Preventing Economic Collapse (TomPaine.com)

Preventing Economic Collapse
Thomas I. Palley
March 27, 2007



Thomas Palley runs the Economics for Democratic and Open Societies Project. He is the author of Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism. His weekly economic policy blog is at www.thomaspalley.com.

The U.S. economy is showing signs of a potentially rapid deceleration. In particular, there is accumulating evidence that the housing sector slowdown may be becoming a meltdown. In many areas house prices are falling. House sales are down nationally, and mortgage delinquencies and foreclosures are rising—especially in the sub-prime market. This has caused tremors in broader financial markets. The only good news is employment and wages continue growing, but labor markets conditions are also widely viewed as a lagging indicator.

This sobering picture argues for the Federal Reserve to immediately start lowering interest rates. Additionally, the Fed must come to grips with the problem of debt-financed asset inflation, which lies behind the current housing bust. That calls for deeper policy reform.

An important element of the case for lower interest rates is the fact that the tightening effects of earlier rate increases continue building because of the long lags with which monetary policy works. Consequently, conditions are still tightening despite the fact the Fed has been on hold since June 2006.

One lag concerns adjustable rate mortgages whose interest rates are adjusted annually. That means rates on these mortgages have been rising throughout the year despite the Fed’s rate pause, and they will continue rising for borrowers whose rates are scheduled to be reset in the next three months. A similar mechanism holds for mortgages with initial low teaser rates and mortgages with one-time reset clauses that trigger after a fixed period. ....(more)

The complete piece is at: http://www.tompaine.com/articles/2007/03/27/preventing_economic_collapse.php

With the trade imbalance so high and the dollar in a precarious position, seems to me that lowering interest rates would be a perilous thing to do.

Some worry is a good thing. But excessive worry is bad. And with jobs actually being made or staying in America, the economy WILL be fine when the day is done.

Chill, folks.

Who'll buy the debt? Won't that devalue the dollar more quickly?