Fed Chief Bernanke Succombs to Wall Street Pressure
The consensus of the economists that the WSJ interviewed for today's Econ blog points to continuing the rate cuts. This latest cut was motivated by the expectations of “the market;” the stock market went up on expectations of a rate cut and Bernanke felt compelled to comply.Although Bernanke has stated that there will be no more cuts for a while, he has shown that he will fold under pressure. The economists here, most of whom work for investment firms whose profits will benefit enormously from further cuts, are all pushing for more rate cuts. The opinions of these economists aren’t based on solid and well-rounded analysis of economic fundamentals, but are thinly cloaked petitions to the Fed for more cuts. The Fed is supposed to keep policy decisions close to its vest so as not to create information arbitrage for insiders, but obviously this isn’t true in the current Fed’s case.
Savings equals investment in the macroeconomy. It is investment that drives stable economic growth, while monetary policy is meant to keep temper inflationary pressures along the way. The current Fed policy demotivates saving because the returns are so low. The option for individuals and businesses then is to spend down savings and to borrow for more spending. This is the Fed's goal for driving the economy, but it is short-sighted. Eventually we have to pay the proverbial piper, as is now the case in the current mortgage market. But instead of letting the few problem hedge funds, lenders and borrowers take their medicine, Bernanke is reinflating the housing bubble that caused the problem in the first place.
The financially responsible and those living on fixed incomes will just have to tighten their belts further. The irresponsible will continue to spend themselves into bankruptcy with the belief that the Fed and the taxpayers will take care of them.
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posted by Lisa @ 8:34 AM
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