Is the Fed living in a fairy-tale world?

Posted by: Michael Mandel on June 25

Is the Fed living in a fairy-tale world? Unemployment is rising, housing prices are plunging, and oil prices are sky-high. Oh, yes, and consumer expectations of their future economic prospects are at a record low, according to the Conference Board. The only sign of light is real consumer spending, which at least according to the official numbers, remains strong.

How can consumers keep spending,? No one knows. Yet the Fed has decided to believe in the cheerful official numbers, and stand pat, keeping the fed funds rate at 2%. In their statement today, the Federal Open Market Committee said

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending….The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.

Now, holding at 2% for one meeting is not a big disaster. It’s perfectly reasonable to wait and see what way the economy is going to go. And 2%, adjusted for inflation, is still equivalent to a negative real rate.

But it’s important to realize that it just doesn’t make sense that consumer spending should be firming up at this point in the cycle. What’s far more likely is that the official numbers are overestimating retail sales and consumer spending, and that the actual numbers have actually been on a downtrend (more about that in a coming blog post). There’s also a good chance, in my estimation, that we will see a sharp downward leg in spending, and an increase in savings, coming sometime soon.

What does that mean for the Fed? I still expect to see the fed funds rate drop as low as 1.5% in the near future, as evidence of the continued weakness in the consumer sector mounts, and starts to feed back into the banking sector. If consumer loan delinquencies keep rising, that will send a red flag up for Chairman Bernanke and his associates.

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Reader Comments

AV

June 25, 2008 04:50 PM

Fairyland, why not? Everything else
inside the Beltway is Disneyland.

It's tough when you have to live outside
castle walls...................

vladimir_dt

June 25, 2008 04:51 PM

Ok, let's see if I get this. It costs more for a gallon of gas, like 3 times more this year than last. I have to buy the gas to run my tractor to plant, fertilize, and harvest my crops. I'm not supposed to demand more money for my produce than I did last year? Not @#$#ing likely. That is really what inflation is. You can't have higher costs without higher prices. So, either the Fed needs to make more money available to the end users, consumers, or it has to make sure the base prices of the required goods are low enough to hold down the prices of goods sold. It is a policy decision, and one that needs to be made soon.

Mike Mandel

June 25, 2008 04:59 PM

Vladimir

Truthfully, you might be justified in raising your prices--but then consumers will have less money to spend on other things.

Whys

June 25, 2008 05:01 PM

From what exactly does Bernanke expect the economy to receive a bounce? Hitting bottom?

I think this illustrates the Fed's hard reality. We can not safely continue to cut interest rates. That leaves Bernanke only one tool to help the markets, cheerful predictions.

If too many consumers are fueling their spending with home equity loans, then this economy isn't worth the IOUs it's written on.

Jack Scott

June 25, 2008 05:02 PM

Tinkering with interest rates is almost irrelevant to the current problems.The real issue is the continuing lack of liquidity in the financial sector.Overseas investors burned by the morgage debacle are unlikely to provide much needed capital to the institutions responsible for that debacle particularly when they can expect their investment to devalue as the $ continues to decline like the currency of a third world banana republic.
The forthcoming depression is going to make the 1930's seem like a party unless swift,effective managementof this economy takes place.Is the fed incompetent,asleep,or simply another organ of government so infected by corporate interests,that it can not take the actions necessary to prevent what can easily become a financial melt down for everyone.

Dvds

June 25, 2008 05:04 PM

The wealthy become more so, and the
poorer become more so. Expect to watch
out for the have nots.

Ed

June 25, 2008 05:14 PM

I have said this for 3 years that it must be nice to live where the Fed lives. No inflation, strong economy and a wonderful life. Something is terribly wrong with the way the Fed is calculating inflation and the strength of the economy in general. There is a major disconnect between the Fed and the real world.

Roger L

June 25, 2008 05:18 PM

Mandel seems to be advocating _lowering_ rates further in this massively inflationary time. So the folks who have saved, rather than wasted, money continue to get slammed, while the government starts talking about how we need to increase our savings rate, and decrease our debt.

Completely ridiculous.

