DRAWING on OBSERVATIONS

Ball point pen on the morning newsprint

Many believe the Federal Reserve contributed to the housing bubble by keeping interest rates too low for too long following the 2001 recession. Yesterday, Ben Bernanke pointed a finger at regulators, not interest rates as the guilty party responsible for reckless lending, the housing bubble and subsequent financial meltdown. The Fed now seeks greater regulatory authority.

Ball point pen on the morning newsprint

With the Short term interest rates effectively at zero percent, the Fed only has few tools left in the shed. They may consider buying long term Treasury securities in order to push up the price, lowering the yields and hopefully reducing the cost of long term borrowing.

Ball point pen on the morning newsprint

The Fed basically has one tool in the shed. If inflation is detected, they could increase interest rates and slow the economy. If a slowing economy is detected, they could lower interest rates and spur the economy. Since business is reluctant to raise prices during a slowing economy, inflation and a recession  are almost always mutually exclusive. But our government has thrown another variable into the mix; a huge debt and a falling dollar. Even if world prices stay the same, the shrinking buying power of the US dollar … Continue Reading