SIFE sheds light on interest rates

The steady rise in the interest rate has caused quite a dilemma for the current economic conditions, which has caused Ben Burnanke to finally carry out the inevitable drop in the interest rate on Sept. 18.

A lengthy era of frugal interest rates created by Alan Greenspan, former chairman of the Board of Governors of the Federal Reserve, has caused the newly appointed Ben Bernanke to consistently raise the prime interest rate until it peaked at 8.25 percent on July 1, 2006. The interest has since then stayed at Burnanke's quota interest rate until it lowered this Tuesday.

Greenspan and Bernanke obviously possess polar opposite tactics that affect our economy's condition. Greenspan took the view that the more money consumers have in their pocket will allow more spending and growth within the economy, but Bernanke viewed that if the wrong people (poor credit borrowers) receive loans, it will cause chaos. They both possess beneficial reasoning behind their actions, but this has caused turmoil in our economy.

Therefore, the solution before this had happened would have been an equilibrium between the two, but damage has already occurred and Bernanke is in the position of having to fix the failing economy in America.

The main crisis involved with the interest rate debacle comes from the main use of the interest rates, which are mortgage loans. The rise of interest rates undoubtedly causes those with adjustable loans to experience increases in their mortgage payments as high as three times as much as it was previously.

Unfortunately, most do not have the capital to afford this and eventual fall behind in their monthly payments, which has created a whole pool of subprime lending. Subprime lending is giving loans to people who do not have the qualified credit to receive the lowest interest rates and therefore are more financially unstable. This catastrophe has caused many American citizens to be forced to foreclose on their property and is the centerpiece of the economy emergency.

Before the interest drop occurred the dollar had hit rock bottom value when compared to the Euro. Unfortunately, the value of the dollar is slowly falling because the sudden rise in the interest rates has cause less money in the pockets to be spendable. Consequently, our citizens are not able to splurge on unnecessary products that they could afford before the rise in interest rates. Especially those who cannot even afford their mortgage payment surely cannot buy a new TV, therefore money that was spent on these products is going elsewhere.

Another reason for the failing economy is the first drop in the employment rate in four years occurred this past August. The United States lost 4,000 jobs during the month and several business sectors suffered, but the most unexpected was that for the third month in a row government jobs dropped, which is unheard of.

To make matters worse, OPEC has recently raised the prices of a barrel of oil to reach over $80 which will without a doubt produce a rise to the price of gas, which causes consumers funds to be allocated in gas more heavily and not on luxuries that used to be affordable.

All of the causes that have happened in our country's economy have undoubtedly caused fright in our society. The necessary solution is to create a synergy between Bernanke's and Greenspan's tactics, but unfortunately, it will take time.