JS

June 25, 2008 05:21 PM

Actually, if prices really are climbing as fast as everyone indicates (ie, inflation), the Fed is crazy to not raise rates now. Standing pat or (heaven forbid) lowering rates puts the US right back into the stagflation 70's.

WB

June 25, 2008 05:27 PM

Bernanke has finally realized Vladimir's dilemma. Mike makes no mention of inflation or inflation expectations, which are high and going up. Once inflation expections overshoot, so do inflation and the collapse of the dollar. He should have raised rates. The recession is here, let's get on with it.

Mike

June 25, 2008 05:28 PM

oil prices are sky-high and you want the Fed to reduce the fed fund rate and weaken the dollar even more ?!? What branch of economics is this, chaos economics?

ken

June 25, 2008 05:29 PM

um, are you saying that the fed perhaps should have lowered rates? your post was on the front page of google news. good for you!

i doubt they live in fairyland. more just that they're quite ok with inflation. which you seem to be as well?

anyhow, if you think its okay for there to be a run on the dollar, and that the working class in america will get crushed like japan has been getting for the last decade or so, then perhaps this is just okey dokie. and you probably need to understand that there isnt going to be any spike in savings if people are just trying to survive, with no place save. helloooo, who's going to save at negative real rates?

anyhow, i can understand why you would get awards from bankers if you're speaking like this. lets stick it to the working class! all together now!

John

June 25, 2008 05:29 PM

I'm not sure who is in a bigger fairyland...the Fed or you! Fed funds at 1.5%!!! C'mon, do you want the already utterly worthless dollar to become the laughing stock of the world!?
The Fed better realize it can't dance this growth vs inflation tightrope forever, and realize the longer they wait to raise rates, the deeper the pain we will all feel in our wallets!

Aaron

June 25, 2008 05:31 PM

There's a really juicy irony in having a scholar of & expert on great depression #1 presiding over the fed for great depression #2.

jack

June 25, 2008 05:32 PM

I thought lower rate would only fan inflation. Are you sure recession is a worse outcome than inflation? I would rather he kept the rates higher to battle inflation. I would argue that Recession is the necessary medicine at this time to change consumer behavior. At least we shouldn't have all the garages full of stuff we do not need.

travis

June 25, 2008 05:45 PM

While the effects of the housing market implosion continue to ripple throughout the economy, the Federal Reserve resorts to its favorite bailout strategy of cutting the fed funds target rate. The slightest sign of weakness in the US economy prompts the Fed to blindly jump to action even as more prudent heads prevail in Europe.

http://www.beyondthemargin.net/2008/06/inflation-rears-its-ugly-head.html

Queegmeister

June 25, 2008 05:45 PM

Yo,
Look at my video on UTUBE
Federal Reserve Ripoff -
It needs updating but the explaination for alot of our problems is there.
We need to LIMIT or Eliminate the FED -
They are running the US into the ground.

Joe Cushing

June 25, 2008 06:15 PM

Thumbs up to Roger L. I think the fed is just trying to come up with a way to take pressure off him to lower rates. Rates are not the problem anyway, it's confidence. Lower rates undermine confidence anyway.

Martin

June 25, 2008 07:27 PM

It is difficult to see all of the factors causing the current turmoil in the economy, but we can learn something from history. So, what would happen if: 1) VERY STRONG federal controls are placed on the mortgage industry immediately and with these changes made very difficult to remove or alter. These controls would guarantee low rates (4 %) for qualified buyers of primary residences regardless of the prime rate and offer government guarantees to make the lower profit margin attractive to lenders due to the low (zero) risk. At the same time raise taxes much higher (50%) on the profits from 2nd homes and speculative residential property if sold less than 5 years of purchase. 2) The same types of incentives and controls for stock investments. Reward long term investing and tax short term profit taking highly. Also, restrict commodities trading by requiring brokerages and buyers to closely follow rules designed to limit trading on volatile commodities (halt trading if necessary). Not as fun for the investors buy it allows the people that actually use the commodities to afford the price. 3) Once new rules are in place it is time to raise the interest rates, quickly. An immediate increase from 2 to 7 percent wouldn't be uncalled for. Announce that it will stay at 7 percent for 5 years.

