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Thursday, October 30, 2008

Reckless Fed Action and the Corrossive Effect of Partisanship

Back in 2002, the Fed Chairman Alan Greenspan lowered the Federal Funds Rate to .75%. The Federal Funds Rate is the rate at which banks borrow from each other. At the time, we were still recovering economically from the internet bubble popping. The pop of the internet bubble eventually cost three trillion Dollars in paper lost. The bubble burst was topped by the economic devastation of 9/11. About one million jobs were lost in October, November, and December of 2001. Then, this was followed by the revelations of accounting malfeasance at Enron et al. I bring this context because when Greenspan lowered the Federal Funds Rate this low so called experts justified it as an appropriate response to extreme economic weakening.

Greenspan wanted banks to borrow and then to lend to stimulate the economy out of its rut. He accomplished his goal. He accomplished it so well that banks borrowed so much that they had more money than they had loans. Since they still had money after tapping all the loans they had, they created more loans, and the rest was history.

Now, new Fed Chairman Ben Bernanke has lowered the Fed Funds Rate to 1%, just .25% higher than Greenspan lowered it to. The reason no one is crying bloody murder is once again so called experts believe that Ben Bernanke is responding with aggressive action to an unprecedented economic weakness. The reason this is happening is that most people don't blame Alan Greenspan for even starting the mortgage crisis.

The reason for this is that there is no partisan angle for blaming the Federal Reserve. Instead, liberals blame deregulation while Conservatives blame social engineering created by ACORN and the Community Reinvestment Act. As such, most of the media has totally disregarded Alan Greenspan's role in starting this crisis. As such, no one has noticed that Ben Bernanke has done nearly the exact same thing. As such, the media has allowed the new Fed Chairman to act just as recklessly as Greenspan himself acted only six years later.

Six years ago, Alan Greenspan lowered rates furiously because his rate drops weren't working. Because his aggressive Fed action was impotent, Greenspan continued doing it until the Federal Funds Rate was below one percent. We have the exact dynamic here. Bernanke dropped rates furiously and the economy only got worse, and so he has dropped them even more. Now, the Federal Funds Rate is at 1%. Why has no one noticed that the same mistakes of history are repeating themselves? It appears to me that most of the media is much more concerned with hammering their own partisan message than trying to figure out the truth. As such, even though we have the exact same reckless behavior repeating itself. Once again the Fed is allowed to act recklessly with impugnity and no one seems to notice. I have no doubt that in several years we will be picking up the pieces on this mistake, and I have no doubt that partisans from both sides will find their own partisan boogeyman to blame for that economic crisis.

1 comment:

Michael Wong said...

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i'll link to you first, then when you have time, link back. :)