Federal reserve cuts rates by 0.75%
“Too little too late” This is the phrase that I’ve been hearing continuously in the news both for reaction of the government to stimulate the economy with tax rebates, and today with the federal reserve decision to cut the interest rate by 0.75%.
Why does the federal reserve need to cut the rate? Our economy is based on ever increasing credit. If people don’t borrow, there will be no money i.e. DEBT=MONEY CREATED IN THE SYSTEM. The reverse is true, repayment of a debt destroys the money created, which is the same thing that happens when a mortgage goes to foreclosure - the money gets destroyed.
There’s been a lot of money destroyed lately due to the sub-prime mortgage crisis going on. By lowering the interest rate, the federal reserve lowers the interest banks pay when they take loans, to give us loans. Consequently, banks should be lowering credit rates soon. This should encourage people to borrow and create new money in the system.
This problem that we’re in is because both the federal reserve and the government react to the market, and did not act earlier to the future indications. Many people knows that if the government did not take the money in the form of taxes, they will print it and more money in the system causes inflation, which leads to rise in prices - so we end up paying it anyways. That said, announcing the tax rebates earlier would neither affect the government nor change the wealth of Americans but it would have supported the market little more and the only reason this didn’t happen is because the government acted slow.
I would have never anticipated the rate cut earlier. I always expect from the federal reserve to react rather than act - in contrary to my expectations from the government who should act before problems happen. The interest collected from the banks will go to the owners of the federal reserve. So, keeping the interest rate higher as long as possible is of interest to the federal reserve, which represent its owners. Although the federal reserve hinted at the rate cut a week earlier, yet they didn’t move except when a problem happened. I really believe that one big question to the next president is how he/she plans to regulate the federal reserve, or at least steer them to be in the benefit of people more than in the benefit of banks.
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