All loans, mortgages, credit card interest, etc. are based on the Federal Reserve Rate. Most loan interest is set at 3% over prime. So, if the Prime Rate is 4%, you pay 7%, and so forth.
Between April 2004 and June 2006 (26 months) the Federal Reserve raised interest rates 17 TIMES ! ! For an increase of 425%, while the inflation rate only increased 90%. - 4 1/2 times the rate of inflation.
WHY ? See my detailed analysis on this page, but take your blood pressure medicine first - this is reeeeaalllyyy going to piss you off.
Jan 30, 2009: In dire economic times like these; in our darkest hour; in an economy headed for a crash; when it looked as though all was lost, what we needed was an economic guru to gallop out of the night on his white horse to impart his knowlede, roll up his sleeves, and save us all.
Instead - we got Tim Geithner.
Timmy was the only man on the planet who could rescue us from this mess. And we need him right now - that's what a frantic Obama Administration told us breathlessly. Tim Who? What is his expertise ? Well, this is the answer to Myth 3 and Myth 4 on my Homepage - ready?
More than anyone, anywhere, Tim Geithner caused this recession. Tim Geitner was one of the 7 equal members of the Board of Governors of the Federal Reserve Board (The Fed). Currently, there are two vacancies on the Board. As the board member responsible for the district that includes the New York Reserve Bank (as in Wall Street - Hello !), Geitner was the most influential member of that board. In reality the Chairman, Ben Bernanke, has no more say over any other board member - and as head of the New York banking district (which, of course, includes Wall Street), Geithner and his district have more say than others.
All barnyard animals are equal. Some are more equal than others. (Animal Farm, 1945).
The chief responsibility of the Fed is to maintain the integrity of the currency - essentially to keep inflation low. Their target inflation rate is 2%. Until 1987, the Fed controlled inflation by controlling M2 (the money in circulation plus savings plus time deposits). In 1987 the geniuses at the Fed decided we no longer had to guard the money supply - inflation was under control, and M2 was boring. Besides controlling the supply of money they printed brought them afoul of powerful enemies - more later.
First. It is totally irresponsible of the Federal Reserve, starting with Alan Greenspan, to drop the Federal Reserve lending rate to a low mark of 2%. So, In fact 1% interest rates are just plain stupid. (Jan 2010, update: the rate is now 1/4 %) Yet that's the level to which the Fed lowered rates - most recently in 20. At these rates, everyone will be tempted to borrow money - and everyone did just that.
Banks made risky real estate loans - after all if the deadbeat couldn't make payments, he could sell his house and make a huge profit. Where's the risk? Ummmm. well . . . . read on.
January 24, 2010: Update: Paul Krugman, in his column in today's New York Times, proffers his endorsement of Ben Bernanke to be re-appointed as Chairman of the Federal Reserve, noting that Mr. Bernanke was responsible for getting Mr. Krugman his teaching position at Princeton.
As if I needed any further reasona to reject Mr. Bernanke's re-appointment.
Beginning in 2004, fearing runaway inflation, the Fed increased interest rates 17 TIMES ! !. What did this mean ? Well, for the banks and Wall Street it meant a huge increase in interest collected on credit card and home mortgage debt. For the consumer, it meant higher monthly payments. In 2003 the prime rate was 1 % which meant that most home mortgage interest rates were about 4%. Over the next three years, for little apparent reason (Google inflation tables online) Mssrs.Geithner, Bernanke and friends raised the prime rate to 5 1/4%.
So, if you initially had an adjustable rate on your home mortgage of, say, $300,000, 30 years, at 4% (3 over prime) your monthly payment was $1,833. When the Fed raised their rate 17 times to 5 1/4 % and your rate became 8 1/4 % (three over prime) your new MONTHLY payment became a whopping $2,896. Now if your monthly income didn't happen to go up $1,063, you were hurting - big time. So by the end of 2006 ordinary people with jobs fell behind in their mortgage payments; the hot real estate market started cooling; home values dropped; mortgages were defaulted; construction (the second largest U.S. employer - behind retail) ground to a halt. And so the cycle spiraled downward. Very little to do with ACORN at all (Sean Hannity).
THIS REEEAAAAALLLYYY IS GOING TO PISS YOU OFF
Mr. Geithner didn't have to raise interest rates to fight inflation (in this case - imagined inflation). The Fed actually has two other tools at their disposal. (1) They can stop printing money, or (2) They can require that member banks (that's all banks) keep more of their deposits in reserve (preferable alternatives in ordinary economic times, but impossible when your government is running the presses at the mint overtime to print money for the "Economic Stimulus). Either way, money becomes scarcer; rates on NEW loans goes up; demand drops, inflation drops. SO why didn't Geitner, Bernanke and friends open door number 2 or 3 ?
If you stop printing money, Congress can no longer pay for all of those pork-barrel projects (I mean stimulus) that get legislators re-elected. Government contractors and suppliers get paid NOW. And, Congress compulsively purchases votes with their "earmarks," so they are not going to cut spending. Also, the Fed doesn't mess with the people who approved their 14 year appointment to the Federal Reserve Board. So, raise the reserve amounts for banks? Ahahahahahah ha ha. Here's the quiz. How many of the Federal Reserve Board members are umm Doctors? Roofers? Farmers? Auto Repairmen? Here's a shock. None. They are all Bankers and Wall Street Brokers - didn't see that coming did you?
January 24, 2010, update: Congress weighs Obama re-appointment of Ben Bernanke.
GOT IT ? ! !
So the bankers of the Fed raised the prime rate, and the banks raised your interest payments - all in the name of controlling inflation, that in 2005 and 2006 did not exist. And we all paid the price. Then, because their Fed-generated gains killed the housing market, not just the sub-primers, but regular mortgage customers, even Wall Street and the banks finally felt your pain. Then the Politicians dutifully bailed them out with YOUR money.
Party first, politician second - you, not at all.
You know the old expression . . . . .
. . . . TIM GEITHNER HAPPENS
By the way . . . . Did you know that Tim Geithner is 4th in line for the Presidency ?
( sure you did ! )
HISTORICAL INFLATION RATE
JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC YEAR
20041.91.71.72.3 3.1 3.33.02.7 2.53.2 18.104.22.168
20053.03.0 3.13.5 2.8 22.214.171.124.126.96.36.199.4
20064.03.6 3.43.5 4.2 188.8.131.52.1 1.32.02.53.2
20090.00.2 -0.4 -0.7 -1.3
RECENT PRIME INTEREST RATES (The rate of interest that the Federal Reserve charges its member banks)
Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec.