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The Federal Reserve today (Aug. 10) finally admitted what Main Street has known for months: the economy is weakening. So the Fed's powerful Open Market Committee, which has already pushed short rates to near zero, shoved money at the big banks, and bought mortgage-backed bonds to drop mortgage rates to extremely low levels, vows that it will provide even more juice. It will reinvest the proceeds it receives from mortgage-backed securities in U.S. Treasury bonds -- hoping thereby to lower long term interest rates even more. Clearly, the Fed is signaling that it won't raise short rates any time soon and won't do anything to repair its very tattered balance sheet.

"The Fed is concerned about deflation (actual decline of prices)," says Ross Starr, professor of economics at the University of California San Diego. "I am more optimistic. They will not let the 1930s, or the Japanese 1990s, recur." There are stark similarities between the U.S. Great Depression of the 1930s and today, says Starr. "Back then, there was an immense amount of cash sitting unlent in banks and that is precisely what is happening now." Some economists worry that if the economy snaps back and the banks start lending heavily again, inflation will be ignited. But Starr thinks that if that happened, the Fed will have "plenty of time" to shift to a tighter monetary policy that would thwart inflation.

In my own opinion, the Fed's lending out money to banks for essentially zero rates is a danger, given the financial institutions' irresponsible behavior of recent years, as well as their still-phony accounting, by which their liabilities are concealed through offshore maneuvering. Also, in my opinion, the very low short rates punish savers, thus exacerbating the dangerously inequitable division of wealth and income in the U.S., whereby the wealthiest 1% corral a huge percentage of wealth and income. Not surprisingly, as soon as the Fed made its announcement, the stock market improved markedly. That's because markets these days respond to liquidity (low interest rates, money-printing, fiscal looseness) more than they respond to the state of the economy. This seeming paradox often puzzles people on Main Street who believe that the stock market reflects the state of the economy. That's only partly true. As the Fed feeds the big banks' trading desks money at 0%, both bonds and stocks rise. But the Fed only does so because Main Street is ailing. For the banks, it's like being staked by a sugar daddy at the poker table

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Comments

Twister Aug. 10, 2010 @ 3:38 p.m.

But they're getting the sugar from MY beet! Y'all's too--or are you still mesmerized by illusion that what's good for GM (as if it needed any further genetic modification) is good for the country?

I still don't hear a chorus from my fellow frogs even though the temperature increase rate is going vertical!

CROAK!

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SurfPuppy619 Aug. 10, 2010 @ 3:46 p.m.

Here is an idea for our Washington Einsteins, why not work on a policy that creates middle class manufacturing jobs-instead of throwing free money at gigantic banks who have ALREADY proven they are not going to lend it out to the poor or middle class, but instead will just make FREE moeny off the spread..........at the taxpayers (i.e. poor and middle class) expense.

Another useless, stupid policy from Washington.

If Obama does not make some serious moves in the next 18 months you can stick a fork in him, because he is done. One term President.

I saw Obama on TV this morning talking about another baloney "stimulas" aimed at-wait for it- the gov sector. Hey, big surprise there.

Yes, you guessed it. Police, FF's and teachers. But wait, there's more, he had two teachers with him today as he made his announcment. 95% of the LAST stimulas went to gov employees. Here is another an idea, why not make teachers, cops and FF's take a 10-15% comp cut-like the rest of America has the last 2 years. Not only are they NOT taking any pay cuts-they are STILL getting raises-every year COLA's PLUS actual raises. Obama is doing for the states what the states cannot do for themselves-run budget deficits. Except now the entire nation is paying for the piss poor managment of many poorly run states-like CA.

Teachers are over comped. They work a part time job, the AVERAGE teacher comp in this state is $107K per year. Bullet proof job security where even the most INCOMPETENT teachers cannot be fired.

Cops, even worse! They are comped MORE, but there is no experience nor education required for the job. Not that education means anything per se, only what the value of it brings in a free market-last time I checked the value of a HS diploma did not bring comp of $200K per year, at least not in the real world. Of course Fantasyland is different.

