Tuesday, March 18, 2008

Economics and politics of the Fed fund rate

The most recent changes in the Federal Funds rate by the Federal Reserve demonstrate clearly that Alan Greenspan screwed up with his long series of rate increases that started in February 2005. The timing of that start is significant because it is only to months after Bush was reelected in part on the basis of no recession in 12004. It is clear that historically every time there is a recession during a Presidential election year, the Party of the incumbent President is removed and replaced by the candidate of the other party.

Greenspan, fully aware of the effects of the economy on Presidential elections, increased the federal funds rate in 2000 (making a Bush election over Gore more likely) and then lowered the Fed funds rate in 2004 so that Bush would be reelected. The evidence is in the timing of fed fund rate changes.

Note the years in blue which are election years, and the years in yellow which are the year after. In 2000 Greenspan was making the economy more difficult in order to defeat the Democrat. In 2004 he was making it better to elect the Republican.

In 2005 Greenspan knew that the low interest rates had created the housing bubble, so he was trying to stop the bubble. The continued into 2006. Greenspan was still trying to correct the problems he had created in 2001 through 2004. In early 2007 CountryWide, the nations' largest mortgage lender, announced in early Spring that the collapse of the housing bubble was causing economic problems. The result was the credit crunch that became obvious to everyone by Summer 2007, but which they thought could be isolated in just the mortgage markets. We now know that was living in a fool's paradise.

Intended federal funds rate 1997 to present

2008March 182.25
January 303.00
January 223.50
2007December 114.25
October 314.50
September 184.75
2006June 295.25
May 105.00
March 284.75
January 314.50
2005December 134.25
November 14.00
September 203.75
August 93.50
June 303.25
May 33.00
March 222.75
February 22.50
2004December 142.25
November 102.00
September 211.75
August 101.50
June 30 1.25
2003June 251.00
2002November 61.25
2001December 111.75
November 62.00
October 22.50
September 173.00
August 213.50
June 273.75
May 154.00
April 184.50
March 205.00
January 315.50
January 36.00
2000May 166.50
March 216.00
February 25.75
1999November 165.50
August 245.25
June 305.00
1998November 174.75
October 155.00
September 295.25
1997March 255.50
(Source Federal Reserve.)

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