Saturday, August 2, 2008

They Played, We Pay

Ben Bernanke, Chairman of the Federal Reserve, is holding the discount rate to a below-market 2% and, together with Henry Paulson, Secretary of the Treasury, has pulled out of the fire the collective butts of some prominent investment firms; as well as those of national and international banks, most of which speculated heavily in high risk, hybridized, mortgage-backed financial instruments.

Nonetheless, housing markets are still in a funk, and artificially low interest rates perpetuate poor lending practices, while possibly encouraging inflation. On top of this, the U.S. Congress and the Administration seek to bail out borrowers whose credit worthiness is sub-par.

Thirty-five years ago, the late, iconoclastic Harvard economist John Kenneth Galbraith wrote that, “Unless lower interest rates and easier borrowing are accompanied by good prospects for selling goods or houses, nothing much may happen.”

Well, nothing much is happening, except that the housing market hasn’t hit bottom yet, GDP growth is hovering barely above recession levels, and the U.S. taxpayer is picking up the tab for corporate mismanagement, poor legislation, anemic regulation, a deflated dollar, dead-beat loans, and an increase in core inflation.

If one wishes to empty a cesspool, one has to drain its contents, nor merely stir them about.

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