The Federal Reserve meets tomorrow to set interest rates, which are currently at 5.25%.The rationale for lowering rates is as follows, as I understand it:
-The market for credit (borrowing vast sums of money, which finance large buy-outs, investments, corporate risk-taking) has tightened very quickly over the failure of poorly monitored Mortgage-backed-securities. Tight markets for credit aren't good macro-economically, especially considering a good deal of recent success has been caused by giant LBO's (leveraged-buy-out) which prop up stock prices and give the market momentum. Inflation is low for the year at 2%, compared to a historical 3%. So, lowering rates (inflating the money supply) would make money cheaper, and ease the tightening caused by the failure of easy (and stupid) mortgage money.
The argument against it might be:
Wall Street has been coddled for too long by Greenspan's gentle hand, which led to the dot-come bubble burst of 2000. Financial markets need discipline, to stop making bad decisions that rely on overly optimistic assessments of future conditions (a problem with both the valuations of tech stocks in the late 90's and the issuing of sub-prime mortgages). Ultimately, market discipline leads to market efficiency.
The final question is how the change would effect the poorer and middle classes. The NYtimes article I link to earlier suggests that the tightening of the credit market squeeze the middle class, making it harder to get a mortgage, borrow money for a business, etc.
On purely macro-economic grounds, I would hold interests at 5.25%. However, on egalitarian grounds, I think there may be a case for a .25% cut.
In the long-run, more efficient markets do benefit the least and less well-off. But in the short-run, there are significant cuts in utility.
It's a tough trade-off.
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