We are screwed people and I don’t think anyone is grasping it
In case none of you are paying attention:
The Federal Reserve entered a new era on Tuesday, lowering its benchmark interest rate virtually to zero and declaring that it would now fight the recession by pumping out vast amounts of money to businesses and consumers through an expanding array of new lending programs.
Going further than expected, the central bank cut its target for the overnight federal funds rate to a range of zero to 0.25 percent and brought the United States to the zero-rate policies that Japan used for years in its own fight against deflation.
Perhaps them already having poured a few trillion to AIG, Citi, Fannie etc wasn’t enough eh?
So, you’d think taking a historic such as basically giving away free money would do wonders for their brothers at arms over on Wall Street right? How’d that work out today?
| Dow | 8,824.34 | -99.80 | -1.12% |
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| Nasdaq | 1,579.31 | -10.58 | -0.67% |
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| S&P 500 | 904.42 | -8.76 | -0.96% |
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| 10 Yr Bond(%) | 2.1900% | -0.1730 | |
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Of much greater practical importance, the Fed bluntly announced that it would print as much money as necessary to revive the frozen credit markets
I haven’t been following this thing to closely, but as I read that above statement, and again I could be totally off base so bare with me, didn’t we just do some crazy bailout with no strings attached for like 700,000,000,000.00 like 3 weeks ago?
just an FYI, Bush is still the President.
We. Are. Screwed.
I have a friend that was getting his doctorate in economics and he went to one of the economic conferences that are essentially job fairs for economists.
He said that he had been meeting with major universities for days in hotel rooms where they had to put their stuff on the bed and sit on improvised chairs to interview him. Then he went to the Fed’s suite.
He wrote me later and said, when I walked in, there was a fruit tray in the middle of the room and there were side rooms that had been set up for meetings. All sorts of people were milling about in the room. “You could tell that this was a place that could, literally, print money.”
I hope that the rest of the world decides that the United States is “too big to fail.”
Printing money can only help if there are borrowers to take it. Otherwise it’s just dead trees.
I think this final rate cut is the last lever that can be pulled to entice borrowing, which is what pretty much everything hinges on (not that I understand why).
Printing money can only help if there are borrowers to take it. Otherwise it’s just dead trees.
It can only help if we use the money to make something, and somebody else buys it.
The next round in the battle is artificialy induced inflation, a neccesary move to prevent a world wide depression, prices and wages must be brought up to recreate billions of dollars of disposable income to rejuvinate retail sales and stop the pink slips they are causing, you will feel a lot of pain at first because wages lag behind at first. If this is not done the fed back loop that we are in will cause unemployment to reach into the 20% range or more that locked the world in the last great depression. Market watch . com. has a good explanation on it`s home page tonight.
Another way to explain it is big mac`s must go to $ 10 so workers pay can be raised to $ 15 an hour so the gap between basic expences and take home pay can be widened. Swiching from a manufacturing economy to a service economy is causing the all important middle class to not have the cash assets to keep the economy perculating and as we are finding out now buying on credit is a dead end street. the mickey d`s example is a poor one because they are not middle class but you get the idea.
you will feel a lot of pain at first because wages lag behind at first.
We have already experienced this as energy price boosted food and all commodities as wages lagged. Now prices are dropping fast and they are calling it “deflation” but it is not real deflation (yet), just a reversion to the norm after the oil spike.
The antidote to high inflation of course is high interest rates… the presence of Paul Volcker on the podium with Obama is ominous (but necessary).
Hands down Volker was the best Fed chairmen ever, Regan fired him because he would not artificialy inflat the economy to make Ronny boy look good . Your argument about oil being the only false sign of deflation is bogus because ALL assets except gold are deflating, platnum and gold have almost equaled in value because platnum has no value as a currency. It`s dangerous to take deflation lightly here, it`s the sign of real hard times ahead.
Shoe Thrower–You bring up some great points, but I still think America has not hit the dead end of credit. The only squeeze seems to be getting a mortgage, or accessing a home-equity loan. The everyday plastic, seem to be alive and well. Any insights?
And yes anon, those high interest rates are right around the corner, akin to the mid-late 80’s, when housing and private consumer credit (furniture companies etc.), went thru the roof–but amazingly people still bought, but smaller. Makes me wonder if that “smaller”, caused all the action for the “bigger”, that got the industry into this mess. Buyers were just so ready to break out.
It is a dead end of new credit. Besides, CC companies are reviewing accounts now and downsizing credit limits left and right. Those who are left owing more than their new credit limit, get socked with those over the limit fees.
People are having a hard time (even those with decent credit) getting car loans too.
Lots of folks are also trying to pay down cards (and buy very little) in an effort to be ready for the worst.
Thanks cass–I see your point, the over the limit fees are being attached, instead of the “Let me clear that up to another $2500, will that be enough today? New higher credit limits is what’s disappearing..got it.
Great point cass and let me add that we are losing the ability to reload by using home equity lines of credit to trim our plastic balances, the banks know this and that`s also causing tight credit. American credit card defaults are rising while home prices are falling causing us to fall into a liqudity trap that cause the entire economy to freeze up. Not a good situation to say the least
cas,
Besides, CC companies are reviewing accounts now and downsizing credit limits left and right. Those who are left owing more than their new credit limit, get socked with those over the limit fees.
