The Federal Reserve has just cut the federal funds rate for loans to banks to an unprecedentedly low rate — ranging from 0.0% to 0.25% — well below its prior 1 percent rate. After taking inflation into account, the Fed is literally giving money away. The Fed’s low interest rates since 2001 helped spawn the current financial crisis and the mortgage bubble, greatly weakening the value of the U.S. dollar and reducing capital investment in the U.S.
The Fed’s rate cut will also have the effect of reducing already very low interest rates on savings accounts, costing savers money. Not only is your bank interest rate less than the inflation rate, eroding the value of your savings, but to add insult to injury, you have to pay income tax on the insultingly-low interest, too.
The Fed’s action misdiagnoses the cause of the financial crisis. Banks aren’t refusing to lend money because interest rates are too high — they’re refusing to lend because they are afraid they won’t be paid back. The Fed’s irresponsible actions lend weight to such fears.
The Fed’s action, which is partly intended to prop up overextended borrowers by reducing their interest payments, sends the message that the government will protect such borrowers from the consequences of their own overspending and recklessness, regardless of the cost to others.
That same mentality is behind Obama’s campaign call for a freeze on foreclosures; the FDIC’s failed policy of reducing the mortgage payments of delinquent borrowers at failed banks; and calls by politicians like House Speaker Nancy Pelosi to bail out defaulting mortgage borrowers. Banks’ reluctance to lend money in such a political climate, and fear that they won’t be fully paid back, is understandable.
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[...] Foreign investors in the U.S., like Switzerland’s Julius Baer family of mutual funds, have long criticized the Fed’s easy-money policies, which helped spawn the mortgage bubble and financial crisis, and now are destroying the value of the dollar in a vain effort to push back the day of reckoning for years of excessive borrowing that occurred in what Julius Baer calls “The Age of Decadence.” The Fed’s absurdly low interest rates are impoverishing savers and punishing thrift and responsibility. [...]
[...] printing of money and buying up of risky and worthless securities at taxpayer expense. He has impoverished savers and punished thrift through his irresponsible interest rate-cuts and giveaways t…. He has promoted irresponsible bailouts for deadbeat mortgage borrowers. And he has ignored [...]
[...] Bader of CEI is a blogger I’ve quoted before, and last week he posited that the Federal Reserve’s rate cut is truly going to punish savers and resume blowing up the [...]