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I don't agree. I think the Fed should have lowered rates earlier. Lower rates lead to a better lending environment which leads to economic growth. If the Fed

I don't agree. I think the Fed should have lowered rates earlier. Lower rates lead to a better lending environment which leads to economic growth. If the Fed had cut more drastically earlier, we wouldn't be worried about a recession right now. And I'll bet the dollar would be even higher, since the world likes investing in currencies that are backed by a strong economy. There is no need to go through a recession just to make the 'organizations that were investing poorly' pay. The market won't discriminate to that degree (ie, good investments that have nothing to do with housing and have wonderful balance sheets like Apple will also go down). If you're going to use medical analogies, I'd say that avoiding a rate cut to punish the 'bad' companies is like committing suicide to alleviate an upset stomach.... Anyways, the problems weren't caused by lower rates alone - banks weren't very good at evaluating the risk profile of the people they were loaning money to. And repackaging mortgages to sell them to the 'bigger fool' gave them little incentive to be more vigilant - in fact, it rewarded aggressive lending practices . I think lenders are now more aware of the problems with this line of thought, which is why they are so reticent to lend now. Hopefully the Fed will cut again at their next meeting.

Dauntless 19y ago
You clearly don't know what hyperinflation does to an economy. It's not like lowering rates is a silver bullet to economic growth. Lowering rates compromises long term growth for short term growth. "Hopefully the Fed will cut again at their next meeting." ... ahhh, forget about it.
- comatose_kid 19y ago
  You're clearly assuming that lowering interest rates will cause hyperinflation. Back that up instead of talking down to me. Explain how hyperinflation will occur when what is typically a person's most valuable asset (home) decreases in price. Explain how hyperinflation will occur if we're in for a recession and the associated job losses. Lowering rates does not sacrifice long term growth. Rates were drastically lowered in 91 and 82 (83?) as well, and that didn't exactly negatively impact long term growth. I'm serious, and I'd appreciate something concrete to help me understand why my viewpoint is incorrect.
  - david927 19y ago
    By lowering the prime interest rate, they are making it easier to borrow dollars, which lowers the dollar's value, which causes price inflation. If you have a strong dollar, you can lower rates. But the dollar is at an all-time low, so then to have a 75bps drop hit it, the result is essentially pushing it towards hyperinflation.
    - comatose_kid 19y ago
      Right - I understand this part. But I think this is more than balanced by the positive effects of rate cuts on our economy. Rate cuts make it smarter to borrow than to save (for businesses and individuals), and the spending of this money means more growth. Economic growth is what will make the US dollar a more attractive investment. I guess that given the huge drops in housing values, combined with the layoffs that will (and have) occurred in the banking and housing industries, I am more worried about deflation than inflation. $100 oil and a lower dollar don't matter as much as banks going under and people walking away from their houses.
      - david927 19y ago
        I think you mean the 'potential' positive effects of a rate drop, because if you remember, Japan dropped their prime rate to 0% for years and it did nothing. It only makes it easier to borrow and therefore easier to finance growth and restructuring if you want it. But if the climate is negative and no one is buying, then there's no reason to grow, etc. Deflation is also bad. Bernanke thinks that the effects of the Great Depression could have been mitigated if monetary inflation would have offset the deflation that was occurring. And I think that what he's doing here. Unfortunately, he's about to find out why that doesn't work.
        comatose_kid 19y ago
        Good point - thanks.
    - vitaminj 19y ago
noonespecial 19y ago
Do you ever think that maybe politicians are missing the boat here? With most Americans paying about 75% in total taxes (when you count sales tax, gas tax, property tax, etc etc) it seems we are always just a tiny downturn away from disaster. If you want your people to spend money and buoy the economy, perhaps instead of making it easy to borrow what they don't have you should try NOT TAKING SO DAMN MUCH from them in the first place. Listen carefully: Money you take from the people and spend in Iraq is gone, mmkayy? Constantly trying to balance on the razors edge of economic collapse and then issuing even MORE credit (and measly tax rebates) when you've gone too far can't possibly be the optimal implementation. Ok, sorry, rant over.
- vitaminj 19y ago
  75% in taxes? Get a grip man... taxes are quite high, but definitely not that high. Check out this report by the tax foundation, which breaks down federal and state taxes by the average household: http://www.taxfoundation.org/files/sr151.pdf http://www.taxfoundation.org/files/sr151.pdf
  - noonespecial 19y ago
    Good link. Yes, in fact I did pull that number out of my... well, you know. It was merely to illustrate that such a point exists. After a certain absolute percent, raising taxes will REDUCE tax receipts and wreck your economy at the same time. I'm certain were all the way down the back side of that curve near the "wreck your economy" shoulder. Yes, even though our absolute tax is lower than some smaller countries whos economies have evolved to operate at a greatly reduced rate. It does also miss many of the 'hidden' taxes we still pay. For example, everyone in this state has to get a silly sticker on their car every year so the mechanic can pretend to look at the breaks and then try to charge you $35 for a $5 light bulb. The sticker costs $25 but I've never made it thru in less than an hour. The price of the silly sticker AND the wasted hour is a tax. There's one $25 fee and at least one wasted hour for every car in the state. This kind of thing is particularly noxious because they could have just had a little courage and added the $25 to the regular car tax, but instead wasted 100's of thousands of man hours a year on what is almost always a fictitious "inspection". You should see what it takes to be able to build a shed in the back yard for your lawnmower... Inflation is usually a tax as well. If a government needs money, can't borrow it, and its not politically expedient to raise taxes again, it can simply print up some money and steal a little from each of the other dollars that people already have. There's also start of and end of life taxes that have to be amortized over the years of the life of a person. If you make a little money or live in a place that sees real estate rise, this is non-trivial. Even the tax code ITSELF is a tax. The ever increasing burden of compliance is nothing but dead weight for individuals and businesses. Finally, there's a stack of extra tax and extra man-hour-wasting hassle headed your way if you have the audacity to try to work for yourself and not simply settle into a nice job in an industry with lobbyists and get your w2 like everyone else. This is probably the one that interests the readers of this forum the most. One slightly other off subject comment on the article. The government using taxation as a vehicle to transfer wealth from the "rich" to the "poor" is a recipe for economic disaster. Ever dollar "robin hooded" is a dollar sucked directly and completely from economic growth. Its a near perfect disincentive for innovators to innovate. Sorry to slasdot/troll the issue but I am passionate about this particular area! The point of all this is, there are better ways to fix the economy than an interest rate cut!

