My question is, will the rate cuts have any positive reaction as long as the bank regulators keep money lending tight as they have been doing? Who controls the regulators and why have they not loosened up? (November 7, 2001)
Very solid point. One of the problems even with the money 'sloshing around' the economy is that the banks have been very reluctant to lend it. And why? Because most banks got boxed on the ears by the Fed back in 2000 for making 'risky' loans. One of the Fed's behind the scenes methods of slamming the economic brakes. If banks get put on probation because they were lending money in a booming economy, they cannot make many loans at all when times are not that good. The Fed literally pored over bank books in fine detail with the purpose of restricting loans. Now the Fed wants them to loan money, but it still has many banks restricted, and it also has scared the pants off of many. Remember Greenspan in front of Congress six months ago indirectly cajolling banks to lend the money? If it meant business the Fed would remove the restrictions and visit each bank and tell them to lend instead of waiting for them to take the hint. After all, the Fed was the one that caused the icy conditions on loans; it should thaw the relations.
Now to your question. Lower rates are going to help. There is a lot of money out there to be put to work, and now that rates are close to or under the inflation rate, there will be more borrowers aggresively seeking loans. Mere numbers seeking money will help loosen the purse strings. Still the Fed has to be more proactive; putting money into the system is good, but the money has to break past the logjam at the banks the Fed caused. It goes to show that once the economy is started in one direction, it is so hard to turn the boat. All the praise Greenspan gets has to be tempered by the clear fact that he and his henchmen started it all by chasing phantom inflation for the benefit of the ultra wealthy.
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