Catch 22 ?

In an attempt to settle the markets, the Federal Reserve has injected about $71 Billion into the banking system in the past week. The effort has been made to instill confidence in the liquidity of financial institutions holding mortgage portfolios because the number of defaults has been rising so sharply. Interest rates have not been lowered since 2004, because the Fed has been worried that a drop in interest rates would fuel inflation.

Most Americans are blithely unaware that the Fed is a PRIVATE banking system -- a clearinghouse for its member banks. The money it has made over the past few years has been at the expense of homeowners who have refinanced their homes through the member banks. It would be a type of justice if the Fed, which did not raise rates sharply enough during the housing boom to slow it and create a more cautious approach to borrowing, would now be bitten by its own creation.

Efforts by the Fed to try to slow the sagging of the economy may be counterproductive. Americans have funded our economic expansion in the past decade by borrowing and spending more than they have earned. The current crunch is the result of running out of equity to borrow against. The lenders have become frightened and are tightening their criteria.

Many analysts are now saying that the Fed must lower the discount rate so that the adjustable rates can drop back. This presupposes that those who are now in economic distress over their outstanding loans will be able to refinance at lower, and hopefully, fixed rates. However, if the Fed's fears about rising inflation come true (and they may regardless, because the rise in inflation has been driven more by events outside the US than events inside the US), the increases in the cost of living may well create a situation where people still have to choose between paying their mortgage and buying food and gasoline. They are going to have to cope with rising utility prices, rising food prices, and devaluation of the dollar due to the increases in deficit spending by the government that are just around the corner.

What? Didn't lowering tax rates increase the flow of money into the treasuries? Yes it did, but only because the increased revenues were made possible by increased capital gains created by increased spending. When the spending declines from the pressure on the wallets of the people, there will be a decline in fiscal intake, which will either require the raising of taxes, the decline of government spending, or the weakening of the dollar. Political realities in view of the coming election cycle make the latter most probable.

Americans have been living high on the hog for some time. That is not bad in itself, but when it is funded by a tax system that punishes production and rewards spending, there is death in the pot. Free markets are essential to prosperity and the welfare of the people, but they cannot long co-exist under our present socialistic tax system.