Dauntless 19y ago

You clearly don't know what hyperinflation does to an economy. It's not like lowering rates is a silver bullet to economic growth. Lowering rates compromises long term growth for short term growth. "Hopefully the Fed will cut again at their next meeting." ... ahhh, forget about it.

comatose_kid 19y ago
You're clearly assuming that lowering interest rates will cause hyperinflation. Back that up instead of talking down to me. Explain how hyperinflation will occur when what is typically a person's most valuable asset (home) decreases in price. Explain how hyperinflation will occur if we're in for a recession and the associated job losses. Lowering rates does not sacrifice long term growth. Rates were drastically lowered in 91 and 82 (83?) as well, and that didn't exactly negatively impact long term growth. I'm serious, and I'd appreciate something concrete to help me understand why my viewpoint is incorrect.
- david927 19y ago
  By lowering the prime interest rate, they are making it easier to borrow dollars, which lowers the dollar's value, which causes price inflation. If you have a strong dollar, you can lower rates. But the dollar is at an all-time low, so then to have a 75bps drop hit it, the result is essentially pushing it towards hyperinflation.
  - comatose_kid 19y ago
    Right - I understand this part. But I think this is more than balanced by the positive effects of rate cuts on our economy. Rate cuts make it smarter to borrow than to save (for businesses and individuals), and the spending of this money means more growth. Economic growth is what will make the US dollar a more attractive investment. I guess that given the huge drops in housing values, combined with the layoffs that will (and have) occurred in the banking and housing industries, I am more worried about deflation than inflation. $100 oil and a lower dollar don't matter as much as banks going under and people walking away from their houses.
    - david927 19y ago
      I think you mean the 'potential' positive effects of a rate drop, because if you remember, Japan dropped their prime rate to 0% for years and it did nothing. It only makes it easier to borrow and therefore easier to finance growth and restructuring if you want it. But if the climate is negative and no one is buying, then there's no reason to grow, etc. Deflation is also bad. Bernanke thinks that the effects of the Great Depression could have been mitigated if monetary inflation would have offset the deflation that was occurring. And I think that what he's doing here. Unfortunately, he's about to find out why that doesn't work.
      - comatose_kid 19y ago
        Good point - thanks.
  - vitaminj 19y ago

