Sunday, October 26, 2008

0% Interest Rates

It is rumored that the Fed is considering lowering the Fed funds rate below 1%.  Really?

If you remember my post about what caused this financial crisis you will remember that one of the main factors was the cheap money the Fed flooded the world with shortly after 9/11.   Did we really learn nothing from the last time?  Do these people really think that even though we got here by making available cheap money, we can fix it by making money even cheaper than we did before?

I wasn't sure about it before, but I'm very sure now, we have got to change the mandate of the Federal Reserve.  They should not be trying to manage the economy because they will screw it up.  Look at what Alan Greenspan just admitted, he didn't know what they hell he was doing.   Giving anyone the power to manipulate interest rates and the money supply is just wrong.  Now people will look at the failure of his policies and conclude that the free market doesn't work.  Of course this is very flawed thinking because the fact remains we never had free markets and still don't today.

The Fed should get back to what it needs to do which is to make regulations that enable better transparency and accountability in the markets and then ENFORCE it.  If they would have done that job, rather than continually worrying about where the Fed Funds rate needs to be, we seriously might not have gotten into this mess.  If they simply did this, three out of the four causes in this financial crisis probably never happen.

But I'm sure that won't happen.  I'm sure Bernanke and the rest of the Fed thinks it can out think the markets, even though time and again, they have shown that they can't.  They will keep doing what they think they need to do, even though it was already proved that they don't know what the hell they are doing.

So I'm still long the market right now, even if I don't want to be.  If the market gaps much lower, I will probably try and get out even though I still believe the short term direction of the market is up.  Our government will do something to make sure that happens, even if it is a bad long term deal.

1 comment:

  1. I always find it hilarious how surprised you are by our government's inability to learn from its own mistakes. Mark my words my friend, the government will continue to make money cheaper. Predatory and irresponsible people will take advantage of the cheap money and misuse it yet again.