Sunday, October 30, 2005


The Fed Isn't Your Friend

This editorial examines what the Federal Reserve means to US citizens. "We all like to believe that there's an all-knowing, all-powerful force looking after us. I'm talking about the widespread belief that an all-powerful Federal Reserve Board controls interest rates and inflation, and is looking out for each and every one of us."

"You've got to remember two things about the Fed. First, it's not looking after your personal interests—it's looking after the financial system, which isn't the same thing. A for-instance: in the early 1990s, when many major banks were effectively insolvent, the Fed bailed them out by lowering short rates, handing them huge profits at the expense of people who depended on CD income for food money."

"The Fed is far from all powerful. In fact, it's considerably less powerful than it was when Greenspan took the helm in 1987. Since then, the United States has become dependent on the rest of the world—especially the central banks of Japan and China and other Asian countries—to finance our budget and trade deficits. If Asia grows less eager to hold dollars, U.S. interest rates will rise, regardless of the Fed's wishes."

"The fact that Bernanke isn't perfect shouldn't be cause for alarm. Neither is Greenspan. The stock bubble grew and burst on his watch, and we've now got a housing bubble that will inevitably burst. Last year, Greenspan talked about how foolish home buyers had been to get fixed-rate mortgages rather than variable-rate ones—but given the sharp rise in short rates, anyone who switched to a floating-rate loan is wailing the blues today."

"We won't know how effective a Fed chairman Cousin Ben is until after his first crisis. But one thing we know already: a divinity, he's not."

Was it not Ben who said the problem was not the USA's low savings rate. It was that the rest of the world (Japan, Germany and Korea) were saving too much. Give me a break Ben!

Mark from Seattle
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