The Only Thing Worse Than Raising Interest Rates Is Lowering Interest Rates

[whistle]

What the Federal Reserve under the direction of Ben Bernancki did today with their announced a 0.5 percent rate cut, was something suicidally stupid.

What the Bank of England is doing; what Paulson is doing is purely political and it makes no economic sense. A soaring interest rate is the worst possible thing for the system. But lowering the interest rate is the worst possible thing for the system also.

The only thing that can be done is to create an economic firewall that freezes the worthless paper, which the U.S. and the English Exchequer as attempting to salvage. They are dombed to failure and it will cost the world dearly.

Monetarist theory does not work at a time like this. We must not be a monkey—or a monetarist. Monetary policy applied to something like this is insane.

You have one person insisting he urgently needs something— like Paulson calling for bail-outs, and another insisting he urgently needs something completely contradictory—like Mervyn King. They're contradicting each other—and, more to the point, they're both contradicting reality.

This is the time for a selective tax program: tax the hell out of people who need to be, taxed—people for whom taxation is the only medicine that can work to curb their compulsion to speculate; and give preferential tax breaks to those who are prepared to make long term investments to promote infrastructure and rebuild the productive economy.

<snip>
Bank of England Offers Aid to Lender Northern Rock
By Reuters | 14 Sep 2007 | 09:57 AM ET

Britain's financial authorities stepped in to rescue mortgage lender Northern Rock on Friday as the group, which has lent aggressively to home buyers, fell victim to the sharp rise in borrowing costs between banks.

In Britain's biggest casualty of a global financial crisis sparked by U.S. mortgage defaults, queues stretched out onto the streets as customers waited to withdraw savings from Northern Rock branches, with some reports of fighting in its north-east England home town of Newcastle.
<MORE>

http://www.cnbc.com/id/20763631

<snip>
September 01, 2007
HousingPANIC is going to take George W. Bush and Ben Bernanke at their word - NO FUC*ING HOUSING GAMBLER BAILOUT!!!!!!

"It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions."

- Ben Bernanke, August 31, 2007


"It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford."

- George W. Bush, August 31, 2007


"If you spend one f*cking American taxpayer dollar bailing out failed flippers, mortgage fraudsters and housing gamblers, the legitimacy of the United States Government will have been forfeited, and the time will be at hand to dissolve the political bands which connect us."

- HousingPANIC, August 31, 2007

<link> http://housingpanic.blogspot.com/2007/09/housingpanic-is-going-to-take-george-w.html

This will be a disaster!

[Rosemary2205]

1. kick in a pointless effort to keep this from dropping like a rock.

Good post, good link, unique viewpoint. And this line goes under the "no shit sherlock" file.

This is the time for a selective tax program: tax the hell out of people who need to be, taxed—people for whom taxation is the only medicine that can work to curb their compulsion to speculate; and give preferential tax breaks to those who are prepared to make long term investments to promote infrastructure and rebuild the productive economy

Thanks for the post

[whistle]

13. Thanks, it is also how democrats should be viewing this whole affair

....long range investment projects to carry the country over the next 40 to 50 years, good paying jobs, leadership in innovation and development, not seduced on how to get rich without working and without paying the fair share of taxes like the republican wet dream promotes

[melm00se]

19. Speculation

has it's place in the economy - without it, there is no seed/venture capital to develop new products/services.

Speculation is betting on the future and taxing speculation might have a chilling effect on the invention.

[whistle]

21. The present speculation has gone far beyond seed, it is now into

...the Vulture capitalism stage

[melm00se]

23. taxation

should be based upon objective criteria rather than subjective criteria.

How do you determine that this investment is "Vulture capitalism" but that one will lead to "good paying jobs, leadership in innovation and development"?

if you can predict that, 100% of the time, in a fair and equitable manner, can you give next weeks lottery numbers?

as to going beyond seed:

While there are some people who will, unfortunately, lose their houses, there are some who will not and will end up better off economically thru the availability of that capital. Don't hastily throw the baby out with the bath water.

[Digit]

2. K&R

[whistle]

22. Thanks, I've added futher responses to the thread as I believe we must

...see the situation as democrats not as republicans want to frame the agenda. So if you can, please read through the other comments. Thanks

[wildhorses]

3. off to the greatest page with you!

now where's my mason jar? i've got a hole to dig.

[girl gone mad]

4. It's a mistake...

and I'm sure Bernanke knows it, but his back was to the wall. Our economy is in as precarious a place as it has been in decades.

[whistle]

15. Yes it is a mistake, but Bernanke is out to help his Country Club pals and hedge fund

....top monkeys get richer than they already are while throwing millions out into the streets. It will be like New Orleans after Katrina but on a national scope.

[eridani]

5. What can Joe and Jane Citizen do here?

Any proposed legislation out there that we can support?

[whistle]

16. Appeal to Congress to pass immediate legislation to help homeowners

...and chartered banks from being foreclosed and evicted. The democrats must act and act now or it is game over. Congress must introduce, pass and implement "the Homeowners and Bank Protection Act of 2007".

