Economic Distortions

The Federal Reserve has once again cut its prime lending rate and to date this will be the seventh reduction since September all in the name of easing what is considered a severe credit crunch. The danger in all this is the devaluation of the dollar which has caused the price of gold to shoot up but more importantly the price of imports are becoming more expensive especially oil. It could be that the Federal Reserves proactive course in correcting a perceived economic anomaly is a mistake. Something had gone wrong in the financial markets when home mortgages were made easy to consumers with little ability to pay. Now that bad loans are working there way into the system banks and investors are waiting for loses to cross over from perceived to actual, in other words things can only settle down when the markets shed their uncertainty. Just what is the value of a home now or two months from now? If loans are tied to value and value is elusive, then credit markets will suffer. The Feds can cut rates all it wants but no one wants to invest in the dark. A case could be made that none of this should have happened in the first place if state and federal governments hadn't strong armed lenders into loosening up its lending practices and create mortgages to consumers with little ability to make good on a note.
Whenever external forces (ie: political) interfere with the mechanisms of markets it's no surprise that distortions in prices and ultimately hardship ensures. It is not natural for gas to shoot up to close to $4.00 a gallon or homes to lose %20 of value when people haven't been driving more then usual or given up on buying homes, when prices change without the change in behaviour of the consumer then we smell a rat.