the tindog coffeehouse

David Saied, a former SEC commissioner for the Republic of Panama, has written a sobering article on six commonly-believed American economic myths.

Number 4 on the list seems particularly relevant this morning, with news of the bankruptcy of Lehman Brothers and sale of Merrill Lynch to Bank of America:

Consumption is indeed important in a free economy: particularly the freedom of consumers to buy their goods in unhampered markets. However, key to long-term economic growth is investment (savings), which is the opposite of consumption. Public policies that promote consumption — such as low interest rates — do so at the expense of savings. Less savings means less investments; an economy that does not save or invest will consume all of its resources and eventually end up bankrupt.

We’ve already seen the collapse of Bear Stearns, Fannie Mae, Freddie Mac, and other big financial institutions, and it looks like this latest round may not be the end of it. And all of it can be traced back to the failure of the mortgage industry in the wake of the end of the housing boom, a boom driven by bad loans and easy credit issued to borrowers who couldn’t afford it.

And yet, even in the midst of this turmoil, we hear that the Fed will be keeping interest rates at 2 percent and may actually lower them further, which seems at odds with Myth # 6:

A rate below the market rate creates a higher demand for credit; thus people and companies get into debt beyond normal levels. On the other hand, low savings-account rates push people to withdraw money, lowering the market supply of funds. These dislocations are at the root of the eventual credit crisis, which follows the boom period that was caused by artificially low interest rates.

I’m the first to admit I’m no economist, but something just doesn’t seem right here. Yes, I know the Fed is trying to prevent a recession by keeping rates low. But isn’t it just exasperating the credit crisis in the process?

Saied also tackles the myth that “dependence on foreign oil” is keeping oil prices high. He correctly points out that switching to American-produced oil will do nothing to lower oil prices, a fact that will of course continue to be completely ignored during this election cycle.

One factor that is related to high oil prices, however, is the weakening of the dollar, and with the collapse of Lehman and others, the dollar will continue to lose value, meaning we can probably expect even higher gas prices, regardless of oil supplies.

Not good.

Previously:
The root cause of the subprime meltdown
How much power should the Fed have?