Cowboys from...Washington Part 3

Riding a skeleton horse…with a lasso of flame?

Not good. Yet what are the theoretical gains from such policy? In an Op-ed for the Washington Post, Bernanke argue it will prevent deflation. Easier financial conditions, he said will support growth, ease lending and make houses more affordable. Yet, the Fed has done this before and the official unemployment rate still hovers near 10 percent. Home prices continue to drop and borrowing is still not easy. The Fed is going to see diminishing returns on a lower interest rate because the interest rate is not the problem. Interest rates were in the double digits in the 1980’s. A lower cost of borrowing is always a plus. But not if banks do not begin lending and unemployment doesn’t go down. Lending rates have remained at such historic lows, that if businesses and people had the ability to borrow they would borrow at last month’s rates or last year’s rates.  If we go back to the example of mortgages, current rates are around 3.5 and 4.28 percent, which is unbelievably low. Can they really go any lower? Even rates of 5 percent seemed like a bargain a year ago, that it wouldn’t have made sense to hold out for a lower rate.

           

Yet, I also do not buy the argument that the Fed’s move will lead to hyperinflation, the lasso of flame that will rip the economy apart again when a new bubble bursts. While it has led to an increase in certain commodities, such as gold, these commodities have been blowing up for a while. While $600 billion is a lot, it represents less than 5 percent of the country’s GDP. Anyway, it can’t be worse than pre-recession interest rates, which helped inflate the housing bubble. If it won’t increase lending, it can’t drive house prices up. It may lead to a long term increase in the cost of imports from China if China doesn’t act to maintain its trading advantage through a weak currency. Chinese inaction just isn't going to happen. People aren't going to be pushing wheelbarrow's full of money to the store to buy a loaf of bread. Prices are still subject to demand and people just don't have money or if they do, they are saving it at unprecedented levels. 

Maybe the country won't fall for the Fed's tricks again. Not these  ones at least. Once Elizabeth Warren gets the Bureau of Consumer Financial Protection up and running, the Fed will have a new way to encourage Americans to follow the path to financial disaster again. This brings us to an important question. Why in a blog about financial reform do I follow the lead of spend three blogs on the Fed and not the election? Because these financial wizards hold the key to Dodd-Frank, giving the Fed even more power to influence the American wallet then ever before. These rogue cowboys have already proven they can stir up trouble pretty quickly. The question is not will but what trouble will they get us into with this and is there a sheriff in sight to stop them?