(Free*) Advice for Federal Reserve

Yesterday the Federal Reserve voted to keep the interest rates at which banks lend money to each other (pretty much the mother of ALL interest rates, except may be the mortgage rate) unchanged at 2%. They also noted that inflationary forces are somewhat higher, whereas the winds of recession are waning. So - in effect, they did nothing - nothing except talking. Here's the more surprising part - I don't blame them for not doing anything - partly because they CANNOT DO ANYTHING. These are such extraordinary times that they don't know what has hit the economy - well OK - they know - but they are definitely not doing anything about it. For the rest of us - let me try to explain.

A. This downturn started because of the credit crisis that began in August of last year (remember the subprime mortgage meltdown - the Bear Stearns collapse - the billions banks wrote off) that resulting in millions losing their homes - and its effect on the housing market.

B. The reason for A. was all the cheap money (practically free) that was available from 2000 onwards - till they started raising interest rates again in 2005. Everyone who wanted to buy a home was able to obtain a loan - irrespective of their ability to pay them back (Countrywide got sued recently for that). However, as soon as the interest rates jumped - they were unable to pay back their home loans - once there were enough people doing this - the mortgage industry, and by association, the housing and financial industry went bust. But I digress - there is enough juice in this saga to inspire a few PhD theses.

C. Because of A. and B. the economy as a whole began to tumble. The stock markets, the hedge funds, the whole deal. This caused a panic in the hedge funds and the pension funds industry as they were unable to make money for their millionaire investors. So they turned to oil!. And the rest, as they say, is history.

D. More and more money flowed into the oil industry, sucking the US stock market dry. This had an adverse effect on the US and the world economy as a whole.

E. Oil has reached 140 dollars a barrel and has threatened to destroy (if not already destroyed) the fabric of our economy and in some ways, our way of life. Every thing that we depend upon for our day to day living is, in one way or the other, dependent on oil. THIS IS THE CAUSE OF THE INFLATIONARY FORCES THE FEDS ARE NOTICING. Not the usual, cyclical inflation the economy observes when there has been a period of modest growth, low unemployment, strong currency! The high price of oil has caused the price of food to go up (high cost of corn because of ethanol), high cost of transportation, of course, high cost of air travel, high cost of heating/energy etc.

So here is my advice:
- lower the interest rate so the economy gets going
- lobby congress to legislate tighter regulation of the futures market where speculators are making millions if not billions because of high oil prices.

Once the price of oil comes down, the charm of high return from the futures market will dissipate forcing the hedge funds, banks and investors to re-examine the US and world stock market. More money will flow in the stock market - with higher market cap, companies will be more confident to innovate, spend on R&D - the whole economy prospers.

* I doubt they have money left over after they filled up their tank!