Monday, December 22, 2008

Change Reserve Requirement?

I've been hearing that Ben Bernanke is using "every available tool" to spur the economy. Dropping interest rates to 0 and lending money freely have been drastic moves, but he is still not using every tool at his disposal.

The Fed has one tool that I haven't heard anybody talking about. The Fed sets the reserve requirement for banks. This power is considered by economists to be the "sledge hammer" of their powers, having a more dramatic impact on the economy than setting rates or making loans.

My question is, do we not need a "sledge hammer" right now? The use of this third power would directly impact the credit issues this country is experiencing. It would have a positive impact on banks that cannot loan because they have capital constraints.

While I'm not advocating lowering the reserve requirement forever, it is available to Ben Bernanke to use to try to get our country through this crisis.

Wednesday, December 10, 2008

Quadlet on

Time magazine writer Stephen Gandel has posted an article on Treasury's Plan for Mortgage Rates Could Be Costly. He references my 2006 article Are Real Estate Prices Dependent on Mortgage Rates. The article discusses a secret Treasury plan to lower mortgage rates to spur the housing market. Stephen's article uses my article to be critical of the plan, like a counter-point. The article also has a quote from a professor emeritus of Wharton to back up my claims.

So, you might ask, do I think the Treasury should go through with such a plan? I would say yes. The real conclusion to draw from my study is that the link between mortgage rates and real estate prices is not a simple one. The economy is a complex interconnected web of correlations and cause-effect relationships. There is no "silver bullet" simple answer to our economy's current problems. In my opinion, the Treasury and Fed should use every tool available to them.

Part of the government's job is to act in difficult times to help the economy get through the cycle and ease the natural corrections of the economy. The government should run a deficit in 09 to help spur the economy. As long as the president understands that in 2-3 years, when the economy is charging again, that the government needs to return to surpluses. Even though no one is talking about it, the Social Security problem is not going to fix itself...

Thursday, December 4, 2008



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