Why the Fed's rate cuts won't help you

[AllyCat]

In its efforts to keep irresponsible bankers on Wall Street afloat, the Federal Reserve is spurring inflation, crippling the dollar and cutting into retirees' incomes. And mortgages and car loans won't get any cheaper.

By Jon Markman

The Federal Reserve today continued its attempt to get out in front of the worst financial crisis to hit the world banking system in five decades by slashing short-term interest rates by three-quarters of a percentage point, to 2.25%, the lowest level since 2004.

But the Fed's effort will have little effect on the ability of the average American to get a cheap loan for a new home, car or college education even as it has a large effect on U.S. banks' ability to fix their balance sheets by racking up fat profits.

If that sounds unfair, welcome to the latest episode of a brutal new American business ethic, in which the government bails out bad bets by risk-taking banking executives in New York with money that it borrows from middle-class families and foreign investors. The effort is gilded with fancy financial language and cloaked in the guise of a rescue that helps all citizens, but the reality is that Washington is essentially robbing the poor to help the rich.

http://articles.moneycentral.msn.com/Investing/SuperModels/WhyTheFedCutsWontHelpYou.aspx

Amazing that the Fed keeps cutting rates, but the daily rate quotes from our banker remain relatively unchanged.

[Lasher]

1. I found this too late to give it the 5th vote.

Good synopsis of what is going on, and why short term fixes for political reasons will ultimately worsen our plight. Here's one part I found ironic:

Rather than providing funds to prospective home buyers and business people with legitimate needs for moving into larger homes or expanding factory lines, records show the banks are hoarding the low-cost money they're borrowing from the Fed and investing it in Treasury bonds paying higher interest yields. They're then pocketing the windfall profits to repair their own ravaged balance sheets.

So the government loans banks money at 2.25%. Then banks loan the same money back to the government at a higher rate. Where do I sign up for that?

[dixiegrrrrl]

2. Real question is why is Fed bailing out a non-bank?

Former Fed Chairman Paul Volcker is raising questions about the Fed's rescue of Bear Stearns.

Volcker's chief questions: Why is the Fed rescuing a non-bank that it does not regulate? Isn't that a job for Congress? Why is the Fed guaranteeing bad loans? The Fed regulates -- and lends to -- banks, not investment houses.

Volcker calls the Bear bailout "... a new departure. And at some point, the government ought to — in my view, the government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.

In other words, rescuing companies other than banks, and guaranteeing bad loans, is a job for Congress and the White House. You want to bail out Carlyle Capital, or Chrysler or K-Mart? Go ahead, knock yourself out. Just don't ask the Fed to do it, because it's not their job.

Of course, potentially catastrophic failure was imminent and the Fed evidently felt it couldn't wait. Volcker: "… They stepped into a vacuum, and I think quite appropriately, it’s a judgment they had to make. But is this what you want for the longstanding regulatory support system? My answer is no."

http://latimesblogs.latimes.com/laland/