Interest Rate Cuts and A Stimulus Package

“A chain is only as strong as its weakest link.” We’ve all heard that expression numerous times throughout our lives. So what might happen with the economy in the coming months? Well as you might or might not know, stock markets around the world have generally been falling, even plummeting on some days. In response to this dismal turn of events, the Federal Reserve has lowered interest rates by three-quarters of a point in a special teleconference the other day. Prior to the rate cut, which was announced about an hour before American markets opened, the Dow was heading for an opening of about 500 points to the downside. The analysts say that the Fed, as it is frequently called, will lower rates again in about a week when they hold their regular meeting.

Meanwhile, the Bush Administration has offered a plan to “stimulate” the economy with a combination of rebates and tax cuts; totaling about 150 billion dollars. Democratic leaders in Congress seem to generally agree, with some negotiations ongoing with the administration to adjust some of the details.

Okay, now what? Well the conventional wisdom says that retailers should especially benefit from the rebates; after all, the Government will send us money and we will go shopping. There’s probably a good deal of truth in that, but for many hard pressed Americans, they will use the money to make payments on overdue bills of all types. Whether the Fed rate cuts and the stimulus package can keep the economy from sinking into a severe recession, I’m not sure. I go back to the opening here, about the weakest link. So many folks are in distress, that after the initial rebate “bounce,” will they still be in the same predicament as before the stimulus money got into their hands? Further, will some who may not be as bad off just decide to hold onto this “bonus” money, as a rainy day fund.


I believe the above actions by the government will help, but we need the Fed and the Bush Administration to push for the credit industry to lower rates immediately, not months and months from now, as they have done in the past when interest rates were lowered by the Fed. What do I mean? Well, in the past, if “XYZ Credit Card” was charging an average of 25% interest on credit card debt, and the Federal Reserve lowered rates, it could take “XYZ” a couple of months or more to bring down their rates to consumers. If the government gives us money and the credit industry just keeps rates high, they’re going to get a fair amount of the stimulus money, not J.C. Penny, or Kmart, or Target. And then the administration has to finally get off this free market mantra and “jawbone” oil and gas prices down***, or just like the credit card companies, the oil industry will end up pocketing a substantial amount of the stimulus money, and the whole collective action by the government will probably pretty much go for naught.

These are the things that are crippling many Americans and the American economy. The whole housing mess will continue, in my opinion, for quite some time, but as the debts are refinanced at lower rates, the crisis there might begin to recede. The thing is, Americans are in too deep, and until or unless a substantial amount of that debt is eliminated, things aren’t really going to improve much, in my opinion. Understand, what has been happening in housing, and increasingly with credit card debt and other debts, is that consumers default, and that eliminates the debt the hard way, as the lenders have been incurring huge losses. What seems to have happened, at least with some credit card companies (that is, banks), is they have been trying to cut their losses by charging higher interest rates to their PAYING customers, thus forcing more of those customers into late payments or default. The same thing is happening with this adjustable rate mortgage stuff. Lenders have jumped interest rates on homeowners by huge amounts, resulting at times in hundreds of more dollars being added to some people’s mortgage payment. Guess what happens then? Many can’t pay the higher rate, they default, the lender forecloses, the house is “dumped” out onto the already terrible housing market forcing prices down even more, the lender takes a hit, those who bought the mortgages as investments, or who held bonds backed by mortgages take a hit, these companies report big financial losses, the stock market reacts negatively, and the whole thing keeps churning on in a vicious cycle.

Just a little bit about these “sub-prime” mortgages; this term doesn’t always mean that some working class family went out and bought a house for $75,000 and now they can’t pay for it. It also means that people took on mortgages (and were GIVEN these mortgages by lenders) at far higher levels than they could normally afford. Maybe some folks needed that $75,000 home, but instead they got a house priced at twice that, while others could afford a $200,000 home, but took out a mortgage for a home priced at $400,000. The other day on some television station, they showed a house of a “sub prime borrower” valued at $750,000, and was in foreclosure!!! My point here is to show that not all sub prime foreclosures are the result of working class people defaulting on mortgages.

And one more thing; the "free marketers" don't seem to be protesting GOVERNMENT action to try to avert a serious economic downturn. As I've noted before, they love the free markets as long as they're making money. When the asses get their butts (get it?) into trouble, they want Uncle Sam to come to the rescue. So don't EVER think it is only poor or average folks who want government help.

*** "Jawboning" is a term you don't hear much anymore, but in the past it was frequently used in reference to government officials making public statements to encourage some entity to do something the government wanted. For example, if a major strike was threatened, the president or other administration officials might make public statements encouraging the two sides to negotiate more. Sometimes, a president might even threaten to use troops, like I believe Harry Truman once did.