Someone on the President's staff, in late 2001 ( not pointing any fingers here ) came up with the great plan that they could raise interest rates to get countries to start buying US bonds. Typically, this would cause huge amounts of inflation as trillions of dollars of foreign money is pumped into the American currency system. Banks, enjoying the high returns of their US bonds decided to lower their regulations and make it easier for people to buy more expensive homes. Three trillion dollars of US currency was sucked out of circulation and put into real estate. Less and less money was available in circulation for business investment. Banks were lending all of their available capitol in Mortgages and were giving up on the business investment game. We became less competitive in the worldwide marketplace because we didn't have enough available capitol to manufacture enough goods to sell overseas.
In 2005-2006, the Fed knew it was running out of tricks. They tried lowering interest rates to spur the economy. But, that caused countries to sell off their US bonds. Money was sucked out of the Governments pockets and sucked out of circulation. Less and less money was available. Although interest rates were appealing to businesses, banks were less and less willing to make business investments.
In late 2008, the Fed knew its game of lower interest rates was not working, so it tried to raise interest rates. Business investment came to a standstill, the housing market crashed, and property values dropped. Banks were loosing money left and right as people decided to abandon homes where their mortgage was higher than the value of the home. The stock market crashed on bad bank numbers. Companies were forced to lay off millions of people. State governments were becoming more and more stressed as they attempted to pay unemployment benefits.
What have we learned?
Raising and lowering the interest rates has little positive effect on the economy. Low interest rates reduce the amount of money in circulation. Raising interest rates causes the job and housing markets to crash.
A steady as she goes approach will encourage long term business investment, a predictable housing market, a safe job market. Stop playing with the interest rates already.
Encourage Americans to buy rental properties in other countries. The rental income will trickle back to America.
Lower the maximum allowed length of a mortgage by one year every year. Start with the maximum mortgage length of 30 years; Then 29, 28, etc. People will slowly start to be able to pay off and own their homes. Ten years from now, with a max mortgage length of 20 years, a huge number of Americans will have personal wealth. That mortgage money will be freed up an put back into circulation.
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