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Luckily, We Have The Fed

Admittedly, I am more stupider than a lot of people when it comes to finances.  So someone please tell me how the stock market really works.  See, I thought the stock market reacted to what is going on in the economy.  I didn’t realize it was the economy.  

Apparently, I was wrong, because the Federal Reserve has announced an emergency rate drop to “fix” the stock market.

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday and indicated further rate cuts were likely.

…

This move is not an instant fix,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics

“Fix” is actually the perfect word.  Markets can be “fixed” kind of like a fight or the World Series can be “fixed”. 

So let me get this straight.  We (individually and as a country) have borrowed too much money, which has us headed towards a recession.  The obvious solution?  Lower interest rates to banks, which allows them to lower interest rates to consumers, which allows them to borrow more money.  Makes sense right?  Right?

“You can’t borrow your way out of debt”–Dave Ramsey

So rest easy tonight, all of ye lower and middle income Americans.  Though the cost of milk, gasoline, and Coors Light doth drift higher whilst thou income remaineth the same, panic disturbs not the slumber of bankers, barons, and brokers.  So long as the DJIA remaineth propped by policy, politicians, and ponzi schemes, you need not be troubled by the frightful prospect of competing on a level playing field and moving forward.

Ah, what the hell!  You can just put it on your credit card, right?  Rates have never been lower!!!

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Credit Card Regulation, Free Markets, and Paying Cash

The Coyote Chronicles challenges Free Marketers to defend deregulation of the credit card industry: 

You can make the argument that people who can’t pay their balances in full every month should not take out a credit card, but thats more than a little disingenuous since we would see a staggering drop in consumer spending if people only spent when they could pay cash. The restaurant and travel industries would suffer immediately. I doubt there would be a Black Friday at all. Don’t even get me started about the car business.

I’ll take a shot at this one.  First of all, Black Friday, car financing, and credit cards themselves are all fairly new concepts.  Somehow, civilization survived before they existed, and suspect it will survive long after they are gone.  The assertion that our economy is propped up by the insane amount of consumer credit that exists currently tells me that we are, as a country, living above our means.  The fact that the savings rate keeps declining while consumer debt continues to rise tells me that we are in denial of this fact.  Government regulation that enables this foolish behavior only delays the inevitable crash that must occur to correct the market and insures with each passing year that the crash will be harder.

What would happen to the economy if people stopped using credit cards and started paying cash?  One thing is for sure.  Every debt free individual would have greatly increased buying power because a higher percentage of his income would be available to purchase goods and services instead of paying interest on the Big Mac Value Meal he bought 4 months ago.

Hat tip to MCB.