Ron Paul is still the man. He just won't be president. Bless him in his retirement.

The Fed has interfered with the proper functioning of interest rates for decades, but perhaps never as boldly as it has in the past few years through its policies of quantitative easing.  In Chairman Bernanke's most recent press conference he stated that the Fed wishes not only to drive down rates on Treasury debt, but also rates on mortgages, corporate bonds, and other important interest rates.  Markets greeted this statement enthusiastically, as they realize that this means trillions more newly-created dollars flowing directly to Wall Street.

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In order to lower the interest rate, more loanable funds must be available. But if individual saving habits remain unchanged, the only way to lower interest rates is to inject additional money or credit into the financial system. This new injection of credit, which has its origins not in savings but merely through a new bank balance sheet entry, results in a lowering of the rate of interest. The lower rate of interest signals the availability of additional loanable funds, which spurs additional borrowing. These borrowed funds are then put to use to fund capital projects. Additionally, as the interest rate lowers some savers may judge that their funds are now better off being used to fund present consumption, rather than continuing to be saved for future consumption.

            Because the interest rate is the price of money, manipulation of interest rates has the same effect in the market for loanable funds as price controls have in markets for goods and services. Since demand for funds has increased, but the supply is not being increased by the market, the only way to match the shortfall is to continue to create new credit. But this process cannot continue indefinitely. At some point the capital projects funded by the new credit are completed. Houses must be sold, mines must begin to produce ore, factories must begin to operate and produce consumer goods.