...they will drop the rate to -5, and start paying people to borrow.

I keep saying this but ...

Once again the Fed fails to understand the fundemental problem. Interest rate cuts spur demand for loans, by making money cheaper. The problem we have today is not demand for money. Everybody wants cash as evidenced by the number of industries forming beggar's lines outside of Paulson's and Congress's doors.

The problem is the banking industry does not want to lend because their balance sheets SUCK. They are loaded down with bad debt and unknown assets tied to securities whose underlying values are linked to a collapsing housing market.

Until that problem is fixed the banks will not lend. No matter how low interest get.

The solution is either to nationalize the banking industry or to lend money at a good rate to the banks that steered clear of the current mess so they can go out and buy up the good assets from from the corpses of their weaker more stupid competitors.

The solution is either to nationalize the banking industry or to lend money at a good rate to the banks that steered clear of the current mess so they can go out and buy up the good assets from from the corpses of their weaker more stupid competitors.

Or audit the Federal Reserve, i.e. get rid of it.

... because the U.S. economy has too many leaks. We spend too much on imports and/or don't bring in enough money on exports. All the money we dump into the U.S. economy quickly disappears overseas.

And, as we speak, the problem is getting even worse. Companies trying to keep their heads above water have accelerated the offshoring of their work. Layoffs are bad enough, but offshoring is worse because those jobs aren't coming back in the foreseeable future.

A central bank is NEVER a bright idea, unless you're the one printing the money. JFK's executive order authorizing silver certificates is still in effect, I believe. Let's produce currency backed by something and get the economy fixed, rather than the insane racket being run by Bernanke et al we're currently enjoying.

My dad and I have a revolving arguement about the Fed and monetary policy.

We both agree that the Federal interest rates should be fixed. I say it should be pegged one percentage point above inflation and not allowed to shift beyond that range. My dad says just fixed interest rates at 6 percent and never move them no matter what. Both approaches basically move the Fed away from gaming the system the way it has been over the last 30 years or so and allow the market to work around them with a clear baseline in monetary policy.

Any way you look at it though its hard to argue that Fed policy over the last 10 years or so has been anything other than destructive to the long term stability of the US economy. Pegging interest rates BELOW the inflation rate skewed all measures of risk in the economy and led to lending patterns that simply are not sustainable and created a bubble bigger than anything seen since the (I hate to say this) the Great Depression. And deflating that bubble is going to take YEARS.

The best we can hope for at this point is a long deep recession lasting 4-5 years.

More likely we are looking at the opening days of the another Great Depression that could last longer than a decade.

Right now the current econo-meme is that we'll bottom out at the end of 09 and start turning around. That sure sounds a little "frothy" to me.

If you are correct, and I think you are, then now is the time for all patriots to stop driving and stop shopping at stores like Wal-Mart that stock predominantly foreign-made products. Do we have any patriotic Americans left?

The lower the rate of return the lenders get, the lower the rate they'll pay us to save. They're paying next-to-zero on passbook savings now, only a few pennies more for CDs; next they'll start charging us to save and paying us to borrow, and down the rabbit hole we go.

My mattress is becoming a more attractive alternative every day; barring flood or fire or rats, it'll at least keep my principle intact.

Monetary policy got us into this fix and was misused to prop up the economy for years with ever-lowering interest rates, leaving us no further room to maneuver.

re: Translated from Fedspeak, that's the equivalent of "Abandon Ship! Every man, woman, and child for themselves!"

I see that you've been reading my 'Titanic' analogies again.

re: The only good news: Inflation is no longer even a whisper of a problem.

Perhaps not this week, anyway.

Federal Reserve sets Stage for Weimar-style Hyperinflation

The Federal Reserve has bluntly refused a request by a major US financial news service to disclose the recipients of more than $2 trillion of emergency loans from US taxpayers and to reveal the assets the central bank is accepting as collateral. Their lawyers resorted to the bizarre argument that they did so to protect 'trade secrets.' Is the secret that the US financial system is de facto bankrupt? The latest Fed move is further indication of the degree of panic and lack of clear strategy within the highest ranks of the US financial institutions. Unprecedented Federal Reserve expansion of the Monetary Base in recent weeks sets the stage for a future Weimar-style hyperinflation perhaps before 2010.

http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Hyperinflation/hyperinflation.html

Interest rates at 0%-0.25% are well below the inflation rate -- officially at 5%, in reality closer to 10%, before the deflationary shock hit.

This means that banks are giving money away, at least in theory.

Increasing the money supply through intangible means (electronic transfers of bonds, T-bills, etc.) seems to be having no effect on the economy -- banks still aren't lending. It's time for a "physical" fiscal policy: cranking up the printing presses.

It would seem logical that the only way to fight deflation is with inflation of the money supply, i.e., pallets of crisp new $100 bills.

Another much-needed improvement would be the elimination of the private Federal Reserve system in favor of a US National Bank. Why should the American taxpayer owe interest to private banks for all this economic stimulus when it could all be paid for with freshly printed paper money at virtually no cost to the taxpayers?