spending more) and in turn help prevent a recession. But the tricky part here, is that since we are increasing the spending power, then doesn’t that pose a threat of inflation ?

ironhiway's avatar

It appears banks are working to recoup mortgage losses by notching up credit interest on individuals, that don’t notice and complain. The cards will be more profitable to the banks. As for spending power yes with lower rates people can by a more expensive house with the same monthly rate. However changes in lending practices have reduced the number of people who can qualify for these loans.

Though YES lowering the rate increases the potential for inflation which is why the Fed started raising the rates in the first place, which helped to fuel the mortgage problem. What the hope is to keep the housing prices at a slow drop to avoid panic which is what will cause recession. Managing fear is a very hard thing to do. Once panic starts irrational behavior grows exponentially bringing down even the most conservative investors and individuals.

SquirrelEStuff's avatar

@ironhiway
I don’t want to delve too much into your personal life, but may I ask your profession?

glial's avatar

I agree with ironhiway. I think it was a good idea.

I also agree with leaving the Ron Paul spam on Digg. I like the guy, but he hasn’t got a snowball’s chance in hell.

Expecting one elected person to “save us” or destroy us, for that matter, is ridiculous.

Personally, my “economy” has been great this year; with no politician to thank for it.

Response moderated
Charlie's avatar

Well, I, for one, am debt free which has caused some problems because I don’t have a credit rateing if I would want a loan which I don’t. Few people can say this but I did one thing many years ago and that was to invest in hard money, Gold/Silver coins. I have very little dealings with any Bank and this has given me a considerable amount of wealth. Most people can’t do what I have done but the more a person stays away from loans and credit the richer you will be. When it comes to pay day, the first person to pay is yourself!!!

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