Federal Reserve & Interest Rates

Today will be the moment of truth, as the Federal Open Market Committee (FOMC) holds the meeting that will determine whether interest rates will be cut.

Ever since the discount rate was cut last month, economists have been predicting this cut. The federal funds rate reduction is an absolutely crucial move, and the timing is now.

Wall street has seen the ill-effects of declines in the UK. With the Dow Jones Industrial Average falling 59.99 points and the Nasdaq Composite Index losing 25.07 points, the shareholder nail-biting begins. There isn’t a shadow of a doubt about the FOMC lowering the federal funds rate (the interest that banks are charged for loans).

The question now is: How much will they lower it?

Fairly new Chairman Ben S. Bernanke has to be very careful with this decision. The rate has not been cut for four years. After the long running of Alan Greenspan as chaiman, Bernanke has his first major influential decision to make.

The repercussions of this decision can make a dramatic impact on the economy, positive or negative. Balancing the rates to fix the credit crunch, while still considering its impact on inflation is no easy task. The amount of the rate cut will determine whether or not our country falls into depression.

Analysts say a half of a percentage rate cut can be just the right amount to keep us out of recession. If the cut is smaller than that, it might help the oil industry, but the economic slowdown would still be a huge risk. Chances are, we a re looking at a rate reduction of a 50-basis point (1/2 %).

It is the popular belief that the rate change will trickle down to the average Joe and his loans. While this might be a help to the economy and bank will certainly benefit, it is not a definite call. The change would help keep the economy out of recession, but it is unclear how this will affect inflation. There is a possibility that the cut could raise inflation, but it is the lesser of two evils (the other being recession).

Economists are betting their bottom dollar on this rate cut, and investors are holding their breath today. Greenspan trusts that Bernanke knows what he’s doing. Hopefully, he does. Someone has to make sure the economy doesn’t go under, and he is in the position to make things right.

Former chairman of the Federal Reserve Alan Greenspan is speaking out. His brand new book: The Age of Turbulence: Adventures in a New World is on pre-order now and will be officially released Monday, September 17th. Word has it that Greenspan has pretty straightforward commentary about the Bush Administration’s financial habits.

Apparently, Greenspan feels that the administration under Bush Jr. left much to be desired in the handling of government funds.

According to CNNMoney.com “He faults the administration of Bush II for a –decision-making process driven entirely by political calculation…By comparison, he found the Democratic interregnum sandwiched between two slices of Bush a version of Periclean Athens, where dedicated men (Bob Rubin, Larry Summers, Clinton, himself) made decisions in the nation’s long-term interest.”

Greenspan served the second longest term as chairman of the Federal Reserve in history. Now retired at age 81, Greenspan has released his memoir which accounts for his experiences, good and bad, working under several different administrations. He felt strongly about the reign of Bill Clinton stating that he had, “a consistent, disciplined focus on long-term economic growth.”

Unfortunately, he couldn’t say the same for our current president. Greenspan writes, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil.” I thought it was about weapons of mass destruction? Wasn’t it about bringing peace and order to Iraq? This was supposed to be the war on terror, right?

There were always criticisms from the beginning about oil being the main underlying drive for the war. Now to have someone from the inside confirm it as fact, it kind of makes me angry.

It seems that everyone has complaints about this war and other issues under the terms of George W. Bush. While people you might call the average Joe claims hardships or lost loved ones and financial difficulties, individuals working closely on the inside have painful confessions as well. We should keep in mind that the president is surrounded by advisors and the level or input in major decisions that the man himself has is rather dubious. In other words, we can’t blame the President alone, there are some people in the shadows of questionable authority.

Alan Greenspan has had his share of time with several presidents, from Regan on. From a financial standpoint, he credits Bill Clinton with having done well for the economy out of all of them.

Overall, “If the story of the past quarter of a century has a one-line plot summary,” Greenspan writes, “it is the rediscovery of the power of market capitalism.”

Most people would agree that the war in Iraq has taken a huge toll on American hearts as well as the federal wallet. Billions of dollars have been poured into this blood bath of a war and some recent news is rather alarming. It appears that there are some United States funds that went MIA.

The Federal Reserve shipped a total of $12 billion over to Iraq to aid the war between April of 2003 and June of 2004. The Coalition Provisional Authority (CPA) was supposed to receive and account for the cash. The were responsible for its distribution. To date, there are $9 billion unaccounted for.

What went wrong?

Theories of corruption are in circulation. Critics are curious as to whether or not President G. W. Bush will be held accountable for corruption. The Federal Reserve Bank of New York and the United States Treasury to great strides to keep the money under surveillance. That is, at least as long as the money was on American soil.

The money was tracked to Baghdad and then to Iraq, apparently to the hands of the CPA. CPA officials claim that there was a system of general tracking in place as far as where the money was spent. Iraq agencies were funded certain amounts, but there aren’t any specific records on what the money was to be used for, exactly. Good old trust and faith was used as a discretionary funding method.

Suspicious eyes are certainly staring at the CPA. Secret activities by government workers is a definite possibility. The United Nations attempted some type of auditing, but they say there was difficulty in contacting important CPA members to complete the task.

Something in this system of funding is lacking. There was obviously way too much opportunity for fraud and corruption. Without high levels of surveillance overseas, and no detailed accounts of spent funds, how can we expect the money to be accounted for? It is easy to point fingers at the CPA, but are they really the ones to blame? Without evidence of corrupt individuals, we really can’t say. The money is just missing. The money was handled too loosely once it left its country of origin (here).

In retrospect, I am sure that the Federal Reserve and the Treasury are wishing now that they watched the money a bit more closely once it got overseas. Where will the government begin to pick up the pieces of this mess? How will they prevent this from ever happening again? Chances are the money is not all in one place. At this point, the only thing that can be done is watch it next time. I don’t know how effective investigations will be now that there are a couple of years in between now and then.