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Michael Hudson: The Price-Wage Squeeze - The Fed Sinks the Dollar
Against the recommendations of most economists and even the Financial Times of London, the Federal Reserve Board yesterday cut its discount rate by yet another quarter-point, to just 2%. Ostensibly, the intention is to try and spur economic “recovery” – as if a cut in the interest rates would do this. At first glance this seems to reflect the Fed’s ideology that manipulating the interest alone can expand or contract the economy – as if it is like a balloon, with its structure is pre-printed on it, to be inflated or deflated at will to control the level of activity.
This simplistic philosophy was a hallmark of the Greenspan era. Changing the interest rate alone meant that the Fed didn’t have to “think,” didn’t have to regulate markets, raise reserve requirements on bank loans to fuel the asset-price inflation that the Fed confused with real “wealth creation.” It didn’t have to regulate subprime lending or rain in widespread financial fraud. All it had to do was raise interest rates when this gave banks an opportunity to charge more and increase their earnings – or cut interest rates to lower cost of bank borrowing from the Fed.
But surely not even the ideologically hide-bound Federal Reserve can still imagine that a structural problem – the looming depression from the Fed’s favoritism to the banking sector promoting de-industrialization of the economy – can be solved by lowering interest rates yet again. While the Fed lowers its rate for lending to banks, these banks have not been passing on the rate cuts to their customers. Credit card rates are going up, and entire Christmas trees of penalties are further increasing banks’ rake-off. Mortgage rates remain high, so that real estate markets remain in the doldrums. The banks simply are not lending.
What they are doing is speculating, above all against the dollar.
This simplistic philosophy was a hallmark of the Greenspan era. Changing the interest rate alone meant that the Fed didn’t have to “think,” didn’t have to regulate markets, raise reserve requirements on bank loans to fuel the asset-price inflation that the Fed confused with real “wealth creation.” It didn’t have to regulate subprime lending or rain in widespread financial fraud. All it had to do was raise interest rates when this gave banks an opportunity to charge more and increase their earnings – or cut interest rates to lower cost of bank borrowing from the Fed.
But surely not even the ideologically hide-bound Federal Reserve can still imagine that a structural problem – the looming depression from the Fed’s favoritism to the banking sector promoting de-industrialization of the economy – can be solved by lowering interest rates yet again. While the Fed lowers its rate for lending to banks, these banks have not been passing on the rate cuts to their customers. Credit card rates are going up, and entire Christmas trees of penalties are further increasing banks’ rake-off. Mortgage rates remain high, so that real estate markets remain in the doldrums. The banks simply are not lending.
What they are doing is speculating, above all against the dollar.
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