Tuesday, September 18, 2007

Federal Reserve Bailouts Create Crisis after Crisis, Government "Fixes" Keep Driving Americans into More Debt

Government Doublespeak: 5.25% is too low. No, too high. No, too low. No, too high. . . .

The Fed already, instead of solving a problem, has created an additional problem. The Fed’s August bailouts and promises have led the markets to (1) believe that the current rate is "too high" and (2) expect a September cut to the benchmark Fed funds rate of 25-50 basis points (bp, 0.25-0.50%), according to the Chicago Board of Trade’s Fed-funds futures market.

The Fed created this "reality" and now has to live with it.

Wall Street might throw a tantrum if it does not get its “fix” of easy money through a nominal rate cut. Wall Street might ignore that a rate hold (no cut, no increase) could be a relative cut (in global context). Wall Street might display Delirium Tremens if the Fed raises the rate 25bp.

The potential September market “crisis” (if the Fed does not cut rates today) is an unnecessary crisis that the Fed has manufactured for itself.

Did the Fed deliberately paint itself into a corner to give itself a “systemic” excuse to bailout speculators, or is the Fed incompetent at managing expectations?

If the Fed does ambush the markets with a rate hold (no cut), remember that the turmoil will include anger and confusion over the Fed’s policy deception, not only the interest rate per se.

Do not blame a “crisis” on “high” interest rates which are not high at all.

Government pro-debt doublespeak sings the opposite song to consumers.

Indeed, meanwhile, recent National Association of Realtor (NAR) advertising and government pro-debt propaganda have argued to consumers that 5.25% is already dirt cheap, to get Americans to keep spending money they do not have by ignoring the past rate rises that increased the Fed funds benchmark rate from 1% to 5.25%:

"[T]ake advantage of historically low mortgage rates" (Today's Colorado Federal Savings Bank, based on 5.25% Fed funds benchmark rate, before today's FOMC meeting results. Actually, Fed rate cuts have limited impact on mortgage rates but they are a favorite sales pitch for home sellers).

US interest rates should be higher than the current 5.25% based on fundamentals such as the US savings rate, current accounts balance, and foreign currency exchange rates, so the current 5.25% is already an anti-recessionary, stimulating, low rate.

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