FF's, even worse-1,000 applicants for every opening, yet they still comp out at $200K per year-WHY????????????????????

We need someone who knows how to shut down the gov gravy train-and soon.

I'm voting for Whitman in November, and if Obama does not get his act together soon he will be on his way out the door too IMO.

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SurfPuppy619 Aug. 10, 2010 @ 3:50 p.m.

I was a BIG Obama fan 18 motnhs ago-and hoped for so much more. I have given him his entire term to turn things around and I am still in his corner-even though I do not like what I am seeing, or approve of it.

Obama has my support for his entire full term, but make no mistake about it-I am not happy with these "stimulas" scams, and if things don't get fixed-and soon- he will be shown the door.

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Founder Aug. 10, 2010 @ 4:14 p.m.

I say:

Buy BUY to Greed!

Vote for Job creators and benefit providers! Jobs not more Garden Parties... Jobs not more "News" briefings... Jobs not more Congressional Junkets... Jobs not more Congressional donations... Jobs not more "US" vs "THEM" talk... Jobs not more BIG loans to Big Wall Street... Jobs not more talk that is not JOB related... Jobs not Gov't. tax credits for layoff's, so Business's can hire at less pay! Jobs, Jobs, Jobs, Jobs, Jobs, Jobs, Jobs, Jobs, Jobs, Jobs and more JOBS!

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Burwell Aug. 10, 2010 @ 7:05 p.m.

Obama needs to replace a permanent 25% decline in consumer spending with an increase in manufacturing output. Increasing output and employment in manufacturing will jump start the economy. There is no other option left. Several million manufacturing jobs could be created in the U.S. with very little effort in a short period of time. For example, Gillette could move razor blade production from Brazil and Mexico back to the U.S. Johnson and Johnson could move production of Band-Aids from Thailand, and production of dental floss from Guatemala, back to the U.S. Proctor and Gamble could shift the manufacture of Oral B toothbrushes from China back to the U.S. Last year production of Oral B's was shifted from the U.S to China with no reduction in the retail sales price. There are literally thousands of imported items that could be made in the U.S. again without a huge capital investment. For example, packaging tape, envelopes, paper clips, staples, notebooks, pens, plastic garbage bags, socks, underwear, etc. Putting working class job seekers back to work would swell income and social security tax receipts and shrink social welfare spending.

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Burwell Aug. 10, 2010 @ 7:23 p.m.

"The Fed is concerned about deflation (actual decline of prices)," says Ross Starr, professor of economics at the University of California San Diego.

Starr is not correct. Treasury is unable to sell any more debt to foreigners, so now the Fed is having to inflate the money supply to create dollars to buy Treasury notes to fund the deficit. The Fed had $2 trillion in reserves when the economy began to implode. This treasure trove had accumulated since WWII, to be used in the event of a war with the Soviet Union. This money is gone, flushed down the toilet. The larder is bare, the teat has run dry. The deflation argument is a smoke screen the Fed concocted in order to prevent the masses from knowing the Government is on the verge of total financial collapse. Starr will likely be stunned when the U.S. Government collapses, but I won't be.

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David Dodd Aug. 10, 2010 @ 7:25 p.m.

This is an excellent point, it brings up points that many economists enjoy fighting about.

My first point, and I'll leave it at this for now - my opinion is that the Fed is inviting banks to loan NO money. By keeping the prime so low, banks can't make a profit floating a line of credit to small businesses. This, possibly more than anything else currently, is keeping the economy from rebounding. Raise the prime, let Wall Street suck a duck, and Main Street will bring the economy back up to where it could be.

I'd be interested in thoughts from Don and other smart people in here...

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Don Bauder Aug. 10, 2010 @ 8:48 p.m.

Response to post #1: We'll all croak one day. It may be sooner than later. Best, Don Bauder

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Don Bauder Aug. 10, 2010 @ 8:51 p.m.

