Federal Reserve Holds Down Rates Again As Economy Stalls

The Federal Reserve has announced it will continue to hold down rates in reflection of a stalling economy. The question is what does this really mean in the context of the economy.

Economic Recovery?

We’ve supposedly been coming out of an economic recession, but it is mighty hard to tell most of the time. The biggest problem is housing is falling off a cliff and still going down the drain as I write this. The housing dream has created wealth for people and most use it as a key element of their retirement planning. Throw in the loss of massive construction jobs and it isn’t a very good picture.

Fed Shooting Blanks

The Federal Reserve Bank is being run by interesting people. Despite all you have read, the real cause of the Great Recession was the Fed. It started because Alan Greenspan kept rates low and provided huge amounts of easy money to the market. The fact people and companies borrowed like mad and went nuts with it is hardly a surprise. Easy money got us into this problem. Oddly, the Fed seems to feel easy money will get us out as well.

Ben Bernanke has tried to stoke the economy by throwing massive amounts of dollars on the smoldering remains of the fire of the last decade. Think the Stimulus Bill come with a big dollar figure of many hundreds of billions of dollars? It was nothing compared to what the Fed has done. The Fed has actually run up some 2.5 trillion in debt on its balance sheet. It started loaning money to not just other banks, but directly to companies. It then moved forward to slice the borrowing rate banks can borrow from it at to just a fraction above zero percent.

Money for Nothing

With apologies to Dire Straits, Bernanke has a policy of providing banks with money for nothing in return. The idea was to flood the banks with money so they would start lending again. Of course, this hasn’t happened. Instead, the banks have used the money to rebuild their balance sheets and haven’t eased their lending practices at all. The end result is an economy that received almost no bump from the plan.

Now What?

Unsurprisingly, the economy is starting to fall apart again. The Federal Reserve is in a very tough position because, well, it doesn’t have much ammunition left in the gun. It can’t lower the rates any further. The idea of doing a QE3 is politically untenable. The interest rates on treasuries being issued are probably going to have to go up since there is expected to be a dearth of buyers at the end of June when QE2 ends.

What does it all mean? It means it is going to be a very interesting summer and probably not in a good way. 

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