I've been watching the credit crisis unfold for the last year. I so incredibly curious as to what is going to happen next week.

So much of economics is perception - if they can just convince the lenders everything will be ok for a while, the borrowers will come back in with incredible demand.

You've just outlined why Jim Rogers is right. Banks have been technically insolvent for at least 2 months, and the NY Fed open market reports have shown that there's at least one very large depository institution in deep trouble. The credit crisis stems from people not knowing who is in trouble, and to what extent. The Fed only makes this worse by extending endless credit to institutions which would've otherwise been forced to liquidate their assets, returning confidence to the system.

The credit market won't start moving just because the Fed keeps throwing money at it, because in the grand scheme of things it's the market that sets interest rates, especially to the low income owners that you're trying to protect. They've gambled with this gimmick for the last 9 months and have only managed to create more uncertainty and a weaker dollar.

Instead of outlining everything I believe in, I'll refer you to Karl Denninger's open letter: http://www.denninger.net/letters/open-letter.pdf

>> ^J-Rova:
> Cartel? Like drugs? Oil? :-P And of course it's a bunch of banks! They have all the information! Would you rather it be a collection of... say, hospitals, making all the same decisions? I can picture that - "Well, Mr. Bernanke, there were an unusually high number of influenza cases this year, sooo ahh, let's see.... ahh, fuck it - we recommend contracting the money supply to prevent inflation." ???? HAH!

It's a bunch of private banks. This is akin to having wolves guarding a hen house.

>> Since mid-2007, Bernanke has been hiking rates for people who were solvent, and lowering for the ones who were not.
> Hiking and lowering rates at the same time, for specific people? I'm not sure where you got that.

You don't understand what I'm saying because you're in over your head. Starting in December 2007 the Fed started auctioning huge short-term loans at the 3% rate, available only to the big banks. This brand new loan mechanism is called the TAF: (Temporary) Term Auction Facility. It has allowed institutions like Citibank and Bank of America to stay afloat despite having no reserves of their own. They will carry on renewing these loans indefinitely as long as they can provide the collateral.

It just so happens that for everyone else, interest rates are determined by the market and not by the Fed, and are a function of risk. No one but the big banks get loans at 3%. Last week, municipalities were forced to raise rates from 4% to 20%, and even at this rate they can't get buyers for their bonds. These finance basic services such as hospitals. Now there are about $265 billion in outstanding municipal bonds (i.e., bonds that haven't found buyers). Mortgage rates have skyrocketed, meaning people can't refinance their houses at acceptable rates. Even prime mortgages are at risk now, and the crisis will spread.

The Fed has provided extremely low rate loans only to big banks -- precisely the ones who caused this crisis and shouldn't be artificially kept afloat. Meanwhile, the market has screwed over the parties who were still solvent by giving them huge rates due to the perceived high risks. By not forcing the exposure and liquidation of bad debt tied to banks, the Fed is creating the conditions for a domino effect. If conditions continue to deteriorate, Americans will have a deflationary credit crisis similar to the one seen in the 1930's.

People borrowed money they couldn't afford to borrow, and lenders allowed them to do it. They all miscalculated some of the risks involved, and it finally started biting some people in the ass. This is NOT the Fed's fault!

The Fed is partly responsible by keeping artificially low interest rates, which gave rise to the credit bubble. Today the Fed is accountable for providing liquidity to float junk assets owned by big depositary institutions, temporarily favoring them and creating the conditions for a widespread credit collapse.

>> Everything connected to the Fed is secretive, and not even members of Congress with the highest clearance can find out what's going on.
> Is this bad?

It's bad because it lets bankers manipulate the market. The President's Working Group on Financial Markets (a.k.a. Plunge Protection Team) is the prime example.

I'm all for having educated discussions about the economy. but I sense that you're the kind of person who first makes his mind and then tries to find arguments to back up your claims. Quoting a few paragraphs from Wikipedia doesn't show the Fed's integrity. If you want to find the truth, look at the market. It can be temporarily manipulated, but in the end it never lies.

snooze, that's a reply that doesn't address his concerns regarding monetary policy. It's not as if Mr. Paul is an advocate of wealth redistribution, but our current credit crisis can be related to the Fed's policy regarding liquidity when they drove the Federal Funds Rate down to 1%. The amount of currency being "created" had a number of adverse consequences which have been detailed by smarter minds than I.