My opinion is easy money from the Fed is what got us into this mess in the first place, going back to Greenspan’s low rates under Clinton. He raised them a bit on Bush at first but then lowered them right back down and the economy eventually overheated. Lots of that money has now left the country, along with many jobs, maybe to never be seen again. Giving out even more money at even lower rates to banks who are now just sitting on it hasn’t helped at all, things are actually worse than ever, and if inflation now hits hard most savings that are left are ruined too. Changing rates is far too blunt an instrument that is far overused. Leave it to banks that earned their money to decide how and when to lend, not up to those that simply print it, then we’d have far fewer of these ridiculous swings both up and down.
Ironically, low rates don’t always mean easy money. I was worried about the Fed causing a deflation, even with low rates, in the 2001-2005 time frame. Since the 1970’s the Fed has never really goosed the money supply sufficiently to cause a significant inflation, until very recently.
If you look at the crash, it wasn’t a total economic crash as much as it was a housing crash, and housing definitely had access to “easy money” during Bush’s presidency. But it wasn’t “easy money” via the Fed, but rather “easy money” via lax lending standards foisted on us by Fannie Mae and Freddie Mac, abetted by both the Democrats and a lot of Republicans, including Bush.
The main reason the housing decline was so huge is that it was only house prices that were out of line at the time. Overall inflation was minimal, so every 10% increase in housing prices each year drove them farther and farther above equilibrium. We are only now approaching that equilibrium with housing prices falling 30-60% and the general price level also rising more rapidly up to meet the falling house prices.
I totally agree with you that “things are worse than ever” mainly because the Fed has created a mess that is going to be difficult to unwind safely, the Obama administration has created a regulatory morass that will also take years to unwind (if we have the sense to do it), and yes, savings could very well be wiped out by a significant rise in the inflation rate over the next decade.
However, if the Fed were ever to be managed the way I’d like to see it managed, short term rates would become more volatile because they would move up and down with every short term swing in the economy instead of being pegged by the Fed at whatever level they decide in committee meetings. They would become a true market-determined rate instead of a managed rate set by the Federal Reserve.