What's the Fed to do?

The Fed has cut rates to .25%. About as close to zero as you can get. If this doesn't work, the Fed won't have too many more cards to play, outside of coordinating printing money with the Treasury. The Japanese had a similar problem in the 80's and 90's. They dropped rates to 0%, but it didn't work, and then they found that there was nothing else they could do to try to stimulate growth. None of the bureaucrats clever schemes were able to lift Japan out of their economic malaise. Why do we think it will work here?

Once again, the problem is that we are malinvested. We have put too much money into enterprises that are not profitable, and the entire economy is overextended in terms of debt. Putting ourselves deeper into debt is not going to help. Destroying the U.S. Dollar is not going to help either.

The Fed is in a bind because they are pumping as much money into the economy as they possibly can in order to get banks to start lending again, but if the banks start lending again, the multiplicative effect of the reserve system will cause hyperinflation. Doesn't make sense? Here's the long explanation. Banks typically only hold 1 dollar for every 10 they lend. This is called the reserve requirement. In good times, banks extend themselves to the limit because they are experiencing good returns on their money. When things turn south, banks contract, they hold more in reserves in order to prevent failure. This is why oil has come down and the dollar has strengthened, even though the treasury has committed to flooding the market with trillions of dollars and the Fed rate is near zero. Analysts are perplexed, because they can't understand how printing money can result in a stronger dollar. The answer lies in the banking system. Banks are lending less, which shrinks the money supply.

So, what happens when things start to turn around, and banks start lending again? BOOM! When banks multiply the amount of money in the economy by a factor of 10, economic activity will explode, but so will prices. This may be great for hedge fund managers in the short-term, but ultimately a much worse recession will follow because the marginal increase in activity is not supportable or desirable because ultimately when people try to retrieve the money in their banks in order to pay for all these new goods and services, they will find that their money isn't there.

Remember, the stated goal all along has been to get housing prices back up, right? The market has already determined that running up the price of housing was a huge mistake, and 2 bedroom condo's are not really worth a $200,000. Rather than allowing the housing market to return to some sane level that will actually allow renters to purchase a home, the powers that be are making great efforts to try to help speculaters and home-owners make a killing on their homes. For some reason our elected officials think that it is good if home values double every 5 years and completely ignore the massive portion of the population that will not be able to afford these inflated prices. Somehow they are able to wring their hands about making houses affordable for the less fortunate and get away with it, which is beyond me.

The real solution is as plain as the nose on your face. Reduce the government's meddlesome influence on our economy. Fix reserve requirements at 100% and return honesty and integrity to the financial system. There is no other solution. Throwing paper at the problem will not work. It defies logic to believe that printing little green slips of paper is going to resurrect our economy.