Monday, March 15, 2010

The Federal Reserve Rules!

It has been interesting to be able to look back on the economic collapse we have experienced in the past couple of years. While the central government of the U.S. rattled cages, set out on a journey of legislation, and argued about bailout funding the Federal Reserve (Fed) took action. Not only, as it turns out, did they take action, but they took it quickly and decisively. The Fed dramatically lowered short-term interest rates and washed the country with money supply. Last week it was reported that because of their actions, the economy was saved! As far as the bailout money was concerned, even after it was approved, the government was slow at spending it. It helped the economy, but the Fed saved the day! Only a couple of months ago, Congress was on the case of the Fed with the idea of curtailing its power. Now, interestingly, Senator Dodd is proposing financial reform legislation that would give the Fed oversight for the financial markets and instruments not currently regulated by any other part of the government (such as the derivatives that help create this mess). The Fed is not perfect. In making interest-free money available to banks and investment banks during this period, these giants were given the ability to take money from the Fed, paying no interest, and to invest it at interest. The difference, known as the spread, is the profit that the big banks and investment banks were allowed to keep. The nasty part of all of this is that instead of plowing this back into their companies, much of this money was given in the form of outlandish bonuses for the year 2009 and likely will be followed by even more extravagant bonuses in 2010! The Fed is aware of this and is gradually reducing the money supply and charging a modest interest rate. It is the old story that, for the betterment of the country, the big guys will get rich! Long term, we must remember that the people who are on the Fed wield a great deal of power and these are appointed positions still subject to political whims. Ed

Thursday, March 4, 2010

Mixed News

It appears the economy is giving us some very mixed signals these days. Consumer confidence seems to be going down, the Federal Reserve says the economy is edging up but at a very slow rate and Congress still has done nothing with employment legislation. The initial claims for unemployment insurance, which was widely anticipated, showed a drop of 29,000 from the prior week to a seasonally adjusted 469,000. This reversed the big rises of the past two weeks. Still the four week average is 470,750 where it had been down to about 450,000 a couple of months ago. Back in November I had anticipated that we would see a marked decrease in initial claims beginning in March since this is what has happened in the past. We will see as the month progresses. With productivity rising, according to the Department of Labor, in the fourth quarter of last year by 6.9%, it would seem that fewer workers are working more hours. At some point we would expect that with the addition of part time, tempoary and over worked workers companies would once again begin to hire full time employees. In the meantime, the consumer is watchful and curtailing spending and thereby keeping inflation down. The overall economic trend appears to be moving up at a slow pace. Ed