Saturday, February 20, 2010

Are they TRYING to ruin the economy?

Sometimes I wonder if our financial system is in the hands of a maniac cab driver who sincerely wants to kill his passengers. Look at the latest, via Ian Welsh:
As you may have heard, the Federal Reserve had decided to increase the discount rate: the rate at which short term loans are made to banks.

The primary effect of this is to strengthen the dollar. That will help reduce effective resource prices and make it easier to export to the US. Both of these things are what the US’s most important creditors (aka: China and Japan), want.

A quarter point increase won’t make much difference, the question is if this is a signal that the Fed intends to continue tightening. Doing so is likely to strangle the incipient, but extremely weak, recovery. One can only conclude that losing more Democratic seats is ok by Bernanke, and quite likely by Obama as well.
This is the sort of action one takes to combat inflation. But inflation is not a factor right now. From the Financial Times:
The prices of US goods and services, excluding food and fuel, fell last month for the first time since 1982 as aggressive measures to stimulate economic growth failed to inflate the cost of living.
So why is the Fed delivering further kicks to American exporters? Why are we becoming more dependent on Chinese imports?

A growing number of people now say that a "controlled" inflation -- yes, such a thing is possible -- would be a good thing right now. A nice little wage/price spiral could make mortgage payments "doable" again. As Krugman argues, higher inflation could also lower unemployment:
It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.
And no, that doesn't mean that a loaf of bread would require a truckload of bank notes, as in Weimar.


Caro said...

One thing that people who want low interest rates keep forgetting is that a lot of older people depend on income from their savings, which is usually invested in the most conservative instruments, like CDs.

The lower the interest rates, the lower their income and, therefore, their contribution to the consumer economy.

Carolyn Kay

Peter of Lone Tree said...

FDIC to Open Illinois Office with 500 Employees to Handle Midwest Bank Failures
Chicago Tribune:,0,3457297.story

Anonymous said...

YES! And I've been talking about this for a long time! I was in a family for more than 26 years who are directly involved with those in a White House Coup. Collapsing the economy which is their primary goal as explained in detail by the family I was in.

So you may hear all kinds of things but it will always come back to make sure their goal is on target. And this seems to be when someone like Joe Cannon says,"WTF?"

Marty Didier
Northbrook, IL

Alessandro Machi said...

Carol, the banksters are robbing both sides and taking their bankster bonuses off the top, bottom and middle.

When Chase Bank increased the monthly minimum payment on a million of their never late paying customers by 150% because these customers had low interest rate, life of the loan agreements in place, they were hurting the very people you speak of.

There are ways to solve this without affecting the senior population.

Getting people to pay back what they owe, even if it means no more interest rate charges, will generate MORE steady, real revenu, than the banks continuing on the present course that is causing massive credit card default rates that is then spilling over into mortgage defaults as well.

kelley b. said...

Are they trying to ruin the economy?

Well, not for themselves. Just for the 99.5% of us that aren't the right sort of people.

Post-industrial neo-feudalism is the coming idea that the wealthy don't talk about among the peons.

Anonymous said...

Are they trying to ruin the Economy?

They already have. We have Elizabeth Warren shouting the warning that nearly 3000 small, community banks are in jeopardy with the commercial real estate fallout. That's 37% of the banks in this country. She's calling for the Government to get ahead of the wave. Think they will?

We have states and municipalities teetering or on the verge of bankruptcy. What do we get? Happy talk.

A report came out last month that 30% of the population is sliding toward poverty levels. That's 90 million people. What are we told? Recovery is right around the corner.

And Matt Taibbi has a new article on the Con of the Ages, Goldman Sachs et al starring as the world's grifters, having pulled off the biggest heist in history. And what do we hear? The Wall St. gang are good, savvy businessmen. And the GS CEO says, he's doing God's work.

Hello serfdom! The financial terrorists have won the war, while the rest of us slept or plugged into the latest scandal or diversion--Woods, Edwards, American Idol.

We are screwed!

Dakinikat said...

