The Fed's Lose-Lose Decision

The Federal Open Market Committee faces a perplexing deliberation over the next 36 hours. They have backed themselves into the corner and either must again cut interest rates just after last week's emergency 3/4 percent cut to maintain the market's momentum, or they must act prudently to hold the line disappointing the market and suffer the criticism of destabilizing the markets. Either way its looks like a lose-lose proposition, because the Fed can hardly be seen as acting on the dictates of Wall Street nor be seen as not acting prudently to aid the economy when benchmark Treasury rates already support a substantially lower Federal Funds rate.

There is of course an alternative course of action. They could just ask the President to issue an executive order to cap credit card interest rates at 12-15% to end the choking-off rates bank issuers are charging to make up for bad sub-prime loans. This would have a far greater immediate and multiplier impact on consumer spending than any further rate cut ever could and would keep Treasuries attractive as an investment to finance US deficits. At the same time it would keep some gunpowder dry, if as they claim, the US is not already in a Recession. Furthermore it would align US rates and monetary policy more with those of our long term allies.

Not doing so is akin to sanctioning usury and taking a big risk of exacerbating greater consumer default, this time on credit cards, compounding the problems the financial system already faces. In fact there's only one reason the Fed would not opt instead to do this: the Fed is blatantly acting on the dictates of its banking brethren who are intent on gouging US consumers to make up for their losses. Indeed implicit evidence of this already exists by the case of last week's .75 basis point cut that didn't effect US mortgage rates.

This author calls on the GAO to investigate price collusion between the banks and the Fed? And while they're at it, they should investigate the Government's reporting of economic data beginning with CPI, GDP and Durable Goods. It wouldn't be surprising to learn that revisions to correct earlier economic data announcements were far less necessary meaning that they have been manipulated for political ends.

Comments

[User 41525]

You shoudl report your ideas of collusion and manipulation of the statisticcs to appropriate offices of the justice department.

You might also contat the anti trust department oabout the CME buyout of NYMEX. Clearly anti compeititve.

[contrariwise]

Looks like state planning to me. While you're at it, why not also regulate the price of gasoline, carrots, vodka and cigarettes?

[EasySolution]

This is election year. Everything is expected. Inflation is a built-in ingredient in capitalism. No one likes recession. However, the real correction will come in 2010, the second year of presidential term. Dow will be 18000 at that time. In the mean time, lets keep on printing the money and enjoy the life.

[SeriousBull]

Dear not on my account,

I agree with you. Read my post today entitled: Will we learn from the lessons of the past. (hint inside: buy mbia and ambac)

[leojbourne]

Instead of lose-lose, the Fed's decision is win-win -- for them. Banks stocks have soared in the past few weeks as various government bailouts come through, and will go higher if the $145 billion "stimulus" package comes to pass. Banks require slow growth or recession, because in a high growth environment, long-term interest rates will go up and therefore bank profits from existing fixed-rate mortgages will go down. When the smoke and mirrors and circus music stop, the banks won't be the ones looking for a musical chair to sit on. They'll be firmly seated in solid profits. The Fed is a profit-making, private bank. The GAO will never audit it, nor will anyone else, and the rules of the free market do not apply to the Fed in any real way. In many respects the United States is more a financial oligarchy than a political democracy. And as in any "fixed" game, the house always wins.

[sasian]

..when will a lack of liquidity become a crisis in real terms.. perhaps never.. ink and paper is all you need, along with the smoke and mirrors..