Letters to the Editor
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The "money multiplier" doesn't work if the banks don't lend
As the Fed "prints" money primarily by buying securities from banks, if those banks don't lend the money doesn't go anywhere. The general rule is those banks will lend all the money (while reserving capital against whatever portion of the loan they are required to) and the money goes out into the economy, comes back to the bank and is loaned again with a reserve, and so forth. But for the lending to actually occur, banks have to think it is in their best interest to make loans. Otherwise they'll just put it in treasuries or something safe, which doesn't necessarily do much for the economy except support the government's ability to borrow.
So the Fed may have to start dropping money from helicopters after all.
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Another ugly angle to this...
... is all the retail/distribution infrastructure that was erected on the assumption of prosperity that never existed. All of the jobs that were created will go away, and they will NEVER come back.
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I can't believe how fast attitudes are changing
This cuts to the heart of the problem, and is why no amount of stimulus will work. The economics (note: not economists necessarily) blogs I read have been talking about this for a long time and before the first Fed cut they agreed that mortgage rates would not fall that much regardless of what the Fed did and would rise as the crisis spread.
Indeed, 3% lower and mortgage rates are even higher than before the cutting began, for the exact reasons they stated. But what is surprising to me is how quickly attitudes of the public are changing. When the first cut happened the MSM screamed that it would save us and prevent a recession. Now, each cut is followed by a "damn the Fed for lowering the dollar" call from many quarters.
I was just about bowled over by the front page Yahoo article today that stated that mortgage rates wouldn't fall even though the Fed keeps cutting, and for the exact reasons that I read about 9 months ago.
Economic knowledge of very arcane systems seems to be growing very quickly and it seems like most people understand the problem using common sense than all the economists with their complex models. Sometimes I read the economists blogs and it is unreal how disconnected from reality they are. I have to say, as someone that is pessimistic about the general level of discourse and understanding in this country, the economic reaction is refreshing.
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Inflating bubbles.
Greenspan's post-dot-com-bust rate cuts spurred the biggest spending binge in recent American history. What will Bernanke's Fed accomplish?
The length and severity of economic downturns depend partly on the magnitude of the 'real' maladjustments which developed during the preceding boom, and partly on the aggravating monetary and credit conditions. The alternative to an economic downturn is to go into debt to delay the inevitable, while making the inevitable that much worse.
Greenspan's strategy was to replace the dot-com bubble with the housing and credit bubble. There aren't many ways to recover from a burst bubble, and this was the best he could think of.
The alternative was to accept economic decline for a few months or years until the maladjustments worked themselves out. The bubble strategy works for a while, but the maladjustments are still there, and the debt hole is that much deeper.
Bernanke has even less courage than Greenspan. He's also gone with the bubble strategy and has elected to make the hole deeper in the attempt to replace the housing and credit bubble with yet another bubble.
The problem is that this will again require the cooperation of creditor nations, and there is reason to believe they will not, or cannot, cooperate as much as they're needed to. Worse, the Dot-com and Housing/Credit bubbles have already been done, so Bernanke is going to have to find another sector of the economy. None of them look like good bubble prospects, though.
So much the worse for Bernanke. He may not be able to weasel through it with a replacement bubble like Greenspan did.
The US is eight years overdue to work out those economic maladjustments. Bernanke likely has no real choice but to preside over a long and severe recession, or worse, as those maladjustments are worked out. His predecessor dug him a pretty deep debt hole, and Bernanke himself is grabbing the biggest shovels he can find.
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and by an interesting coincidence ...
$3 trillion is Joseph Stiglitz's estimate for the total cost of the Iraq war. But don't worry, we put it on the credit card.
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Unfortunate coincidence
That $3T debt has to be paid just as our climate is shifting. It would have been handy to have that kind of money to pay for adapting our forty year old infrastructure.
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It's 9/11, y'all!
When 9/11 happened it reminded Americans that we are not immortal; so they started focusing on the "now." Instant gratification. What's the point of saving money and making sound financial decisions when you might blow up tomorrow? Bush's era of fear mongering has had lasting, unexpected consequences.
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@Gonzo814
"Bush's era of fear mongering has had lasting, unexpected consequences."
I suspect his incessant reminders about our "prosperity" may have delayed the onset of caution. Why should anyone worry when the president himself is saying that everything is peachy-keen?
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Re: rate cuts
It is interesting to note that many people have not made the connection, that all this tax money that Bush and his cronies keep putting back into the economy through tax returns and rate cuts do nothing for the average american. A rate cut means nothing to the average american because those rates do not "trickle down" to the consumer, instead the consumer is still faced with rising interest rates and fees as well a sinking dollar and rising fuel, food, housing, health and insurance costs. Not to mention that despite all the aid flowing to big corporations, it will not equal guaranteed jobs. The average worker is still likely to find his job cut, off shored, as well any guarantees to adequate health care or any meaningful severance package unless they are the very fortunate few on the boards of a mega corporation. So what does this say about the conservatives "trickle down economics?" And when are the nut-jobs who continue to support these shysters going to get it, probly about the time they find themselves looking for a cheap apartment to rent after they lost their home to foreclosure. Or maybe when they discover that their money is not worth the paper it is printed on and that Bin Laden's family is building their new mini mall down the street. Well at least Americans obesity problem will finally be solved because no one will be able to afford to drive their SUV, to the local fast food joint and they will have to walk to work or at least to the bus stop.