Am I the only one who’s not entirely convinced that the Fed is doing the right thing by continuing to slash interest rates, or that the stimulus package is that good of an idea? It really seems like a knee-jerk (or band-aid) solution, for a couple of reasons:
- It’s addressing short-term problems, but making long-term problems worse. Yes, a lot of Americans’ equity is in their homes, and it’s painful when home prices dip. But at the same time, the savings rate is already negative. Increasing consumption (through a stimulus or lower interest rates) is a really bad idea when Americans are already spending more than they earn. It may prop things up for another decade or so, but sooner or later it’s going to come crashing down. Maybe it’s better to deal with a small recession now if it avoids a bigger problem later on.
- It sends the message that the Fed’s goal is to protect investors’ portfolios, not the economy. The Fed shouldn’t make decisions solely on the basis of investors’ pocketbooks, and it shouldn’t bail out irresponsible lenders except to the extent necessary to avoid financial collapse.
- It avoids placing responsiblity on anybody for the subprime collapse. Banks employing bad lending practices? Consumers taking on too much debt? Overconfident hedge funds taking on too much risk? It doesn’t matter, we’ll all take on more debt (as a nation) to pay ourselves off in the short run.
Earlier this decade, the Fed kept the dot-com bust from getting too bad by inflating a new bubble in the housing market. Now that that’s gone south too, you’d think somebody might have learned their lesson. Apparently not.
