Ball of Hair

Here is your economics lesson for the day. I’ll make it very simple.The government can influence the economy by two basic methods--monetary policy and fiscal policy.

Monetary policy is concerned with the money supply--how much money is available in the economy. Monetary policy is mostly the responsibility of the Federal Reserve Board, which sets the interest rate for loans to banks in the Federal Reserve System. In a recession, the Fed, as it is usually called, lowers the interest rate. If you can take out a car loan at 2% interest, you are much more likely to borrow money than if the loan comes with a 20% interest rate. A low interest rate encourages people to buy goods, which increases the need for workers to make, distribute, and sell the goods, all of which stimulates the economy. In an inflationary period, the Fed raises interest rates. There are other steps the Fed can take, but that is enough for today’s lesson.

Fiscal policy involves taxing and spending, and it is usually considered the responsibility of the President and Congress. In a recession the government should increase spending and lower taxes. This puts money into people’s hands, they spend it, employment increases, which also increases spending, and the recession is soon over. Will there be a deficit? Of course, but when times are good Congress can raise taxes or decrease spending and create a surplus. This last happened during the Clinton years.

So, you see, all of those people who are now worried about the deficit and call for spending cuts would do the very thing that will prolong the recession or even turn it into a depression. The fact that U.S. Senators and Representatives and the leaders of one of the two major political parties in the U.S. are included in this group shows that either American schools are not doing their job or that a large segment of the American public has the brains of a ball of hair. Or both.

Roy Christman

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Home Mortgage Loan Rates

Submitted by jowenc on Sun, 04/18/2010 - 01:50.

Usually, when the Federal Reserve Board lowers interest rates, a lot of people are inclined to spend more which in turn causes inflation. And since inflation affects mortgage rates, as the inflation increases mortgage rates also increase. When the inflation rate is high, the purchasing power of money decreases. And, once lending companies get that rate index increase, they also add a margin to their profit which in turn increases our home mortgage loan rates.

Usually need not apply

Submitted by JWalck on Sun, 07/18/2010 - 02:16.

We are not in a situation where usually applies. We are in a liquidity trap. This has the effect of making tax cuts only very slightly more stimulative than borrowing money. This is because borrowing money is essentially free at the current rates.

There are two ways to get the economy going in the right direction again, but neither one is politically possible at this point in time. We could have a stimulus package large enough to do the job instead of something like the Ben Nelsen version of the bill, which was roughly 40% less than what was needed at the time. The other thing that could be done is to place a fee on savings over a certain cap. This will have the effect of forcing that otherwise saved money into other ventures to avoid paying the fee.