Who has more power than the President of the USA (POTUS)? The director of the the Federal Reserve, thats who. The Fed answers to no one. The Fed sets policy on money. It raises or lowers federal interest rates as it sees fit to improve our economy. There are a few simple rules. If you want people to save their money, raise interest rates being paid. If you want people to spend their money, lower interest being charged. In a booming economy supply and demand will often cause a surge in inflation. Businesses will limit the supply of a product or service so they can charge higher prices for it. And the consumer will pay those higher prices because they have a great amount of expendable cash. The highest bidder wins the sale. This can put so much cash into an economy there is very little being stored in banks. Banks must have the stored cash to fund the loans people want and need, which increase in a boom time. It can become a catch-22. So what the FED does is too raise interest rates charged to banks and other financial institutions so that they in turn will raise both interest charged and interest earned. In the late 70s the same thing happened with the housing market that took place in early 2000s. Everyone had money, regs on lending institutions were dropped, prices doubled, but that was ok because everyone was working and had money and suddenly you could borrow 100% of a homes accessed value, or more if you needed it to say pay of credit cards. But there was a catch, variable interest rates. That put so much cash into the economy there wasnt enough stored in saving to cover the banks expenses. So enter the FED. They raised interest rates to encourage people to put some of their expendable income in saving. The banks had to pay more interest to the FED so that charged more on the loans people already had. Mortgage payments doubled. People could no longer make the payments, so they decided to sell the houses. Supply and demand again. No one could afford the loans payments with the higher interest, so there was a flood of homes on the market. An over abundance of overpriced homes. Lowest priced product was now leading the economy. Homes values were cut in half, but the loan amounts werent. Millions of families had to walk off and leave everything they owned in a house because they could not afford the higher payment, couldnt sell the home, and even they could it was only with half what they owed. Businesses failed, no one had money to spend there, banks failed, they werent getting the loans payments from clients, the stock market crashed as every one tried to sell off stock of dying companies. Enter the FED. They lowered interest rates to record lows to encourage consumers to spend money, particularly on new autos and homes. And it worked. Our economy is recovering. Sure hope financial Corps do t find a way to around low rates to increase their profit margins with help from friends whose campaigns they funded. It will be hard on the little guy. But thats what they seem to have wanted. Those trickle down economics that give federal money to big business to produce products we cant afford to buy and ignore the infrastructure repair and replacement projects that would put millions of tradesmen to work and help maintain our safety and cities.
Posted on: Sat, 08 Nov 2014 12:57:15 +0000
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