That should guarantee immediate stability in residential housing while still allowing for long term and profitable investment.
Also, the dollar would stabilize and then increase in value once the world markets see the U.S. government has actually taken long term action towards stability, instead of just paying for another study and then ignoring and taking no action on the results.

Fred

June 25, 2008 08:00 PM

Futher cut on interest rate will futher weaken the dollar. That would encourage more money to go into commodities, that creates more inflation. Every time the Fed tries to cut rate and print more money to save the stock market, they ended up creating another bubble. Internet, housing, and now commodities bubble. When are they gonna learn stop intervening the market?

justme

June 25, 2008 08:52 PM

Every time the FED lowered interest rate, the commodity prices had gone up. People are not stupid! You can devalue U.S. dollars so much without people hedging against inflation. Assuming the real inflation is 5% and with interest rate at 2%, we have a real rate of -3%. I think that is pretty stimulative. Recession is not a bad thing, if the economy does not keel over to a deep recession. It is time for people to spend less, drive less, consume less, buy less. Just imagine if only import half as much oil as we import right now. The saving will be stimulative to our economy. Hopefully, we will get a more stable and sustainable economy.

Kartik

June 25, 2008 08:58 PM

Whenever interest rates are lowered below 3% or above 5%, it merely causes problems. We have seen this repeatedly in the last decade.

It should not go outside of the 3%-5% range except in extraordinary circumstances.

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Dave

June 26, 2008 02:39 AM

Why do American economists believe that all problems can be solved by more debt and subsidised interest rates. Would you lend your own money to these banks at 2% or 1.5%.

James

June 26, 2008 06:44 AM

It's inflation that is hurting people. The Fed should RAISE rates.

As for real estate prices, they need to keep falling until housing affordability returns to its long-term norm.

Scott

June 26, 2008 09:05 AM

This statement is curious, "The only sign of light is real consumer spending, which at least according to the official numbers, remains strong." We've all heard the Media Mantra for years - "Americans don't save money." If credit cards companies, mortgage companies, etc are all cutting back on short and long term credit, where is all of this money for consumer spending coming from? My guess is either 401Ks are now being used as bank accounts and/or we save a lot more money than the bean counters think.

Dave

June 26, 2008 09:44 AM

Decisions in this country are no longer based on what is good for citizens. It is based on what is good for the special interest. If anything is to get done in America today, corporations wait for a tax break from congress before they will act (at taxpayers expense)while these same corporations give there CEO's and other officers bonuses that are more than what people get as pay for a year. Look at AIG as an example, the stock goes down more than 50% and the outgoing CEO gets more than $32 million as severance pay. The only Disney Land going on in American today is our leaders cannot relate to the people they lead, and certainly do not lead by example. We need leaders that do not appeal to the mind but sincerely to the hearts of the people by showing them, they do feel our pain by living like the rest of us and not making money off of what they know we want to hear, or listening only to special interest.

Jeff

June 26, 2008 10:46 AM

I believe what the Fed should do is raise interest rates steadily for now, not by too much this. This will decrease the growth speed of inflation. The US dollar will increase in value against most currencies which will in then bring down the cost of oil per barrel which will put a little more money in everyone's pocket. If oil prices drop then transportation and energy costs will drop as well furthere decreasing the rate at which inflation is climbing. Wake up Bernanke it's time to throw out the academics.

Tom

June 26, 2008 10:50 AM

Inside the beltway is analogous to inside the green zone. Out of touch with reality.

Squeezebox

June 26, 2008 11:40 AM

If you want to know how high or low to set interest rates, you not only have to look at M1 and M2, but also M3. How much money is actually available? It looks like we're printing money, but at the same time, banks are raising consumer interest rates and taking money out of the economy on their own. How many credit card users are paying off their balances rather than getting taken to the cleaners by Bank of America? Paying off loans actually shrinks the money supply. Folks cash in their 401K plans to pay off debts and there's less money invested in production. People cut up their credit cards and there's less money spent on consumption. People have suddenly resolved to spend less and save more, and that is a classical Keynesian leakage in the money supply. As to whether to leave interest rates alone, the jury's still out.

