One Quarter Percent – Has the Fed Learned Nothing?!!

Earlier this year I showed how this entire credit crisis is the fault of the Federal Reserve due to their completely inept handling of interest rates as we came out of the last recession. See http://themoderatevoice.com/22860/guest-voice-the-federal-%e2%80%9canything-but%e2%80%9d-reserved-911-terrorists-strike-again/ . Now they are doing it again. How can we let them?

Major Screw-Up Number One: In summary, in response to the last recession, the Fed lowered the Fed Funds Rate, which drives or influences all interest rates world wide, including LIBOR. This rate had not been below 3% for 40 years, yet the Fed lowered the rate from 6% in January 2001 to 1.75% in December and 1% in June, 2003. It was below 3% for 3 years and 8 months and at 1% for a year, both absolutely unprecedented.

Free money spurred out-of-control mortgage lending, which dramaticly increased home demand, which increased home prices, which further increased mortgage lending and of course home building. It also revved up the bundling and selling of mortgage backed securities and spurred the creation of synthetic CDOs and the like. Subprime, Alt A, Auction Rate Securities, CDOs and all that existed prior to 2001. This action by the Fed just put all of this on steroids and unleashed the inherent creative survival-of-the-fittest greed alive and predictable in all people.

Major Screw-Up Number Two: Then, they REAALLLYY screwed this up. The Fed raised the Fed Funds Rate by 4.25% in 2 years. The last time rates were this low the Fed took 8 years to raise rates by this much. The rapid increase in rates ruined fragile home mortgages throwing them into foreclosure, ruining home demand, causing home prices to fall, lending to dry up, mortgage companies to fail and fire people, lenders to fail and fire people, insurers to fail and fire people and home builders to fail and fire people. Higher unemployment leads to less spending and that kills the whole economy.

So what is the NEW answer to the current recession they caused, do the same thing as last time.
Lower interest rates to a new record low.

What to do Now?
It is too late. This has already happened. Since it has, what is the next right thing to do?

Announce right now that rates will begin to rise, one quarter percent every 4 months until rates hit 5.25%. This is about the average Fed Funds Rate over time. First raise will be April, then August, then December, like clockwork for 6 years and 8 months.

Lenders and borrowers will have certainty. Borrow now or the rates will go up in April. Everyone can plan. Lenders can make loans that predict future known increases in rates.

Why are interest rates shrouded in mystery? Who does that help? It provides the Fed with some kind of secret power over the economy that they hate to relinquish.

I suggest that if the Fed will not do this itself, then Congress should take this power from them and do it legislatively. The Fed screwed this up once. We cannot afford for them to do it again. Good luck America.