See my post at:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=1841718&mesg_id=1842045

[eridani]

31. Is there a bill number on this, or do we have to find someone to write it? n/t

[whistle]

33. It is writen, it only needs to be introduced

[JCMach1]

6. I disagree, if anything the FED sat on its hands for at least two months

While money supply is a factor in the drop of the $$$, balance of trade and the ongoing budget deficits are a bigger factor.

[girl gone mad]

10. The dollar's decline is the result of..

too low interest rates, not too high.

[whistle]

17. That was deliberate so that money would tighten and put homeowners who had

...lost their jobs or had marginalized their incomes would be effected by the ARMs upward adjustments under the increased Fed interest policis and tightening of money.

[KillCapitalism]

7. Bernanke is in a tough spot.

I think the rates should have just stayed at 5.25%.

I'm not sure what his motive was in lowering the rate by .5%, but I'm gonna speculate that he is bailing out the hedge fund crowd and big bankers. Look at how high gold went yesterday. Crude closed at over $82/barrel, so the effects of the rate cut were immediate, and things (inflation) will only get worse over time. But hey, the stock market went through the roof lol. Raising the rate would truly cause a credit crunch and slow down the economy b/c there would be even less people buying cars and homes. I don't think anyone on Earth would want to be in Bernanke's shoes right now.

[PDenton]

8. stagflation

The economy isn't really going anywhere, but there clearly is a bubble in housing, and maybe even the stock market.

I think raising rates would have been better, to fight inflation.

I do like the OP's idea that we need to tax people who are just going to burn money on speculation instead of long-term investment in infrastructure. The last two stock market boom/bubbles have been because a leisure class had alot of money to play with, and they played poorly, investing in worthless companies and worthless real-estate.

[unblock]

12. RAISING rates?? during a liquidity crunch??

the idea of cutting only by 25 bps or even keeping rates unchanged is one thing, but RAISING rates would have been an immediate disaster. it would have been a sure-fire way to make the liquidity problems spread like wildfire.

[whistle]

18. Bernanke is in the "sweet seat" among his base of the wealthiest

... top 2% and as for the rest of us, we will now be subjected to the cruelest of taxation, inflation and stagflation. Hyper rising prices and zero or even negative economic growth.

[nadinbrzezinski]

9. Agreed, he is trying to avoid a 1929 disaster

that was the emphasis of his teaching as an academic, but he's overcompensating

[unblock]

11. yeah, right, the most important thing is to PANIC!

the fed is in a situation where "the" solution to all that ails us is not obvious, but the approach indicated so far is hardly unreasonable and hardly worthy of panic.

when the fed is faced with an liquidity crunch, the simple first move is to cut interest rates. conduits are having a very tough time rolling over their paper. even those conduits with ZERO exposure to subprime loans are having significant difficulties. why shouldn't the fed make their life easier?

oh, and by the way, those who invested in crappy subprime loans are still stuck with crappy subprime loans. the only way the fed move helps them is by slowing down the foreclosure rate by eventually making life easier for those homeowners struggling to make end meet. why should the fed vote for more foreclosures?

and where is the disaster? the downside of lowering interest rates, of course, is a weaker dollar and higher inflation. the weaker dollar is not necessarily a horrible thing, because the dollar's strength for too long has turned us into a consumerist economy because imports are cheap and employment is expensive. a cheaper dollar makes imports more expensive, which ultimately makes buying locally more attractive.

inflation is rarely good, in and of itself, but we know what the fix is. moreover it's not at all clear that inflation is a necessary byproduct of lowering interest rates given the latest economic readings, most notably the liquidity crunch. we'll see.

but the idea that the fed should solve the immediate problem (liquidity crunch) first, and solve the future problem (inflation, weak dollar) later is hardly a terrible approach.


i do agree with the notion that the fed alone cannot control the entire economy and the congress can and should do their part. but historically, congress is very slow and usually solves problems too late.

[lonestarnot]

14. We are fucked, but the question is HOW fucked?

[whistle]

20. See my post at:

http://www.democraticunderground.com/discuss/duboard.ph...

[Festivito]

24. Your link fails. /nt

[whistle]

26. Here is the post

whistle (1000+ posts) Wed Sep-19-07 12:34 AM
Response to Reply #4

9. You suffer from monetary MBA delusional disorder, that money ONLY goes

Edited on Wed Sep-19-07 12:51 AM by whistle
...to speculators, not people about to lose their homes. Where is the foreclose ur protection? Not from what the Fed did today. Local banks won't get that money, hedge fund groups will. You are acting like savings and loan institutions still exist to help neighborhoods.

You are watching "It's a Wonderful Life" and living in the fantasy. That died with the failures that Greenspan engineered in 1989. That is history. The democrats must act and act now or it is game over. Congress must introduce, pass and implement the Homeowners and Bank Protection Act of 2007,

This act includes the following provisions:

1. Congress must establish a Federal agency to place the Federal and state chartered banks under protection, freezing all existing home mortgages for a period of however many months or years are required to adjust the values to fair prices, and restructure existing mortgages at appropriate interest rates. Further, this action would also write off all of the speculative debt obligations of mortgage-backed securities, derivatives, and other forms of Ponzi Schemes that have brought the banking system to the point of bankruptcy.