Henry

June 26, 2008 11:59 AM

The FED is solely responsible for price inflation and malinvestment (examples: the tech bubble, the housing bubble, the commodities bubble, etc.). This is due to the fact that the cost of money is not determined by a free and open market but, instead, is determined by nothing more that a criminal gang of elitist and insider bankers. The FED is a private banking cartel that the Federal Government uses to finance our welfare-warfare state since tax receipts are never enough to pay the bills. The interest paid on the National Debt is now approximately thirty cents out of every federal tax dollar paid by Americans. The relentless expansion of the money supply by the FED always results in price inflation. The US dollar has lost 98% of its purchasing power since the FED was created by Congress in 1913. Eventually, the FED will be forced to raise interest rates. It will be forced to do this in order to avoid hyper-inflation and a domestic insurrection that would be sure to follow. The bad news: when the FED begins to raise rates in earnest, the stock market will tank. The good news: with rising rates, price inflation will come to a screeching halt. CDs will also pay much higher rates to those who are lucky enough to still have some cash left. As Paul Harvey says; "and thats the rest of the story."

Henry

June 26, 2008 12:30 PM

The FED is solely responsible for price inflation. Since the FED was created in 1913, the dollar has lost 98% of its purchasing power. The FED is solely responsible for malinvestment (i.e. tech, real estate, and commodities bubbles). Both of these evils are due to the fact that a small group of elitist and insider bankers have the power to dictate the cost of money (interest rates) rather than the cost of money being determined by free and open markets. The FED is also the dirty little engine that finances the deficit spending of our welfare-warfare state since tax receipts are never enough to pay the bills. They create money out of thin air and "lend" it to the Federal Government. Approximately 25 cents out of every Federal tax dollar is now paid out as "interest" on the national debt. However, the FED will soon be forced to raise rates in order to avoid a hyper-inflation situation and likely civil disturbances. At that point, the stock market will tank. Price inflation will come to a halt and CDs will inevitably pay higher interest rates - to those who are lucky enough to have some cash left to invest.

Dominic

June 26, 2008 12:35 PM

Michael

Do you really want to throw even more gasoline into the fire??

Justin Coffey

June 26, 2008 12:50 PM

Mr. Mandel appears to be the one living in a fairytale world, as the clear implication of his editorial is that the Fed should have dropped rates by another quarter or half point. This is operating on the theory that there is too little money (ie liquidity) in the markets at present.

This could not be further from the truth. The world is flush with money which is evidenced by the enormous liquidity of sovereign funds, and also by the rise in commodity prices. The problem isn't lack of money, it's lack of confidence in markets due to the world wide epiphany that some market investment vehicles (ie CDOs) are so opaque that the even likes of Warren Buffet state that it is impossible for any institution to accurately comprehend their risk.

Confidence is further eroded by the Fed's lack of vigilance on inflation and the value of the US Dollar. Given that the Dollar seems to have no firm bottom, it seems entirely unlikely that many investment funds would be bullish on US Markets.

The solution to the US Economic woes are a slow but steady march upward for the Fed rate, perhaps to as high as 4% over the next 18 months, and increased regulation of investment products, not to decrease the variety, but rather to increase their transparency.

marxbites

June 26, 2008 02:05 PM

The private for profit Fed is America's king of special interests that all others bow to for their sustenance. It is the Credit Card with an unltd ceiling, no maximum credit like the plastic in our own wallets.

We now do not pay the debt with the higher taxes that would kill the re-elections of traitors to our constitution which specifically forbids a fiat money system at interest, yet our grandchildren will born into servitude to service the 9+ TRILLION of total debt that does not even include the coming socialist welfare SS/Medicare crunch as the retired to worker ratio begins going parabolic.

I say stiff the FED and confiscate the people's stolen wealth rat-holed away from taxation in all their elitist super-privileged foundations and trusts, and PAY BACK the 5 generations of Americans robbed by the Int'l shylocks that subsumed with war debts ALL the countries banks for their own - that financed an entire century of wars for banker's, and their merchants of death, profits.

