The Federal Reserve Board, in extraordinary out-of-session action, today lowered the federal funds and discount rates to 3.5 percent. Whoop-de-do. Why the hell did they ever raise them above that to begin with?
It baffles me where these people get their reasoning. Do you ever read the Fed’s nonsensical comments? Where did they learn this babble?
Yeah, yeah, they were trying to control inflation, but do you save your children by drowning them when they have a fever? That’s essentially what the Fed did to the U.S. (and world) economy.
Good going, guys. Let’s see, that’s an least three over-reactions in the Greenspan-Barnanke era.
Three strikes and you’re out?
As I wrote previously, the U.S. economy functions best on low interest rates, in the 2.5 to 3.0 percentage point range. When rates started to more than double that in the past two years, trouble soon followed. Witness the recent so-called "subprime" mess.
Now, however, hopeful signs are emerging that Fed Chairman Ben Bernanke is coming to his (my) senses, as it’s widely believe he and his board will cut rates by one-half a percentage point in late January, bringing it down to the 3.75 percent level.
Close, but he’s going to have to go lower. Remember, Japan had its rates at zero for almost a decade, and the best that could accomplish was to maintain the status quo of constant deflation and recession.
There are lessons for mature economies, low interest rates being one of them. In truth, we really have an "overprime" problem–interest rates too high–rather than a "subprime" problem of lending rates being too generous.
Maybe Bernanke has learned a painful lesson.
