Federal Reserve Debacle

About three years ago, (give or take a little) the economy was booming and most interest rates (especially home mortgage loans) were down as low as 3.75% in most loan institutions. A large number of home seeking patrons saw this as the time to purchase the American dream of private home ownership and invested in one. As usual, all went well, at least until they awakened from the dream.

Then, the mighty Federal Reserve board of directors looked down from their gold laden towers and decided something was wrong here. People were happy, jobs were available and prosperity was abundant. This could not be. There must be something wrong, or worse, trouble must be just around the corner. They huddled together around the massive round table and with unanimous consent demanded they put the brakes on the economy, -- hard. They started with an increase of 1/4% on the money they made available to the Federal Reserve bank family. After several months another 1/4% and another, and another, until almost three years later they had raised the cost of money 1/4% twenty five times. It does not take a mathematician to multiply 25 times .25% to see 6.25% added to the existing rate on loans. This was devastating for big ticket borrowers with high volume loans. More so harmful to home buyers who have adjustable rate mortgages. Many of these families had incomes of $50-60,000 annually, living with principals of austerity, they were able to keep up with their expenses. However, with a 6.25% rise added to their monthly payment, it meant hundreds of dollars more per month on an already overburdened income. Something had to give, and give it did, with tens of thousands of bankruptcies and home foreclosures along with the loss of many other high ticket items. Lenders where also giving out loans of over 100% financing and no money down.

Why did this happen and whose fault was it? The Government?–mmmm, partly. The financial institutions?–mmmm, partly. I lay the blame on the borrowers for their over extension of personal income and the Federal Reserve policy for incompetent application of drastic rate increases on the prime rate.

Let me use a narrative to clarify my accusation. Imagine a very long and heavily loaded train. I’ve seen a lot of them in Wyoming with three engines in front pulling and two at the rear pushing with about 120 cars in between. They are coming to a high mountain and the engineer increases the power of the engines. They slowly climb up the mountain until the front engines reach the summit and start down the other side. The engineer does not decrease the power because while the engines are over the top of the mountain, they still have to pull the rest of the train up the other side. After an equal amount of the total weight of the train is distributed on both sides of the summit, the engineer acts. An experienced engineer will know the approximate weight and length of his train, and will monitor the distance his front engines are going down the grade from the summit. When he begins to reach the halfway length of his train going down the mountain, he will start to decelerate because the cars on the rear half of the train will soon began to push the front engines instead of being pulled by them. He now will be ready to apply the brakes until he gets back on relatively flat ground.

I used this narrative because it clearly describes the situation created by the Federal Reserve’s policy of slowing what they consider to be an overheated economy, by preventing prospective borrowers from making loans that would contribute to the overheating effect. They believe rampant spending, is the cause of excessive inflation and that it can be stopped by limiting the amount of cash to the borrowers.

The Fed’s narrative should be viewed in reverse from the example cited above. They don’t know where to stop the braking and start the accelerating. They have missed the distance indicators along the track from the peak of their mountain. (Meaning the high point of their money lending policy.) They put the brakes on with a 1/4% raise over 15 times and each time waited for results and did not see them right away, so they started braking again, and again until they went too far, and the holding back policy caught up with them. It ran over us and threw us into a mode of recession which is where we are right now.

A good monetary engineer will sense when the train is more then halfway over the hill and begin the slowdown of power before he has to burn the brakes in order to stop. That’s the dilemma they created for us now. It is obvious they are in a state of panic once again because they dropped the loan rate twice in the last few days by an unheard of 3/4% each time.

These people are supposed to be experts, but it is easy to see that they, like many of our political representatives are filling their seats with incompetency. The President should eliminate the Federal Reserve Bank, and we should vote out our representatives because they don’t know how to deal with this.

In conclusion, if you don’t know how to engineer the train, get the hell out of the drivers seat and put someone there that can. --- Did I mention that I spent over 31/2 years as an engineer? And I do know how to do my job.