Kill the FED - restore sound money and the freedom & prosperity to America once again as it was between Jackson's killing off of the 2nd Bank US & the CW, and from the CW to 1913. The best of financial times in America, rising standards of living and falling prices, with limited govt to boot that sound money has always been the best at insuring against the tyranny of govt manipulated fiat.

Brandon W

June 26, 2008 03:30 PM

**sighs**
Said it before... inflation is actually running 11.8%... The government is flagrantly fudging the methodology to make it report smaller... adjust everything to that rate, accordingly... blah blah blah (and comprehensive unemployment is actually at 13.8%).

Raise rates enough to control inflation and it'll send us into a crushing deflationary Depression.

Keep rates low enough and pump enough liquidity to ward that off and we're headed into a crushing hyperinflationary Depression.

Looks like Helicopter Ben is aiming for option #2.

AnnInFL

June 26, 2008 04:01 PM

We already have raging inflation, reflected in skyrocketing oil prices. The Fed can't raise interest rates yet because the banks are in so much trouble and we haven't seen the worst yet. So the Fed is desperately hoping the inflation won't get passed through to consumer prices (because the consumer is so tapped out and in debt that he can't pay any more). What does this mean? That manufacturers and retailers will have to eat the costs! Just like the airline industry that is going bankrupt because they can't pass along their costs in higher air fares. So how many businesses will be going bankrupt as a result of these Fed policies and irresponsible banking practices?!

sanjay sathe

June 26, 2008 05:20 PM

This continuing urge to cut interest rates is the equivalent of giving a patient suffering a viral infection antibiotics. Not only is is not effective but as we are all discovering overuse of antibiotics is counter effective. Ever since the Fed decided to ignore the value of the dollar oil and other commodity prices have shot through the roof. Every cut instead of stimulating the economy is actually making things worse. The Fed should have held interest rates and dealt with the liquidity problem through the various facilities that it belatedly arrived at.

marxbites

June 26, 2008 05:58 PM

The United States Fiat Money & the Federal Reserve System

By Darryl Robert Schoon
Jun 23 2008 11:25AM

www.drschoon.com

Fiat money is an oxymoron. Traditionally, money has been both a storehouse of value and a medium of exchange. Fiat money exists by mimicking both; but when its ability to do so ends, fiat money exposed for what it is, reverts to what it is - government issued coupons with expiration dates printed in invisible ink.

Fiat money distorts the time value of money and in so doing destroys both money and the economies that use it. Real money like gold and silver has value over time, the greater its value and the longer it endures, the more likely it will be accepted as money.

Throughout history, gold and silver have demonstrated such utility and as a consequence both have been used as money for thousands of years. Unfortunately, throughout history governments have either debased, sic diluted, the amount of gold and silver in their coins or attempted to circumvent gold and silver entirely by mandating the use of paper money, sic fiat.

This is why:

Wealth, e.g. money, is power in a stored state. Unleashed, wealth is capable of doing its possessors' bidding for better or worse. Wealth can exacerbate suffering or alleviate it and its power to do both - usually the former - has been coveted by governments since governments existed.

While productivity is doing more with less, fiat money allows governments to do more with nothing. Fiat currencies are a way for governments to spend what they don’t have; and while counterfeiting by individuals is a crime, passing government coupons off as money is legal because governments make the laws.

WHOSE LAWS WHOSE BENEFIT

The issuance of fiat money by governments is, in truth, a white collar crime; and, as happens when white collar crimes are discovered, a highly visible paper trail leads directly back to the wrongdoers - in this case, the central banks.

Central banks are the mechanism by which society’s productivity is drained and indebted. Credit-based money issued by central banks turns into debt, debt which immediately begins to accrue compounding interest paid by productive members of society, e.g. workers, businessmen, farmers, savers and taxpayers. The interest, of course, is paid to bankers, non-productive members of society.

The motives for the co-conspirators in this crime are different but equally fulfilling. Governments get to spend what they don’t have and bankers get to collect interest on money that is not theirs - a win/win for the governments and bankers and a lose/lose for citizens and savers.

FIAT MONEY IS A CANCER ON THE ECONOMIC BODY

The longer a fiat money system exists, the greater the odds of economic collapse. Over time fiat credit money destroys economies because time exacerbates the systemic flaws of credit-based, sic capital, markets.