People are having a hard time (even those with decent credit) getting car loans too.
sort of true except good credit people (fico) still get credit. I just refi’d my car, my wife her’s, I got a 20k ccrd from chase for a southwest card….
they are still approving stuff, but cutting out the risk people…anybody with any DQ on their credit report is feeling the pinch
Trouble is you lower retail sales when you tighten credit causing joblosses and the feedback loop we are in so lucky you for now but everyones job is hanging by a thread and if you get pinked slipped your out compleatly for years.
A colleague of mine in the Boston area went to buy a new car to replace a falling apart Toyota. This guy makes well into six figures, has no credit card debt, a rational mortgage and excellent credit rating. The car loan people wanted the car dealer to take the first 4K of the loan before giving the loan. My colleague and the car dealer had to negotiate how much of the loan the dealer had to cover before giving it to him. Of course, there is an upper limit to how many times the dealer can be asked to take part of a loan too.
Cassandra m; thanks for relating that personal story, that highlites the usefullness of the internet, these stories are common place on the economic blogs I spend a lot of time on. You surely see how this kind of policy can distroy GDP as well as the entire economy. The solution lies in putting cash in peoples hands by inducing high inflation, this will be misunderstood by most americans but fortunitly the fed is set up so they can act independently of the electorate, only the chairmen can be fired by the president and the people that Obama has chosen leads me to belive he won`t interfere. I felt not to long ago our chances for a depression where 100%, after Obama`s team was named it fell to 50%, an todays fed annoncement it`s fallen even more. We are still in for a long recession to catch up with the excesses in credit we have heaped on ourselves but the time is not calculated in decades any longer.
Technically, I believe that deflation is actually the contraction of money supply and credit, not just the dropping of prices. That’s why the negative inflation number that came out yesterday spurred the rate move to essentially zero.
Cassandra,
I heard that more than 50% of people who want to buy a car can’t get the credit to do so. You have to have >700 credit score right now.
Yes, we’re seriously screwed.
People try to convince themselves that our commercial driven credit supported lives will return. We’ve over spent and over used the planet as well. Where I come from they say “you can’t squeeze blood from a turnip.”
I agree Jen. I think the American way of life is going to undergo a profound change. How we have been living is not sustainable and if we go back to it, we’ll just be facing the same problems down the road.
Unstable; you are correct, but it`s very very harmful, you cannot take it for granted, it will distoy your standard of living by taking your job will leaving your basic living expences high.
There is another story on Blagovich out there…what was he doing when they went after him? “Illinois will no longer do business with the Bank of America”…Jason sent you the story. Blago maybe a crook, but he like Spitzer was taking on the big dudes…just sayin.
You are right to be concerned. I am with you Jason.
Our economy is driven by the stuff we buy way more than the stuff we make. Which makes me really pessimistic that we’ll see a sea change once we emerge on the other side. If we make very little, how do we recover our economy if we aren’t buying stuff?
they are still approving stuff, but cutting out the risk people
These are not “risk people” … 11o million Americans now have negative info in their credit history.
I need to say something about what I call the Amish argument that pops up in economic discussings a lot now and it`s sort of been implied tonight, if americans became much more frugul in large numbers we would fall in the same trap that Japan has been in for 20 years, we do consume way too much compared to the rest of the world but it made our economic engine run, capitilism needs excess consumption to work. The problem lies in the fact we spent money we did not have, we thought we did in the form of home equity lines and big credit card limits, but are incomes were losing ground to inflation in our basic nut that we have to pay every month.
To change are society into a non consumer oriented society like the Amish you have to except total socialism, and that`s just shared misery. I worked among the people of Lancaster county and they do not avoid the drawbacks of poverty as many people think, they work hard, are cold in the winter hot in the summer, have bad teeth and lack the freedom to travel or enjoy hobbies. It ain`t what it appears to be, but most lack the edjucation or skills to escape. So be careful what you wish for it might not be as attractive in practice as in theory.
So how do you make the logic leap from we need to consume less to we want to be like the Amish. Surely there’s a happy medium. If we go to using less credit, we’re going to consume less.
Unstable; we need a larger gap between take home pay and basic expences, that`s the reason for induced inflation, credit will always be part of big ticket buying, but we need to be able to make the payments and have cash to buy more.
But really–having storage sheds? For our junk? C’mon, we can do better and without.
How about making the pet rock guy rich and thousands of singing fish on nour walls, we do get carried away.
It`s funny I`m having the same arguments now I had 35 years ago in college. My line then was if you hate capitilism turn in your fresby because Whamo don`t make a dime under socialism. At least we can make up our own minds about how thrifty we want to be.
Back to the printing of money, the best thing that we can do is to print the money and use that money to build bridges, pay for solar systems and jumpstart a green economy. Part of that may be to commit to buy a large number of cars from the big 3 that meet higher CAFE standards.
Dumping that money in a hole (like the whole TARP thing) is a losing proposition.
pay for solar systems
It’s like four billion years old and it’s not paid off yet?
Very good. We aren’t paying until they are complete. They still can’t get the temperature right.
The Tarp thing, That`s republicans trusting republicans, you would think they would learn.