noonespecial 19y ago

Do you ever think that maybe politicians are missing the boat here? With most Americans paying about 75% in total taxes (when you count sales tax, gas tax, property tax, etc etc) it seems we are always just a tiny downturn away from disaster. If you want your people to spend money and buoy the economy, perhaps instead of making it easy to borrow what they don't have you should try NOT TAKING SO DAMN MUCH from them in the first place. Listen carefully: Money you take from the people and spend in Iraq is gone, mmkayy? Constantly trying to balance on the razors edge of economic collapse and then issuing even MORE credit (and measly tax rebates) when you've gone too far can't possibly be the optimal implementation. Ok, sorry, rant over.

vitaminj 19y ago
75% in taxes? Get a grip man... taxes are quite high, but definitely not that high. Check out this report by the tax foundation, which breaks down federal and state taxes by the average household: http://www.taxfoundation.org/files/sr151.pdf http://www.taxfoundation.org/files/sr151.pdf
- noonespecial 19y ago
  Good link. Yes, in fact I did pull that number out of my... well, you know. It was merely to illustrate that such a point exists. After a certain absolute percent, raising taxes will REDUCE tax receipts and wreck your economy at the same time. I'm certain were all the way down the back side of that curve near the "wreck your economy" shoulder. Yes, even though our absolute tax is lower than some smaller countries whos economies have evolved to operate at a greatly reduced rate. It does also miss many of the 'hidden' taxes we still pay. For example, everyone in this state has to get a silly sticker on their car every year so the mechanic can pretend to look at the breaks and then try to charge you $35 for a $5 light bulb. The sticker costs $25 but I've never made it thru in less than an hour. The price of the silly sticker AND the wasted hour is a tax. There's one $25 fee and at least one wasted hour for every car in the state. This kind of thing is particularly noxious because they could have just had a little courage and added the $25 to the regular car tax, but instead wasted 100's of thousands of man hours a year on what is almost always a fictitious "inspection". You should see what it takes to be able to build a shed in the back yard for your lawnmower... Inflation is usually a tax as well. If a government needs money, can't borrow it, and its not politically expedient to raise taxes again, it can simply print up some money and steal a little from each of the other dollars that people already have. There's also start of and end of life taxes that have to be amortized over the years of the life of a person. If you make a little money or live in a place that sees real estate rise, this is non-trivial. Even the tax code ITSELF is a tax. The ever increasing burden of compliance is nothing but dead weight for individuals and businesses. Finally, there's a stack of extra tax and extra man-hour-wasting hassle headed your way if you have the audacity to try to work for yourself and not simply settle into a nice job in an industry with lobbyists and get your w2 like everyone else. This is probably the one that interests the readers of this forum the most. One slightly other off subject comment on the article. The government using taxation as a vehicle to transfer wealth from the "rich" to the "poor" is a recipe for economic disaster. Ever dollar "robin hooded" is a dollar sucked directly and completely from economic growth. Its a near perfect disincentive for innovators to innovate. Sorry to slasdot/troll the issue but I am passionate about this particular area! The point of all this is, there are better ways to fix the economy than an interest rate cut!