Lake Erie Conservative

thoughtful discussion(s) about issue(s)

… Our Economy is Hooked on Easy Money …

Posted by paulfromwloh on Thursday,July 18th,2013

.. Amazingly enough , much like a drug addict , the U.S. economy is hooked on the Federal Reserve’s easy money policies.

.. the Fed has pumped trillions of dollars into banks and financial markets since the last financial crisis  — first, by buying banks’ troubled real estate loans , and then by purchasing long-term Treasury and mortgage-backed securities to push down mortgage rates.

.. Foolishly , Congress passes a new bill [Dodd – Frank] that has caused the costs of doing business in the banking sector to soar . The effect of it has made the Sarbanes – Oxley bill (securities markets) , passed a decade ago , look puny by comparirison . This rescued Wall Street banks from near death experiences, while federal regulators shuttered more than 480 smaller banks. Unable to cope with more cumbersome regulation, many other regional banks sold out to bigger institutions.

.. The reduction in competion may be nice . It reduces the competition for deposits , and drives down interest rates , from the competitive side . Retired Americans who rely on interest from savings to help pay bills have taken an enormous loss. The result of this has impoverished millions of seniors , and those nearing retirement .

.. Those who are hungry for yields are going ga-ga for junk bonds . Which , by the by , is not the brightest move .  Should the Fed permit interest rates to rise, defaults would burn investors in a replay of the financial crisis.

.. The low interest rates have had a predictable effect on the real estate market . It has recovered ,  but only somewhat  . Homebuyers, farmers and speculators, armed with cheap mortgages, have bid up home and agricultural land values, and should the Fed let mortgage rates rise, many would not be able to sell properties as needed and ultimately would default on loans. Rerun time on the banks . Oops .

.. The disappearance of smaller banks has had a drastic effect on the small business sector . Smaller businesses can’t get credit from disappearing regional banks. Smaller real estate developers are selling out to big national builders, which can access the bond market to finance projects. Reduced competition pushes up new home prices, but when cheap money goes away, those mega-builders will be unable to sell options-ladened homes and some will default on their bonds. Talk about the Law of Unintended Consequences !

Like the first crack taken by the dysfunctional personality, easy money made the economy function somewhat better for a brief period. From the beginning of the recovery through September of last year, gross domestic product grew at a modest 2.2 percent. But like the addict, it needs ever-larger doses to stay on task. Last September, the Fed nearly doubled purchases of long-term securities, but growth has since slowed to about 1 percent  .

.. But , What can be Done ? More to Follow in another post  …


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: