Comments on: The bailout profits A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: OnTheTimes Mon, 07 Dec 2009 15:47:39 +0000 “What’s unarguable is that while the Fed has done a good job of making the banks profitable again, it’s done a much worse job when it comes to keeping a lid on unemployment.”

The Fed’s job shouldn’t be to manage the economy, just to ensure the viability of the financial system. The money supply should not be used to contol the economy, as it doesn’t work. The idea that raising or lower interest rates will rein in or spur growth is wishful thinking, and the sooner we give up on this fantasy, the better.

When growth is higher than desired, it should be limited by restricting access to capital, not just by making it more expensive. Increasing capital requirements for both lenders and borrowers during bubbles not only puts the brakes on the biggest driver of bubbles – leverage – but it also reduces exposure to risk by lenders, including the government. Raising interest rates from 3% to 4$ won’t stop speculators from borrowing when the market they are investing in is rising at 20%. However, higher interest rates cause businesses that are capital intensive to raise prices, resulting in inflation.

Conversely, when we are in a recession, capital ratios should be lowered to encourage more investment and risk taking. Unless interest rates are stifling high, they don’t need to be lowered, all that does is induce bubbles in capital intensive assets, like real estate. Housing prices rise and fall as interest rates fall and rise, and because the cost of housing is a huge part of everyone’s budget, generate great uncertainty and instability.

The Fed, which does not answer directly to the voters, should not be assigned the task of managing the economy. The president and congress have plenty of tools at their disposal for doing that (which is ironic, as they throw most of them out).

By: mccartbi Mon, 07 Dec 2009 15:34:06 +0000 Give me control of the Federal Reserve and I can make all my “investments” turn out OK too…