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Why the Fed's rate cuts won't help you

The Federal Reserve today continued its attempt to get out in front of the worst financial crisis to hit the world banking system in five decades by slashing short-term interest rates by three-quarters of a percentage point, to 2.25%, the lowest level since 2004.

But the Fed's effort will have little effect on the ability of the average American to get a cheap loan for a new home, car or college education even as it has a large effect on U.S. banks' ability to fix their balance sheets by racking up fat profits.

If that sounds unfair, welcome to the latest episode of a brutal new American business ethic, in which the government bails out bad bets by risk-taking banking executives in New York with money that it borrows from middle-class families and foreign investors. The effort is gilded with fancy financial language and cloaked in the guise of a rescue that helps all citizens, but the reality is that Washington is essentially robbing the poor to help the rich.

It seems odd, but these are extraordinary times. Normally, when the Federal Reserve cuts the rate at which it lends money to U.S. banks, those banks in turn cut the rates at which they lend money to citizens and companies for personal and commercial use. Simple enough. Yet in the past few months, banks have made three important changes in their usual practice:

• They have not been passing all of their interest-rate savings to customers.

• They have restricted lending only to most creditworthy, documented applicants.

• They have cut the total amount they're willing to lend.

Good for banks, bad for you

Banks are taking these seemingly perverse steps in an effort to reverse the effects of the massive losses they have withstood for lending too broadly to consumers and companies with lousy credit over the past five years.

They're pulling a big 180, which is as confusing as it is disheartening. Rather than providing funds to prospective home buyers and business people with legitimate needs for moving into larger homes or expanding factory lines, records show the banks are hoarding the low-cost money they're borrowing from the Fed and investing it in Treasury bonds paying higher interest yields. They're then pocketing the windfall profits to repair their own ravaged balance sheets.

As if that's not bad enough, the Fed's swiftly conceived, unprecedented course of action harms the public in three other ways:

• It boosts inflation by lifting the total number of dollars in circulation.

• It undercuts the attractiveness of the U.S. dollar, which leads to higher food, energy and gold prices.

• It cuts the yields of dividend-paying investments such as government bonds upon which retirees depend for steady income.

In other words, the Fed action helps imprudent bankers dig out of a hole by putting prudent citizens and foreigners in one. This gives big financial businesses a shot at staving off disaster at the risk of cutting the spending and earning power of everyone else