Fed Slashes Interest Rates; Nothing Happens

This post first appeared on Minyanville.

You can't say they didn't try.

Nevertheless, the Federal Reserve's drastic moves aimed at jumpstarting lending, highlighted by dropping interest rates to nil yesterday, just aren't working. To be sure, conditions are better than they were just months ago during the height of the financial panic, but a normally functioning credit market is likely still months away.

Bloomberg reports banks are still hoarding cash and shunning loans from their counterparts around the world, preferring instead to borrow from the Fed directly. The interbank lending markets are basically nonexistent.

The spread between LIBOR -- the London Interbank Offer Rate, which measures what big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) charge one another for loans -- and Treasury bills still 6 times wider than it was last June.

Companies, specifcally ones with less-than-stellar credit ratings, are paying record amounts to borrow from skittish bond investors. In fact, never before have buyers of corporate debt demanded more yield on their investments, according to data compiled by Bloomberg.

As Minyanville's Kevin Depew is apt to say, back on Main Street, everyday Americans "are getting shot from both sides."

Each time the Fed lowers interest rates, savers earn less on the money they sock away in the bank. This, combined with our ballooning national debt and struggling economy, are torpedoing the dollar, which has a punitive effect on those responsible enough to shy away from immediately parting with every penny they earn.

Washington is sending a clear message that the only way out of this mess is precisely what got us here in the first place: More spending. By providing paltry returns on savings and continuing to debase the currency, regulators and lawmakers alike are punishing responsible, conservative economic actions.

The trouble -- and why these fantastic efforts to rain money down on our broken economy will ultimately fail -- is that years of robust spending were driven by free and easy access to credit. Artificially low interest rates, loose lending guidelines, and a social mood that fostered spend-happy trips to the mall are a thing of the past.

Try though they may, bureaucrats cannot squeeze blood from the proverbial turnip. They spent the past 20 years hammering away at it, until finally the poor root couldn't take any more. It rolled over, returning to its shallow hole in the earth, to wait for brighter days.

The American consumer has followed suit.