Tuesday, December 1, 2009

The Economy & Monetary Policy


Last night I read where Fed Chairman Ben Bernanke wrote an op-ed piece in Sunday's Washington Post describing how "political influence" would screw up our central bank's ability to conduct monetary policy.

Our Congress behaves so poorly that it is almost enough to make me become a conservative. The only thing holding me back is that the conservatives in Congress do the same thing - act poorly.

Would not it be a good idea to require that members of Congress read and learn something about monetary theory and policy before they screw things up. But these people in Congress know it all already. Mark my words, if Chairman Bernanke can not influence this new legislation, the United States will see a big change in the way the world will treat our debt and the holding of US dollars. We, those of us in the country, might not see it, but the rest of the industrialized world will react to the politicalization of our monetary policy. The ministers of finance around the world know a hell of lot more about monetary theory and policy than Senator Dodd and the rest of our Congress. They are not fools and they will not tolerate our foolishness and stupidity.

With credit card interest rates at 29.99% APR (Annual Percentage Rate), monetary policy to a certain extent has shifted from the Fed to the banks that set the interest rate for credit cards. Let me explain. The Fed is keeping interest rates low in the hope that banks will lend money to businesses so that they will expand and hire more people. This is good because this is the direction we all want our domestic economy to go in. Unfortunately, the issuers of credit cards are making their own "monetary policy" when they raise the interest rate on the unpaid balance to 29.99%. This will cause people to buy less or cut up their credit cards altogether. Just the opposite of what the Fed is trying to do by keeping the cost of money low for the banks.

Going back to a cash economy is a step backwards. Credit and the availability of credit is what permits an economy to grow at a faster rate. The banks know this, but they are not concerned with the overall economy. Banks are concerned with making as much money for themselves and their shareholders. The problem is - banks and credit are the tools by which our domestic economy can move forward at a faster pace.

The Fed needs greater control over monetary policy not less.

Stay tuned.

5 comments:

Summer Smith said...

I get your drift, Moneythoughts! And, as usual, your observations ring true. But, getting all these "dumb ducks" lined up in a row, would be something like trying to nail Jello to the wall!!

As ever -- yours seems to be a voice of sanity crying in the wilderness of chaos and corruption. But you know what? One of the "new" journalism and literary trends to emerge in the past few years is that people like yourself emerge from the blogosphere to the hard-copy-get-it-published sphere. Somehow, we seem to pay more attention to those who get "published!"

Keep up the good work! You are greatly needed!

Summer

winslow said...

Do you think the government should intervene to get banks to lower credit card rates to something reasonable like a max of 10-15 points above prime?

In our state, the pay-day loan industry has a direct line to the govenor.

moneythoughts said...

The banks borrow fed funds, over night loans, at next to nothing because the Fed wants to get the economy moving. But, the assholes running the banks and setting credit card interest rates are out for themselves as long as the government will let them play this way. Banks have a purpose, but they don't treat their clients with much care or respect. That is why a strong Fed and better regulations can check the greed factor of senior bank management.

LceeL said...

I think it's criminal that credit card companies, at a time when people are already having trouble making ends meet, are raising rates against already strained budgets. THEY DON'T CARE. The ONLY thing they care about is sweepeing as much cash as they can into THEIR pockets before you, me and everybody else go bankrupt.

moneythoughts said...

I guess what I was trying to say, and I admit sometimes I don't do a very good job of saying it, that the low interest rate policy of the Fed and the high interest rates that are now being charged to consumers on their credit cards, are at cross purposes. The banks are borrowing at next to nothing for Fed Funds while the consumer is paying as much as 29.99% for credit. If the consumer is discouraged from buying, then the small business will not expand or hire more employees. Rather than taking monetary policy away from the Fed, Congress should skip the scape goating of the Fed and give the Fed the necessary latitude to make monetary policy. Ghee, is it that simple?