Many analysts now expect the Fed’s policy makers to cut half a percentage point off the Fed’s benchmark interest rate, reducing it to 3.75 when they next meet, on Jan. 29 and 30. They expect the Fed to continue cutting, to 3 percent or even lower by summer, to prevent — or at least mitigate — a recession. The goal would be to get people to borrow and spend more.
By LOUIS UCHITELLE and MICHAEL M. GRYNBAUM
New York Times News Service, Jan 11, 2008
I find that highlighted statement (the emphasis is mine) utterly astounding. Granted, I do not have any sort of formal educational background in economics, but in what world does this make any sense?
American savings rates are at an all time low. Wages are not keeping pace with inflation. Home equity is disappearing faster than the ice caps. Bank foreclosures on homes are multiplying like rabbits. Late payment of credit card debt is increasing. An increasing number of people are without health insurance because they cannot afford the premiums.
And the solution for the financial crisis is for people to borrow more and spend the borrowed money.
This solution makes sense for the management and stockholders of corporations who are selling the products and services that the borrowers are going to buy. It makes sense for the managers and stockholders of the lending institutions who will be lending the money.
Notice the “managers and stockholders” in the part about who it makes sense for. It makes sense for the money-holding part of the economy, the part of the economy that consists of people who already have money and want to have more of it.
This solution makes no sense whatever for people who work for wages; wages that increasingly are not providing for the well-being of wage earners and their families.
A policy of propping up the economy with the spending of borrowed money drives those on the bottom rungs of the economic ladder deeper into debt to further enrich those on the upper rungs.
And… Does not reducing interest rates contribute to further weakening of the dollar in the world economy? On the face of it that helps our export market, but we are so dependent on imported oil and manufactured goods that a weaker dollar deepens our trade deficit rather than reducing it, and it adds to inflation and further erodes the purchasing power of worker’s wages.
Maybe I don’t know what I’m talking about, but maybe we’re being conned.