Rising economic tide is keeping all boats afloat

Published 12:00 am Thursday, August 12, 2004

Editor, the News-Herald:

I’m confused about the column Andy Prutsok wrote for the August 8th issue of the Suffolk News Herald.

You stated that most people in your age group &uot;struggle with ridiculously high mortgage payments that are artificially inflated by the supply being controlled and by interest rates that are being held in check by a Federal Reserve that cares about nobody except the banking industry.&uot;

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The reality is that that it is the responsibility of the Federal Reserve Board to increase money supply during a recession, which causes interest rates to decline.

Lower interest rates allow people, who ordinarily could not afford a house, to be able to buy one.

In fact, more people own houses now than any time in the history of our country.

Those people who already owned a home had the opportunity to renegotiate their mortgage and obtain a much lower interest rate which, in turn, lowered their monthly payment.

It is true that the cost of housing increased after the initial lowering of interest rates, but that was due to demand for housing, not control of the supply. Who was controlling the supply?

You also said that the Fed does not care about anybody but the banking industry.

I imagine that bankers would be shocked at this since there are some conflicts of interest between bankers and the Fed.

One of the responsibilities of the Federal Reserve is monetary policy.

The Fed uses its power to maintain full employment under non-inflationary conditions by increasing money supply. This has the effect, as stated above, to cause a decline in interest rates.

This increases the purchasing power of businesses so they have a stronger presence in the market place.

The result is that businesses hire more people.

In fact, we have seen this very thing happening as we recover from the recession that started during the last quarter of the Clinton administration.

Contrarily, in an inflationary period, the Federal Reserve would cause a contraction of the money supply, which would cause interest rates to increase, thus reducing spending and countering inflation.

The Federal Reserve responded correctly to the recession by making more money available at a lower interest rate.

This, along with President Bush’s tax cuts,

which also made more money available to both individuals and businesses, is the reason why we are recovering from the recession.

The unemployment rate has fallen from about 6.5% to 5.5%.

The latter figure is lower than the average during the 1970s, 1980s and 1990’s.

So rather than the boat filling with water, as you put it, the rising tide is causing all boats to float.

Eugene Sankey