20 March 2008

Consumption Junkies

Ron Araujo and I car pooled to work at one time and were in the same graduate program in economics. I think that Ron and I laughed together as much as I have with any co-workers (and if you ask my series of exasperated supervisors, that would be a remarkable amount of laughter).

NPR broadcast an inteview with Ron yesterday. As CFO of Mission Federal Credit Union, he was explaining how the Fed's rate move would translate into personal loans. He is still quick and I can swear that I heard an edge of laughter in his voice, even as he talked about something serious. Ron does a fabulous job of making it all sound simple and obvious - something I wish our profs had done. It's easy for me to imagine that in a few years, Ron could be one of those talking head guys on CNBC. Once again, I was made inordinately proud of my friendship with someone who has done well. (Pretending, once again, that this somehow has something to do with me.)

His interview made me think, though. The price of money has dropped. Loans are cheaper. But the flip side of this is that the reward for saving is lower. And I had a blinding flash of the obvious.

It is true that lowering interest rates can help to stimulate the economy by stimulating spending. But we're in a fairly precarious spot because our savings rate runs close to zero. Stimulating borrowing and discouraging savings is unlikely to help that. Might it be that we're taking short term measures that just make our underlying problems bigger?

[A British ATM is in the news for dispensing twice as much money as it should. Next time I talk to Ron, I need to ask him: why couldn't we "stimulate" the economy that way? Random ATM withdrawals enhancement program (RAWEP) sounds like it would be a hit with a polity that has made gambling a multi-billion dollar industry.]


Lifehiker said...

Might it be? Mr. RWorld, you are being coy. You know very well that these low interest rates signify that our economy is on "life support". CPR is great, but you've got to be almost dead before they try it on you, and then you get $50,000 in hospital bills. That's where we are.

The average person has no idea that when our government lends money at 2% rather than 4%, it loses 2% in profit. That profit is just like tax money - it helps fund the budget - and when there's less of it, taxes must be raised to make up the difference.

Two percent sounds tiny, but 2% of the huge sum the government lends is some serious cash. Just add that amount to the already huge federal deficit, and call it a tax on the American people.

The 95% or more of the U.S. population who had nothing to do with the sub-prime credit crisis are being saddled with the immense cost of fixing it. I guess you'd call that "making our underlying problems bigger".

cce said...

I'm all for the RAWEP program, screw the state of the economy, I could use a little money for "nothing" right now. How's that for typical American sentiment? Ask me how much money I have in savings. Just ask me.

nunya said...

"The 2007 US Department of Commerce Report showed a US savings rate of minus 1.0%"
" for the first time since the Great Depression of the 1930's. "

Gypsy at Heart said...

I wanted to comment something that showed some knowledge on my part with regards to this issue but Lifehiker cut me off at the knees, Cce expressed what I'd want for myself also and nunya stated a statistic so depressing it rivals the Great Depression. I'll leave it at that. I'm too tired anyways and shouldn't be leaving a comment at all when every second word I write is punctuated by a yawn.

Anonymous said...

Don't be surprised to see this get worse: the hidden hands that pull the strings of Bush and Co. and the MSM seem to have a plan.

Eliot Spitzer, politically speaking, was assassinated for having exposed the ties between Bush and the predatory practices of nationwide lenders; watch the YT video at: