Revisiting Economic Strategy

First off, my apologies for my absence here as of late. The post-election flurry of things I neglected beforehand finally caught up to me, coupled with a great deal of automotive maintenance, and a profound desire to make Ubuntu(!) work the way I wanted. On with the post...

The Federal Reserve is on the brink of yet another drastic interest rate cut, possibly down to .25%, which brings to mind my previous post (see "Credit Crisis Did Not Begin With Housing Decline"). This obviously begs the question, what are they really thinking? Or better yet, are they really thinking?

This graph illustrates the history of the Fed's interest rate fluctuations over the past 5 years.

What seems most alarming about this trend is that the interest rate was dropped in early 2003 and saw its previously lowest point during 2004, followed by steep increases in 2005 and early 2006. It's odd that these increases seem to eerily coincide with a housing down-turn. To spare another lengthy explanation, see my previously linked post.

I realize that the Fed has limited tools at its disposal to repair an ailing market, but as history SHOULD have taught us, dropping the interest rate does nothing but cause exponential inflation after the fact, and when things start becoming more and more expensive at alarming rates, the economy is sure to suffer. Aside from a virtually frozen credit market, things seem relatively cheap now (petro-gas for starters), and things seemed relatively cheap earlier this decade, but when commodity prices started going up, people stopped paying their mortgages (a huge problem is mortgage-backed debt and securities), they stopped paying their credit bills, and things generally went downhill in very short order.

Consistency always seems a better tool to solve economic problems, along with a slow but steady approach, because these jack-rabbit starts and stops cause unnecessary panic in the markets, markets that already overreact to absolutely anything that goes on in the private and public finance sectors. Slow methodical changes would surely be much preferable to this dramatic flux, which does very little to calm our economic fears, and seems to do nothing to stabilize an eroding market.