Tuesday, March 18, 2008

The Fed Strikes Again

WASHINGTON (AP) -- The Federal Reserve on Tuesday slashed a key interest rate by three-fourths of a percentage point, moving aggressively to contain a credit crisis threatening to push the country into a severe recession.

The latest action brought the federal funds rate - the interest that banks charge each other - down to 2.25 percent, the lowest point since late 2004. It marked the second back-to-back cuts of three-fourths of a percentage point.


In explaining its actions, the Fed said that it was having to navigate a difficult policy environment that included sluggish economic activity and rising inflation pressures.

The Fed statement said that "the outlook for economic activity has weakened further" but that "inflation has been elevated" with some signs that expectations of future inflation pressures are rising, a dangerous sign for the Fed.

No shit. Inflation? Could it be from the prolific and perpetual rate-cutting that the Fed has been doing? Could it be a result of the liquidity generated by the Fed? Could it be a result of the constant borrowing of a culture that has been raised with a dependency on credit and debt, which ultimately demands more money be put into a system than there is money to pay back? The direct consequent of which, is further generation and devaluation of currency?

And when bubbles held together by artificial value and credit dependency finally burst, you see what we see now: a breakdown starting in one small market that will finally spread to all others because of the bullshit economics we have been utilizing. And of course, the Fed's only response is that something HAS to be done (which translates into developing more debt for the sake of Wall Street). Sometimes, as painful as it may be, no action is better than trying to prop up a system that is inherently doomed to crashes like this.

Mish also has a great article HERE on the problems of too much liquidity and "liquidity traps."

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