Stop Dropping the Interest Rate, Please

In all of it's infinite wisdom the Fed continues to drop interest rates. Did you think one percent was as low as they'll go? You're wrong. According to Mr. Bernanke, interest rates below 1% are "certainly feasible". Additionally, as of 1 December 2008, the effective fed funds rate is 0.52%.

There are many problems with this. For one, the Fed rate drops aren't positively effecting the economy. Look at each rate drop over the past six months or so. The rate dropped, the market went up for the day and then continued to spiral down the next. Dropping the rate is doing nothing but starving the federal government from interest income that it could desperately use. The low interest rate, even in combination with an astronomical bailout, is not inducing banks to lend. Unless you have a credit score above 750 and make over $100,000 a year, you're probably going to run into issues finding credit for anything. For example: A friend of mine works at a Chrysler dealership here in metro Detroit. She saw a man come in the other day returning the two cars he leased for his children. This man was a Chrysler employee for over two decades. He said that he understood that Chrysler was no longer leasing and wanted to buyout the leased vehicles. He had never missed a car payment in the twenty years he has owned or leased Chrysler vehicles, but alas, he was declined. We are talking about a man with a near perfect credit score whose income can be docked for a missed payment through Chrysler and he could not get a loan (and a small one at that). The mortgage industry is no better. If the Fed truly thinks that another quarter of a percent is really going to help, they are in need of some new management.

The second issue that I take with the persistently dropping Fed rate is a matter of creating another bubble. If the market does indeed begin to recover and rates remain low, we will quickly see an artificial credit bubble inflating. Banks will be falling over themselves to grant credit to every jackass that can fill in an application. We will return to the days when infants and family pets are being pre-approved for credit cards. Who would be stupid enough to fall back into that, you ask? The American consumer and the banks that provide the credit. It seems that no matter how bad we screw ourselves we eventually mend our wounds and ask, nay beg, for more. I mean really, did anyone at the Fed put two and two together with Greenspan's sweeping rate cuts and the housing bubble. They're running to fall into the same trap.

If you haven't figured it out yet, I do tend towards classical economics vs. Keynesian. I do have great respect for certain Keynesian concepts, however. I will concede that markets do not adjust rapidly and that monetary policy can work to our advantage. That said, I support a system of very limited monetary policy. Even a Keynesian will tell you that the market has no time to adjust if you make monetary policy changes on a weekly (OK, I'm exaggerating) basis.

Mr. Bernanke, it is time to stop. I respect you as an economist and I believe that you have done considerable positive work in the field. Hell, my current Macroeconomics textbook was coauthored by you. That said, stop. Please stop. Don't let everyone look back on your tenure and wonder how we let another Greenspan Bubble happen.