The Fed. should listen to the genius of The Scanner

[Scanner]

Raise interest rates. . .significantly so that people actually WANT to put money in the bank for a safe 5% interest (or more for a CD).

In one fell swoop, you would restore confidence in our banking system and the banks would have money to lend, solving the liquidity problem. People could then get a mortgage. . .sure it would be 10% interest but that's not historically unreasonable.

The Fed tries to solve everything with a rate cut and it just won't work.

The world will never realize my genius.

[tripods68]

But you will drag the economy further into deeper depression. You need to keep lowers rates to stimulate the economy.

[Scanner]

You need to keep lowers rates to stimulate the economy.

Pundit poppycock.

Oh, and I bought USO today. . .

[Scanner]

You see, the "Housing Crisis" begat the "Credit Crisis", right?

Everyone thinks this has to do entirely with housing. . .but really, it's about money.

When you deposit money in a bank and they pay you .43%, the message the bank is basically saying is as follows:

"Your money ain't worth nothing to us. In fact, it's more of a hassle to keep track of than it is an asset."

And then the banks complain they have no money to lend? It's because the gov't has pushed interest rates down.

WTF????

No wonder there is no cash.

Look at SavingAdvicees here. . .many hardworking, frugal, conservative people who want a place to "save their money" at a reasonable interest rate that is safe.

(not me, but if nothing else, I have learned this forum is conservative)

But nothing exists for that market.

The Republican Administration has forced people to put money in the equity sector at the expense of the debt sector (banking/bonds). This is bad, bad, bad.

And the Republicans want to privatize SSI????

Why not just take our SSI money and place on it Red at Caesar's in Atlantic City?

BTW, I am voting for McCain but only because he's only Republican in name.

[jIM_Ohio]

I think raising rates a little is due, but that won't happen until after the election.

The fear is ARMs resetting
however it would improve liquidity if people put money into banks (the conventional logic is lower rates boost liquidity because banks borrow from each other for short term needs).

[tripods68]

You don't improve liquidity if the people loss confidence on banking system. Many people now are slowly pulling out their moneys because of the fear of full blown financial collapse in the market. When that happens how the fed is going to provide liquidity to others when the very banks they governs has very money to loan them, then now what? Their last resort is to borrow from directly to the US Treasurer who can print $$ like there is no tomorrow, but that will stimulate the higher expected Inflation fear. That's even worse case scenario. The main thing for Mr. Paulson to do is to "calm" the market in orderly fashion and to tell the American people their money is still "safe" that is fully insured up to $100K per account and not lose their confidence.

[Scanner]

Tripod,

Yes, but why not make saving more attractive if they need money to lend? The banks don't set interest rates - it's fully regulated.

People are tieing their money up in stocks, not in debt instruments like CD's. . .so yes, they print more money. That will create a downward pressure on the dollar.

Hey, I benefit long term from printing "funny money" - I own silver (in a big correction last month) but if you want to abate the credit crisis and control inflation at the same time, have small time depositors rescue it.

How big is this website? .000001%? How many here are always looking for places to stuff money? Why has stuffing money in the bank become such a joke? It's because the interest rates are a joke.

There can't be no consequences of that.

If you could get 7-10% on a CD tommorrow. . .tell the truth. . .wouldn't you buy some at those prices? I would and I am a typical risk-loving investor. But I am not stupid either. If there was a CD for 8.5%, you can bet I'd buy up some of that.

Why not say, "America. . .calm down. And as a display of confidence, we are raising interest rates because we need depositors attracted to banking."?

[jIM_Ohio]

Scanner- I will lower your 8.5% to 6%- show me a 6% return on a CD and I would probably move my whole bond allocation to CDs immediately.

7% and I would sell equities, even at a loss, to buy some CDs. 8.5% and I would go 50% cash.

[disneysteve]

The problem is you can't tweak one segment of the financial landscape without impacting the others. Everything is interconnected. Back in the 80s, CDs were paying 15%. Sounds great. But inflation was also in the double digits.

Raise the rates on savings/CDs and banks have to raise the rates they charge customers to borrow. That makes it harder to buy a house or a car or do home renovations or start a new business or expand an existing one. The can't pay more on savings without impacting the economy in other ways.

Jim, I can't get you 6% but you can get APY of 5.1% on a 5-year CD.

[Broken Arrow]

Hehe, at first, I thought this was tongue-in-cheek. I guess maybe in some sense, it still is.

However, I have to agree with Tripod. Here's something to consider as well:

Under the Gold Standard, which linked currencies to the value of gold, governments were committed to maintaining fixed exchange rates. However, during the Depression they were forced to keep interest rates high to persuade banks to buy and hold their currency. Since prices were falling, interest-rate repayments rose in real terms, making it too expensive for both businesses and individuals to borrow.

That high interest rate, in a way, helped to exacerbate the conditions of economic depression in the 30's.

Contrast that with the way Alan Greenspan pumped money supply into the system as well as lowering the interest rate to help stimulate the economy through both 9/11 in 2001 and some accounting scandals in 2002. To this day, he is heralded as someone who has guided our economy through these tough times.

It may not be entirely fair to compare the two eras, but perhaps it is enough to illustrate the basic point that in order to stimulate the economy, it helps to keep interest rates low for businesses to raise capital and weather these down times.

Yes, there are some unintended consequences, but I would think there are other ways to tackle them, such as re-examining capital gains tax.

[maat55]

Dave Ramsey followers would love Scanners plan. Pay cash for everything and earn 10% with no risk. WOW. Scanner are you a closet DR. fan?

[Scanner]

LOL.

No, I just don't see a rate cut as the panacea every time something bad happens to the economy.

Housing crisis? Get a rate cut.

Auto makers not doing well? Get a rate cut.

Credit crisis? We need a rate cut.

Americans getting obese? By golly, let's give them a rate cut.

Pretty soon, the way it's going, the banks will be paying me money to borrow it instead of the other way around.

I'll go to the bank to take out $10,000 and I'll just have to pay back $9000.

[jIM_Ohio]

I have two or three theories I want to see tested.

1) Balance the budget and I think rates go to neutral and even some rate increases above neutral will be OK and inflation will be in check.

Can we waive that amendment about Presidential terms and re-elect Bill Clinton?

2) Raise rates and let the housing bubble really pop. Right now the housing market is bad, but all this government and fed intervention has cushioned the severity. Cut the G D chord and just raide rates and burst the bubble once and for all.

3) put me in charge. I will raise rates on Monday then lower them every Friday. I will balance the budget every Tuesday and overspend every Thursday. Then wednesdays we have a party to stimulate the economy.

[Broken Arrow]

Heheh, yeah sure! I'll vote for the Scanner/JimOhio ticket.

For what it's worth, I vaguely recall Alan Greenspan also commenting one time to spike the interest rate super high. Something crazy like 18%. Just for a short while to halt all the haphazard lending that was still lingering. He said it would have been better to do that and halt the mess rather than go through a recession. Of course, he's also retired so....

[disneysteve]

Pretty soon, the way it's going, the banks will be paying me money to borrow it instead of the other way around.

I'll go to the bank to take out $10,000 and I'll just have to pay back $9000.

In that case, I'd like to borrow $50 million please.