The feds need to lower the prime??

HIGHLY cynical this evening with the world in general.

FreeMarketNews.com

The U.S. economy is showing signs of a potentially rapid deceleration. In particular, there is accumulating evidence that the housing sector slowdown may be becoming a meltdown. In many areas house prices are falling. House sales are down nationally, and mortgage delinquencies and foreclosures are rising—especially in the sub-prime market. Is it preventable. Maybe for the moment, in my humble opinion, but eventually, were going to be devastated economically. My belief any way.

http://www.tompaine.com/articles/2007/03/27/preventing_economic_collapse.php

China has started to drill an 8,875-meter-deep well in southwestern Sichuan Province to explore an untapped underground oil and gas field, sources with Sinopec Corp. said on Saturday..UH HUH. They own a large percentage of US soil, companies, business ventures gone over to them and now their drilling the deepest well for oil and gas..I smell major issues evolving here. Our downfall? See I don't have faith in our government anymore. I so wish I did, yet time has proven they're just not that damned concerned about the citizens of this once great country or the country itself. Do you see them taking 50% cut in pay to help? OH HELL NO...


http://www.chinadaily.com.cn/china/2007-03/24/content_835770.htm

Lastly, declining home prices and tightening credit standards will diminish mortgage equity extraction, as is already happening. Since such cash outs have been an important factor supporting robust consumer spending, this augurs weaker future spending.

In addition to lowering interest rates, the Fed must also address two problems calling for deeper policy change. First, Chairman Bernanke’s close identification with inflation targeting has created something of a bind. Though the Fed has no official inflation target, it has allowed market opinion to settle on the idea of an implicit two percent target. With inflation stubbornly stuck above two percent, this means a rate reduction could dent the Fed’s credibility.

This confirms former Chairman Greenspan’s view that inflation targeting would adversely limit the Fed’s flexibility and discretion. The clear implication is that inflation targeting is a bad idea, and the Bernanke Fed should now distance itself from that idea by abandoning chatter about inflation targeting.

A second problem is that a rate reduction could trigger renewed debt-financed asset inflation, which highlights a major dilemma. If the Fed pushes rates too high in its attempt to choke off wider inflationary effects of asset inflation, it risks triggering a credit crunch and defaults as is now happening. Conversely, if it does not push rates high enough it risks triggering accelerated inflation as agents borrow more in anticipation of rising prices. This implies a knife-edge situation, with the economy being held hostage by asset speculation.

One solution is quantitative regulation extending the system of margin requirements to asset classes such as mortgages. This would enable the Fed to vary the cost of those assets without changing interest rates, thereby damping speculation without imposing collateral damage on the rest of economy.

As a graduate student, Chairman Bernanke wrote about how the Great Depression was fostered by a cascade of bank failures that rippled through the financial system. It would be ironic if he were now to preside over his own financial crisis. Moving promptly to lower rates and enacting policy reform that gives the Fed new tools for controlling asset inflation seems a good way to lessen that likelihood.

This article was originally posted on Tuesday 20 March. Paragraph two was amended on Thursday 22 March to take account of the Federal Reserve’s decision to leave interest rates unchanged but to alter its policy statement.

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Dr. Thomas Palley is an economist living in Washington DC. He holds a B.A. degree from Oxford University, and a M.A. degree in International Relations and Ph.D. in Economics, both from Yale University...