Sunday, February 03, 2008

Peter Schiff On Fed Rate Cuts And Stimulus Package

Ron Paul economic advisor Peter Schiff's weekly columns are virtually always good, so if I was going to blog everytime it is good I'd have to do it nearly all weeks. Instead I just do it when it is unusually good and/or makes an entirely new point.

This week was one example of this, when he analysises the Keynesian policies pursued by the Federal Reserve and the Bush administration in cooperation with the Democratic Congress, in the form of dramatic interest rate cuts combined with a so-called stimulus package. You can read the whole column here, some excerpts follow below:

"A common definition of insanity is the act of repeating the same activity while expecting a different result. Bernanke is now repeating the same mistakes made by Greenspan, yet he and almost everyone on Wall Street expect a different result. The stock market bubble of the 1990s resulted from interest rates being too low, which sent false signals to businesses, causing them to over-invest in information technology, telecom, and dot coms. When that bubble burst, rather than allowing the corrective recession to run its course, the Fed responded by slashing interest rates. The result was an even larger bubble in real estate; causing consumers too borrow far too much money to buy houses and other goodies.

Now that the housing bubble has burst, the Fed is once again slashing interest rates to postpone the pain. However, in order to correct for years of extravagant borrowing and spending, the country is in desperate need of a period of saving and economizing. But by rewarding debtors and punishing savers, lower interest rates actually encourage the opposite behavior. Given how much harm this strategy has already done in the past why should we assume it will work any better now?

Consider a real world example. Suppose your spendthrift neighbor, maxed out on credit card and home equity debt, no savings in the bank, struggling to make ends meet and one paycheck away from foreclosure and personal bankruptcy, comes to you for financial advice regarding what to do with the $1,200 he received in the Federal Stimulus Lottery? Would your advice be to "go out and buy yourself a brand new plasma T.V."? My guess is that you would suggest he pay down his debts. If you were a good friend you might help him devise a budget to put his financial house back in order. Such a plan might include trading in his Mercedes SUV for a more fuel efficient Honda, brown bag lunches instead of expensive restaurants, tearing up department store charge cards, cancelling vacations, cutting back premium cable channels, etc. When you are neck deep in debt, the solution is to economize, ratchet down your lifestyle and repair your personal balance sheet. In other words, you go though your own personal recession.

Would your advice be any different if it was not just one neighbor asking but 300 million? If it's wrong for an overly-indebted individual to blow a windfall, it's just as wrong if millions of us do it collectively. If our economy is already suffering from too much debt, think of how much worse off we will be after we blow thought these rebate checks."


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