Focused on cutting interest rates in order to obstruct economic decline and to prevent the destructive incursion of inflation, the Federal Reserve has acted independently (though with the administration's endorsement) to counteract mild or regressive growth patterns. After several years of sluggish economic performance and a response on the part of the Federal Reserve by way of a consistent reduction in interest rates, a number of factors have conspired to produce market bust. Precipitated at its base by an irresponsible level of homeowner loaning at a subprime rate, the market's current condition is one of marked pressure upon banks to collect on debts which a great many owners cannot afford to resolve.
As a result, the last six months have seen a tumultuous unfolding of market events, with the housing economy taking the biggest hit. With few buyers in the possession of real assets and banks now wary to lend to all but the most resource-wealthy of borrowers, the Federal Reserve has intervened once again. Consistent with its response to flagging market conditions throughout the Bush tenure, "the Fed has also lowered its benchmark rate six times since September to 2.25% from 5.25%, and traders anticipate it will cut by at least another quarter point this month to cushion the economy's downturn." (Brinsley, 1) in the midst of this, a major U.S. bank, Bear Stearns declared insolvency this past month, requiring the Fed to step in an intervene with a multi-million dollar bailout. To this end, "Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. To buy its Wall Street rival." (Brinsley, 1)
In the face of the current and overwhelming market condition challenges such as the collapse and merger of major banks, this appeal to monetary policy has been a largely reactionary economic device, ill-equipped to provide opportunities for growth. Instead, it has served as a preventative measure to further decline and the downward spiral of diminished dollar value.
Even in this capacity though, it has been considerably nullified in its protection of the economy by the significance of the impact which inflation is now having on the ability of borrowers to attend to their loans.. While monetary policy can be utilized as an immediate stabilizer in times of recession or contraction, it is nonetheless dependent upon the sound propriety of tax policy and discretionary spending in order to functionally serve a market economy. The dependence of both interest rate levels and expansion rates upon a collective of investment means that any policy which is detrimental to that end may likely have a composite effect of contracting the economy.
The subprime mortgage crisis is perfectly indicative of the danger with which the Reserve has flirted throughout the reckless tenure of the current presidential administration. Under the thumb of inflation, dramatic rises in gas prices and associated commodities and the continued decline of the dollar's value relative to foreign currencies, average borrowers cannot afford to repay their home ownership loans. The outcome is today's recession, which if continued unchecked by poor presidential policy will spill over into outright depression. The Federal Reserve has spent the past six months intensifying a strategy which had only narrowly averted economic disaster across seven years. By this year, that aversion had defaulted officially, bringing about an end to obscuring our true economic state.
Just this week, it was reported that "the unemployment rate rose to 6.7%, a total of 10.3 million, which is 2.7 million more than the start of the recession in December 2007. Unemployment has steadily worsened since its low point of 4.4% in October 2006. (Source: BLS, Employment Situation Summary)" (Amadeo, 1) Now it has become clear that we are experiencing a real and undeniable recession.
And we can see through the consideration of the monetary policy, that idea of a culture of ownership has been crushed under its own weight, with no real prosperity to give it girding. Certainly, middle class Americans have historically taken the perspective that while opportunity and wealth are theirs to gain, the burden of risk which gives foundation to this system is to be taken on by those wealthy enough to invest in the development of a small business, stakeholding in a large organization or presiding ownership over varying stocks and properties of fluid value. The ownership and investment which are the lifeblood of the American economy have been seen to offer simultaneously the greatest opportunity and the most significant load to bear in the event of unforeseen recession or personal misfortune. Today, however, due to an increasingly unstable economy and a degree of exploitation which appears to pit the rich against the already dramatically disadvantaged poor, the risks once reserved for those with the means to go out and seek them are now becoming a common experience for those who have simply sought to live their lives according to America's prosperous standards. According to the text by Hacker (2006), there is an ever-diminishing concreteness and stability underlying the American economy with the outcome being a context of sheer risk for those without the means or intent to undertake such.
Indeed, as the Hacker text shows, such matters as the housing crisis, the drastic deficit budgeting and the current misappropriation of our monetary policy have collectively shaken a system that had prior encouraged the entrance of so many players unfit for its rigors. It is the argument of the Hacker text that the United States has been oriented toward the endorsement of the types of economic behaviors that stimulate personal ownership and a stake in a competitive economy. However, in its current incarnation, this system is proving internally flawed. As the author argues, "an insurance and opportunity society is based on a simple but powerful notion: We are most capable of fully participating in our economy and our society, most capable of taking risks and looking toward our future, when we have a basic foundation of financial security." (xi)
This is to argue that there is a fundamental disadvantage to those middle and lower-middle class Americans who have worked and risked limited financial means to, for instance, become home owners in the midst of what is now being called a credit crunch. The extreme largeness of quantity of residential and property foreclosures just in the last year is indicative exactly of Hacker's point, demonstrating that something as fundamental as the ownership of one's own property has become a point of instability and even peril to the point of economic ruin. Here, there is a clear indication that while tens of thousands of Americans are being blamed and are losing property for defaulting on high-interest, sub-prime mortgage loan repayments, they are nonetheless suffering the consequences of poor policy orientation and the willful shifting of the economic burden from rich to middle class and poor.
This discussion touches upon a number of factors which have contributed to that shift, identifying such issues as free trade as being clearly culpable for some degree of this change. With so many manufacturing and service jobs leaving the American economy for more cost-effective contexts in the developing world, the insecurity of the American job market has been compounded by such damning factors as the inflationary climb in the price of fuel commodities. These two inverse trends are significantly reducing the buying power of the average American, with the value of the dollar diminishing considerably in the face of rising foreign ownership within American borders.
Ultimately, this highlights an issue which is fundamental and devastating to all middle class Americans. With the mismanagement of our economy deconstructing a once sturdy free-market economy, the wealthy have wrangled through policy change and corporate corruption to shift the burden of risk to the middle class while retaining all the positive opportunities there available.
The monetary policy has essentially served as a swinging door to federal policies which were inherently designed to perpetrate a wealth transfer from poor to rich. The fiscal irresponsibility and corporate deregulation of the Bush Administration helped to dismantle a prosperous America in a relatively brief space of time. The Federal Reserve, for its part, simply cut interest rates at a staggered rate and with the ultimate effect of gradually obscuring the true declination of our economic fortunes. Today, with bailouts being pitched in Congress to the rescue of corporate criminals and American homeowners falling into misfortune, it is clear that America must take the Federal Reserve out of private hands and restore it to the public interest.
Amadeo, K. (2008). Economy Lost 1.9 Million Jobs Since Recession Began. About the U.S. Economy. Online at http://useconomy.about.com/b/2008/12/08/economy-lost-19-million-jobs-since-recession-began.htm
Associated Press (AP). (2002). Text of Statement on Interest Rate Policy. The New York Times. Online at http://query.nytimes.com/gst/fullpage.html?res=9C06E3DA143AF932A25751C1A9649C8B63
Brinsley, John. (2008). Volcker says Fed's Be ar loan stretches legal power. Bloomberg. Online at http://www.bloomberg.com/apps/news?pid=20601087&sid=aPDZWKWhz21c&refer=home
Faux, Jeff. (2002). Take Back the Tax Cut. Economic Policy Institute Journal, Winter, 2002. Online at http://www.epinet.org/printer.cfm?id=980&content_type=2