Capital is but the polite word for credit and that is why it is used. Capitalism sounds so much better (and more like money) than creditism. The word capital implies a "moneyness" that does not exist.

Credit turns into debt and over time in fiat money systems the growth of debt overwhelms the ability of producers and savers to service it. This is why debt markets, e.g. bond markets, are now so much larger than equity markets and why defaults involve increasingly larger and larger amounts. In the current fiat money system, time is running out.

COMPOUNDING DEBT + TIME = INCREASING DEFAULTS

Time also contributes to the destruction of the "value" of fiat money. The continual issuance of fiat credit money expands the amount of fiat "money" in circulation and thereby lowers the value of all previously issued currency.

This is why savers are penalized in fiat credit based economies. Savings, measured in terms of constantly declining dollars, are worth less over time. In the 95 years since the creation of credit based money by the Federal Reserve, the US dollar has lost 95 % of its purchasing power.

In fiat credit-based economies, savers are penalized and speculators are rewarded. And while this is welcomed by Wall Street, it is a death warrant for Main Street. In the US over the past twenty years, while Wall Street has expanded, Main Street has contracted.

The shift in America from a productive to a speculative economy is evidenced by the recent growth and dominance of financial "services" companies, e.g. Goldman Sachs, JP Morgan Chase, BofA, Morgan Stanley, Lehman Bros, Wachovia, etc. - their only "service", of course, is a uniquely destructive and deadly form of "self-service".

Over time, parasites will kill the body on which they live and this can be seen in the current decline of the United States. The decline of America was not caused by outside forces, e.g. communism, terrorism, illegal immigration, currency manipulation or product dumping as the US corporate controlled media would have Americans believe. The decline of America was an inside job.

The collapse of the US came from within. In 1913, the US replaced its savings based currency with fiat debt-based money issued by the Federal Reserve System, a consortium of European and US private banks whose intent was to profit from the growing productivity of America - and profit they did but to the detriment of America.

Since 1913, the Federal Reserve System has helped Wall Street bankers leach and indebt the productivity of American businesses and workers until America is now but a shadow of its former self. As the fortunes of Wall Streets rose, America’s fortunes declined.

THE FIAT MONEY 3-STEP CREDIT (step forward) DEBT (stumble) DEFAULT (fall)

It’s been 95 years since the Federal Reserve System and its credit based money took over the US economy. Now, the United States, once the world’s only creditor is by far its largest debtor. A report from the Federal Reserve in 2006 stated the US is technically bankrupt with $65.9 trillion in irreconcilable obligations. Currently, the US can only pay its debts by issuing new debt. Default comes next.

THE US CENTENNIAL CELEBRATION OF FIAT MONEY

In 2013, in only five years the Federal Reserve System will celebrate its 100th birthday in America, the celebration of 100 years of bankers, financiers and corporate CEOs dismantling the productivity of America for personal gain.

It is my belief the next five years will determine America’s destiny. Once seen as a beacon, it is now distrusted and feared and rightly so. Those who bled this nation dry are still in control and the American people, America’s only hope, are not even aware of what has happened; and, if America is to be saved, there is not much time left in which to do so.

The odds aren’t good and Americans, heavily indebted and addicted to credit, are still hoping the Federal Reserve can save them, much as a patient hopes doctors will provide the right medicines, not knowing the doctors are getting kickbacks from the pharmaceutical companies and are skimming prescriptions for their own benefit.

In fiat based economies, time is the enemy and 95 years have passed since fiat money was introduced into the US. In America and elsewhere time is passing and the clock is ticking and recently it’s been sounding more and more like a time bomb.

It is hoped the election of a new president will save America. It won’t. Democracy, once the hope of the world, is now its greatest disappointment. Money - and fiat money at that - has subverted the democratic process everywhere; and today, in all nations, politicians from both conservative and liberal parties dance to fiat money’s funereal beat - in a mockery of democracy’s original intent.

DEMOCRACY - A CONTROLLED DANCE REQUIRING TWO PARTIES TO PERFORM

Nations, as well as people, can pass away in their sleep; and unless the American people wake up and wake up soon, their slumber will be the death rattle of what was recently the greatest nation on earth.

