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I took a slight bit of criticism for my claim Tuesday (see post immediately below this one) that the latest Federal Reserve rate cut was “Bush’s doing” (note I never said that) because The Fed is a separate entity from the Federal Government. I argue that the Fed does NOTHING without the express approval (or urging) of the White House. But when the current Nobel Prize winner in Economics agrees with me that a near zero percent interest rate (floating between 0% and 0.25%) is a recipe for disaster, I can’t help but think that maybe I’m right.

Said Nobel Prize winner Paul Krugman writes at the above link that the Federal Reserve’s move to cut interest rates this low mirrors Japan’s “Zero Interest Rate Policy” (ZIRP) in 1998 that led to Japan’s banking crisis in 1999. For us it could be doubly worse because 1) we’re ALREADY in a banking crisis, and 2) where Japan could cut rates to zero “across the board”, we can’t because we depend upon foreign investment to cover Bush’s tax cuts.

It is difficult to detail exactly why this is such a serious matter without delving into a lot of dry Keynesian economic theories, but Japan has already shown us what happens when you cut Interest Rates to zero: eventually, they must go up, slowing an already weak economy even further.

But we don’t need to look at Japan to know this is the case because… thanks to clueless Conservative economic policies, what we are experiencing RIGHT NOW is the direct result of the Bush Administration’s Fed cutting interest rates to the bone after entering office in 2001. You may remember me reporting last November how Bush & Cheney talked the economy into a Recession just to get elected in 2000. Upon talking office, the Bush White House pushed the Federal Reserve to cut interest rates to stem the looming recession. Even before 9/11, the Fed had already cut interest rates SEVEN times… and never more than 0.5% at once. After 9/11, the Fed cut interest rates several times more after 9/11, hoping to promote spending to rescue the sagging economy:

2001 rate cuts

…and it worked… in the short term (like every other Republican solution; see: invasion of Iraq, and ousting the Taliban). One of the most “famous” effects was the surge in ultra-low interest home loans that spurred home sales and a construction boom. And we all know how THAT turned out.

See, as I noted Tuesday, the government needs interest rates high enough to attract foreign investment without slowing spending. It’s a delicate balancing act. So, even though the economy was still weak, the Federal Reserve HAD to raise interest rates enough to encourage other countries to lend us enough money to pay for two wars AND Bush’s tax cuts all at the same time. Think about that for a second. The Bush Administration was simultaneously cutting taxes to “help the economy” while raising interest rates… which discourages spending and hurts the economy… to attract foreign money to make up the shortfall in tax revenue due to cutting taxes. If that sounds like sound fiscal policy to you, you’re either a Republican or suffering from severe head trauma.

So here we go again. The Bush Administration has cut interest rates to the bone trying to keep the economy afloat. And as the saying goes: “When the only tool in your toolbox is a hammer, every problem looks like a nail.” Republicans actually have two tools in their toolbox: tax cuts and rate cuts. They won’t spend money on infrastructure (though they obviously have no problem spending money on war and military contractors) and they won’t raise taxes on the wealthiest Americans to make up for the shortfall so they can keep interest rates where they are. They can’t cut taxes even further without exploding the debt even more than the have, leaving them with no other option but to cut interest rates to the bone. And to paraphrase Issac Newton, what goes down eventually must come up. At some point, interest rates will have to come back up to cover the shortfall in tax revenue. And just as they did in 2004, interest rates will have to be raised even before the economy has recovered enough to absorb the hit, thus choking the economy just as it’s struggling to recover. Krugman calls this “the liquidity trap”.

You’ve certainly noticed that gas prices have fallen from over $4/gal just last July to barely $1.50/gal by December. Why? Because investors in the oil futures market that pushed oil to nearly $150/barrel last Summer finally recognized that high oil and gas prices helped produce a global recession, and now we need low gas prices to help the economy recover. But Wednesday, OPEC announced plans to cut oil production by 2.2 million barrels a day. While the market reacted by sending oil prices down even further over fear of what low supply might due to an already weak economy, eventually, it’s going to push prices up (law of supply & demand) and hurt the economy even more. Difference is, this time, we’ll have a President in office fast-tracking energy independence, which will (eventually) make us less vulnerable to the whims of OPEC.

The damage the Bush Administration has done to this economy in less than eight years in nothing short of astounding. From more than doubling the National Debt, not one but TWO recessions, historic job loss figures not seen since The Great Depression, the entire U.S. auto industry teetering on the brink of extinction, and now putting in place an economic timebomb set to go off during Obama’s first term, the damage Neo-Conservative economic policies have done to this nation will be with us for the next FIVE DECADES. It’s looking more and more like the outgoing President Bush is determined to take the economy with him as he leaves Washington.

Look for a follow-up in the near future as I examine how to repair the damage Bush/Cheney have done as quickly & painlessly as possible.

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