Current Market Crisis in the US

The financial situation in the United States, and consequently the world, has taken a wrong turn. Like milk that has been in the refrigerator too long, our free market economy has turned sour. The causes are many, but it is easy to determine the main problem. Bad loans, that were guaranteed by nothing, were given to people who could not afford them. Banks tried to use tricks like adjustable rate mortgages (ARMs) to help individuals along, but in the end only ended up with useless paper. If a person cannot afford a house with a regular mortgage now, how are they going to come up with a big increase when the ARM ends in five years?

The fixes that have been implemented were predictable. The Federal Reserve has cut the prime interest rate back to almost nothing. This is supposed the have the effect of creating an atmosphere where people are more likely to borrow. Banks should also have the confidence to lend because many loans are now being guaranteed by the government, so that credit can start flowing again. The only power that the Federal Reserve has is to set a prime interest rate. They have no power to make sure that individual banks follow their lead, but they usually do. Banks lower rates when the fed does, and raise them when they are told to. They do this because other banks will have a better interest rate than they do, and this keeps the interest rate across the board pretty constant.

     The real power of the Fed is as a confidence booster or breaker. When Alan Greenspan was the chairman, he could cause panic around the world by his

 

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