In just two weeks, on July 4th 2008, the United States will celebrate its 232nd birthday. But during its last 95 years, fiat money courtesy of the Federal Reserve System has steadily eroded the economic foundations of America. Once the wealthiest nation in the world, it is no longer. The cause is clear. So is the cure.

GLL

June 26, 2008 10:38 PM

Welcome to the new gilded age. The FED shot their wad bailing out the over leveraged gambling financial sector. But then they learn that "To Big To Fail" only means something when the unwinding is in the billions vs. the trillions they are now facing. The money pumps are being shut off because hyper-inflation wipes out everyone including the super wealthy. If this actually goes over the cliff, we can kiss the middle class goodbye.

rumi

June 27, 2008 09:32 PM

amzing to learn alot from you guys. thanks.

Viking

June 29, 2008 09:59 PM

To lower interest rates further at this point would be alsolute suicide for the economy with inflation already out of control.I am amazed that Mike Mandel would advocate this course,as I remember that he wrote a column a couple of months ago re. the problems we confronted because we had lived beyond our means to the tune of $3 trillion over the last decade.It seems to me that the only course we can and should take is to keep interest rates high enough to defend the value of the dollar,which will help keep inflation in check and take our lumps.Isn't it fair that we have to live below our means for a while,because we lived beyond our means for so long?If not us,who are we asking to pay for it,the prudent folks,who did not get caught up in the orgy and saved and invested,will see the value of their investments be eroded by inflation,or foreigners who invested here in good faith,will see the value of their investments eroded by the fallen dollar?Please tell me who should pay??

Mike Mandel

June 30, 2008 12:51 PM

I didn't do a count, but certainly the comments are running heavily against me.

To Viking: How much of a lump do you want to take? I'd like to protect the prudent folks, too--but the value of their investments is more likely to be eroded by a steep decline in the economy than by creeping inflation. I'm going to bet a year from now, the consensus will be that the Fed didn't cut fast enough or far enough.

Justin Coffey

June 30, 2008 07:39 PM

Mr. Mandel,
Yes, I think the nays have it.

In so much as taking our lumps is concerned, wouldn't you agree that the US economy is lumbering towards the slow-growth high savings economies of Western Europe?

Is there any other way? It appears as though we've used up all available sources of credit driving the consumption based economy. I understand the need to keep our banks liquid and lending, but keeping rates low in hopes of spurring fast growth at this point in time sound an awful lot like "driving fast and loose" as some racing fans might say. In other words, flat out dangerous to our long term wellbeing.

Shouldn't we raise rates and then concern ourselves with figuring out ways to mitigate the risk in the bank's portfolios? If their balance sheets started looking better, wouldn't this free up capital and they begin to lend again?

I'd be greatly interested to hear your musings on what might be possible if we did that. I suppose this suggestions is the beginnings of an industry wide bailout for failing mortgage products, but perhaps some one such as yourself with a real economics background could flesh out some interesting proposals.

Thanks!

-Justin

Viking

July 1, 2008 12:32 AM

Mike,your point is well taken,but can we agree that at least part of the housing bubble was caused by the FED keeping the interst rates too low for too long after the dotcom bust?If we repeat the same mistake we will only create another bubble in raw materials,which is already under way.Put another way the world has simply grown too fast for mining and materials companies,including oil companies to keep up with demand,so the world must slow down to allow supplies to catch up to demand.Otherwise inflation will get out of control and the FED will have to clamp down much harder later on.Anyway we used to accept that we had to have a recession once in a while.Remember the saying that it is the FED's job to take the punchbowl away before the party got out of hand?I haven't heard that one lately,but I think it is time to bring it back!I agree that the prudent folks will take their lumps too in a declining economy,but we must keep the fundamentals strong and intact,including a strong dollar,so we have a strong foundation from which to grow from when we finally hit bottom.

Juan

July 25, 2008 03:39 PM

The FED is neither the government or part of the government. It's a private entity with no reserves and owned by a few wealthy families. They are ruining this country with too much debt and they need to be dismantled ASAP, wishfull thinking...

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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