2. During the transitional period, all foreclosures shall be frozen, allowing American families to retain their homes. Monthly payments, the equivalent of rental payments, shall be made to designated banks, which can use the funds as collateral for normal lending practices, thus recapitalizing the banking systems. These affordable monthly payments will be factored into new mortgages, reflecting the deflating of the housing bubble, and the establishment of appropriate property valuations, and reduced fixed mortgage interest rates. This shakeout will take several years to achieve. In the interim period no homeowner shall be evicted from his or her property, and the Federal and state chartered banks shall be protected, so they can resume their traditional functions, serving local communities, and facilitating credit for investment in productive industries, agriculture, infrastructure, etc.

3. State governors shall assume the administrative responsibilities for implementing the program, including the "rental" assessments to designated banks, with the Federal government providing the necessary credits and guarantees to assure the successful transition.

The Congress of the United States must act to pass legislation embodying these three principles immediately, as emergency legislation, halting a "tsunami" of foreclosures, keeping millions of American families in their homes to avert social chaos, and protecting chartered lending banks of the United States and the states. It this does not happen within the next 30 days, the country is likely to go into an economic meltdown that will trigger a 1930s style depression or even an economic dark age which would take decades to recover from.

[Festivito]

28. But, that will anger the secret central bank owners. And they kill.

Will we have the honest AND WORTHY among us to ride the S.S. Spirit of the Americas into the swells to freedom from such control, or will the sea be filled with scared and devious grabbers holding to whatever flotation devices are tossed from the controllers' devious design?

Time will tell.

[cascadiance]

25. There are other ways of fueling people getting loans than lowering rates...

Lowering rates just sinks the already dropping dollar to new depths!

The real issue is to put more money into the hands of the average person instead of continuing allowing the money grab by the corrupt cronies of this administration at the top rungs of our society. THAT is the solution. Then we can keep higher interest rates AND keep a healthy home buying market, economy, etc.

The bastards in charge don't want to give up their money train, despite the fact that it's destroying our economy and the country in the process. They need to be CALLED OUT NOW!

We can do this with some true income tax reform, not just tax cuts for the rich in time of wars, which there is a reason for no other country having done it in history during a time of war!

[Kelly Rupert]

27. And the only thing worse than that is leaving them the same.

We're all going to die a violently inflationary death!

[whistle]

32. So monetary policy really is not the answer or even the driving force of economics

...is it

[Gabi Hayes]

29. the smash and grab kleptocracy is doing all it can to take as MUCH as it can

out of the federal kitty and redistribute it to themselves, while just barely keeping the lid on until they get voted (if they can't steal it again) out next year, when the dems will be forced to try to bail the country out again

it's too late

too late for the economy

too late for the war

too late for the environment

on that happy note, it's time for some everyday torture: Cub game...three double plays in three innings

[kineneb]

30. more to read here, in agreement- a disaster

http://www.atimes.com/atimes/Global_Economy/II20Dj01.html

US rate cuts: Like a blow to the head
By Julian Delasantellis

-snip-
In an extraordinary meeting of the United States Federal Reserve on Tuesday, the board shocked the financial world (very much including me) by announcing interest rate cuts far more extensive than previously expected. The expectation was that the cuts would have been limited to just a single 0.25-percentage-point (25 basis point) cut in the benchmark Federal Funds target rate; instead, the Fed reduced the target rate 50 basis points, along with a second 50 basis point cut (the first was on August 17) in a less commonly reported but possibly more important rate that the Federal Reserve also controls, the Federal Reserve discount rate.

This is a complete rejection of the policy of former Fed chief Alan Greenspan of slow and gradual interest rate changes so as to assure the markets that they will not be continually surprised by unexpected Federal Reserve actions, a policy that Bernanke had been maintaining during the previous 19 months of his tenure.

The contrast between Tuesday's meeting result and the sunny optimism of the previous Fed meeting on August 7 is breathtaking; it is far and away the most ominous portent of the future prospects of the US economy since the current "subprime crisis" broke into the market's consciousness earlier this year. Comparing the results of the August meeting with Tuesday's is like going to the doctor wanting to have a hangnail removed and having the physician start his conversation by asking how you feel about cremation.

-snip-

To me, the most remarkable thing about these events is that they demonstrate the breathtaking disregard that US economic policy makers have regarding the value and fate of their own national currency. Richard Nixon-era secretary of the treasury John Connolly, speaking to European economic officials, once said that the US dollar was "our currency, but your problem". The country could get away with that back in the early 1970s, when the US was the world's biggest lender; now that this situation is reversed, and the country must borrow $2-3 billion from foreigners each and every day just to feed its overconsumption addiction.

-snip-

I really enjoy reading Asia Times Online, it has info that never shows up in our press.