Response to post #2: Strongly disagree on teachers. They have a tough job that requires both an education and a lot of outside-the-classroom work. They deserve more than they are paid. Best, Don Bauder

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Don Bauder Aug. 10, 2010 @ 8:52 p.m.

Response to post #3: By whom? Sarah Palin? Mitch McConnell? Best, Don Bauder

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Don Bauder Aug. 10, 2010 @ 8:54 p.m.

Response to post #4: A zero percent loan to Wall Street is not a BIG loan. Best, Don Bauder

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Don Bauder Aug. 10, 2010 @ 8:58 p.m.

Response to post #5: I agree with you. Moving those jobs back to the U.S. would be desirable. It's reprehensible that those jobs were moved abroad just to jack up short term profits. It's a case of greed trumping social and community responsibility. But no government has the power to force those companies to bring those plants back. Best, Don Bauder

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Don Bauder Aug. 10, 2010 @ 9 p.m.

Response to post #6: Almost the entire economics profession disagrees with you. However, almost all economists didn't see the Great Recession coming, either. Best, Don Bauder

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Don Bauder Aug. 10, 2010 @ 9:04 p.m.

Response to post #7: Well, I don't profess to be smart, but I believe that the Fed for some time has been discouraging the banks from making loans, all the while telling the public that it is trying to get them to make loans. If the banking system starting making loans strongly, serious inflation would erupt, because so much money has been created. But that money doesn't turn into inflation unless the banks loan it out. And the Fed only wants the banks to dribble it out. Best, Don Bauder

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David Dodd Aug. 10, 2010 @ 9:43 p.m.

It is true that the amazingly vast amount of money supply will eventually bring inflation, but the cure to such inflation has always been the rise of interest rates. Hand-in-hand? If banks offer lines of credit for under 5% then yes, I can see how inflation would become an issue rapidly, but if the Fed decides to raise their rate and the prime increases and then, say, the banks begin to loan at a healthy 7% or even 8%, wouldn't that keep inflation under check? Banks make money, small businesses have a chance to expand (and even hire!), while a higher interest rate helps make the money supply a tad more soluble.

I mean, inflation is coming, regardless of whether the Fed stalls it.

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Don Bauder Aug. 11, 2010 @ 6:28 a.m.

Response to post #15: Some economists believe that if inflation poses a threat, the Fed will be able to raise the federal funds rate quickly to thwart it. Other economists doubt the Fed could pull off such a feat so deftly. Best, Don Bauder

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Twister Aug. 15, 2010 @ 2:29 p.m.

Hysteresis leads to hysteria. When landing or taking off an airplane, especially one with a tail wheel, one must fan the rudders to dampen oscillations and prevent a ground loop, a disaster most em-bare-assing at low velocity, and exponentially tragic at higher velocities.

However, timidly pressing and holding one rudder pedal opposite the swing of the nose leads to the need to un-hysterically jam opposite rudder, maybe even a little braking, followed by a rapid release of pressure and more moderate counter-pressure, followed by counter-counter pressure until a sensible level of fanning can be restored. Of course, all of this can be prevented by alert competence in the first place. Make taildragger (no pun intended) competence a requirement for all economists, presidents, and other "leaders."

Sullenberger for president!

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Founder Aug. 15, 2010 @ 3:38 p.m.

Reply #17 I'd suggest this, regarding your "Flight of Fancy Footwork":

It's sage advice, to avoid "over compensation" at all cost, in both student pilots and High time Financiers...

Over & Out!

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Don Bauder Aug. 15, 2010 @ 10:05 p.m.

Response to post #17: I can't disagree with you because I am having trouble comprehending what you are saying. Best, Don Bauder

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Don Bauder Aug. 15, 2010 @ 10:07 p.m.

Response to post #18: Overcompensation is one of the economic and societal cancers hurting America. Best, Don Bauder

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