World News Blog

Tuesday, October 28, 2008

Comment: US looks to ease credit

Many will say it's what caused the trouble in the first place, but easy credit has become the core of the American economic values system. So, the Federal Reserve is expected to make another cut in interest rates, a move which will eventually become available as the rate goes below 1 percent.

Now very good news for the smart people who have their money in FDIC-protected savings accounts, but these folk haven't had much say over the past few decades in what Washington does with the people's money.

Interestingly, with all the growth in money supply we have still seen the US dollar moving up and gold moving down, although this trend has reversed somewhat in the last few days. This appears to be going against the fundamentals, but a lot of people have an interest in propping the dollar up.

With the holiday season coming up, Asian exporters want the dollar high so they can sell their goods on the US market. Oil exporting countries also want the to prop up the dollar with oil prices having plunged so steeply. Both Asian and Middle Eastern countries are sitting on huge stashes of dollar reserves and dollar-based loans, so it makes sense that a good chunk of the money flowing out of the equities markets would go toward defending the dollar. Only the yen has been doing better among the major currencies.

The high dollar is of course bad news for US exporters who were not doing all that well even before the crisis began. Therefore we could see that trade deficit maintain its position or even expand in the coming months despite a general slowdown in the economy.

In other economic news, both consumer confidence and housing prices created new records today. Confidence plunged to an all-time low in October, while housing prices set a record yearly dive of 17.7 percent.

The Associated Press
Fed meets, with new rate cut expected
AFP - 2 hours ago
The US central bank, which led a coordinated global rate cut earlier this month that pushed its target rate down a half-point to 1.50 percent, ...
Tips for savers, as another Fed rate cut looms Los Angeles Times
Can a Fed rate cut make credit flow? Christian Science Monitor

Fed heads toward uncharted territory CNNMoney.com

Labels: consumer confidence, federal reserve, gold prices, housing prices, interest rates, US dollar

Wednesday, October 08, 2008

Comment: Do bailouts actually prolong downturns?

There is probably no better historical example to examine this question as the Great Depression, when the government intervened for more than a decade trying to prop up the financial system.

Although the Great Depression is generally seen as starting at the stock market crash of 1929 from at least 1929, small banks and farms had been floundering severely. However, it was not until 1931, when the government started a massive bailout program with the National Credit Corporation (NCC) that things started going downhill very quickly.

In 1932, the NCC was replaced with the Reconstruction Finance Corporation (RFC) and things continued to spiral downward reaching the lowest point during the Depression in 1933.

Yet, the RFC continued its bailout program mostly unsuccessfully until America's entry into World War II, generally seen as the point when shortly afterward the Depression ended completely. During the war, the RFC continued to operate giving out $2 billion a year. From 1932 until 1941, the RFC gave out $9.465 billion, a lot of money in those days.

When the war started, the government drafted many of the employed workers, and hired and trained large numbers of unskilled workers, at its own expense, to work in wartime factories. These policies together with rationing and a greater worker discipline helped the country work out of the lingering unemployment that still plagued the country. The stock market did not recover its pre-crash position though until 1954.

Some groups of economists, like those of the Austrian School, who believe that government intervention only prolonged the problems in the economy. Others, like the Monetarists, believe the Federal Reserve did not act quickly and strongly enough to address the crisis.

During the Depression, the Fed followed a deflationary strategy that kept interest rates high. The current Fed chief, Ben Bernanke, believes more in an low interest rate strategy, an attempt to ease credit, but in effect putting upward pressure on inflation.

Bernanke's views may account for today's cut in interest rates, another attempt by the government to bend over backward in accommodating the credit markets. However, as with the Great Depression, it is impossible to deny that easy credit is responsible for the current economic crisis.

Attempts at propping up the easy credit market, then, only reinforce the causative factors according to one school of thought.

The fact that the stock markets have not reacted positively to the torrent of government measures aimed at propping up the easy credit system probably indicates some doubt over the policy.

Labels: austrian school, bailouts, easy credit, financial bailout, financial crisis, great depression, historical lessons, interest rates, monetarist school, wall street