This increase isn't that big of a deal because interest elasticity at the zero bound is nearly infinite any way. It probably won't strengthen the dollar or damper the economy. The discount rate is the rate that commercial banks borrow from the Fed's discount window. They can always go to each other via the Fed Funds market or over in Europe via LIBOR if there's lots of money floating around. What this is supposed to do is dry up that cheap source of money that's being used for speculative purposes by the new 'commercial banks' like Goldman Sachs. It's mostly symbolic at this point. The Fed's telling the bankers that their marginal cost of capital is on the rise, so invest more wisely. Ian's understanding of economics is kind've surfacey ... I used to have to disabuse him of a few things when he was posting on FDL a long time ago. It's not unusual for him to misconstrue something.

Anonymous said...

Ruin the economy, culture and politics?

A. Adolph Marx said...

ouch clicked the wrong button there. Ruin the Economy, Culture and Politics?

Bob said...

All of this is just the dark clouds on the horizon.

Just wait until this storm really hits.

Got your storm cellar stocked up?

Zeppo said...

Bob, learn how to sprout, then,

..and if you got land or some materials for a DIY frame-garden,

Snowflake said...

I assume that the rate rise is another way for Obama to bow to China.

I could not believe how he treated the Dalai Lama-out the back door by the garbage?

Tiro said...

So is the Ian Welsh you quote the self-described "social media strategy consultant," or the Scottish ex-labour minister to Parliament?

Perry Logan said...

It makes you wonder what goes on in the minds of Friedmanites and supply-siders. Their methods have destroyed nation after nation, but they just don't seem to notice.

How very right-wing. ;)

Even as I speak, the Chicago School of Economics are proving mathematically that the economic meltdown never occurred.

lambert strether said...

Never say "the economy." Always ask, "Whose economy"?

Bob said...


That "sprouting" has potential. And I do have land. The problem is water.

Anonymous said...

Inflation will greatly harm retirees whose pension amounts are FROZEN at the level they were when a worker retired, and those pension amounts will NEVER increase.

Social Security -- IF it survives Obama's "deficit" commission -- is also limited as a barrier against inflation. The amount of the monthly Social Security check is currently FROZEN at last year's level and will REMAIN frozen for probably the next few years. Meantime, the cost of insurance, groceries and especially local property taxes continue to ZOOM upward.

Inflation is fine if wages can rise with costs, but it is a killer for anyone on a fixed income -- and millions of decent Americans are living on FIXED or FROZEN incomes.

Anonymous said...

Dakinikat is right. I would add that only about $18bn is still out at the discount window - thats back of the sofa change in these matters. In fact it might be interesting to see why still needs to borrow at that rate right now. Might point out the next potential bank failure.

The "rain man" is merely warning you not to get complacent while you make stupidly big money borrowing short and lending long (oh man, you have no idea how good that trade has been! Free money for any bank or speculator with any commonsense). Record breaking curve steepness. Its almost like they are trying to bail the banks out ;)

Personally I think (as does God's vampire squid) that there is plenty of money to be collected from lending long to the government and borrowing short from the government. I dont pay too much attention to the Rain Man's warnings. I think the economy is sufficiently f*cked that nothing changes for quite a few months more - like 12-18. But what if Im wrong?

Well I guess my bank or hedge fund will just have to go to the government for more money to replace the money I lost.

Just kidding - hedge funds cant go to the government.

Oh, its worth noting that there is a Marxist analysis of the current situation. I think it yields better predictive results. The Marxist analysis suggests (at least my analysis does) that the govt will have to tighten policy to reduce the living standards of the bulk of the population now - to avoid crisis in the bulk of the corporate entities. Regardless of how counter-intuitive it seems.


Zeppo said...

OK Bob (oh and you're right, Sprouting will be a powerful tool for survival) if you *want* water, too, I got some for you. one is an electricity-free water distiller (will make you 1.5 gallons a day, more than enough for sprouting and drinking)or the freebie DIY version, and then if you do have a garden, you can irrigate it with water pulled out from the air [warning: this one does need electricity, so you can always do this or the DIY version].