Mortgages Made Simple with Rick Gundzik

Sunday, April 17, 2005
Alan Greenspan - Uncle Al
Today we would like to discuss the role of Alan Greenspan in our economy, or as we like to call him, "Uncle Al." Most of you have heard of Alan Greenspan from your local newscast or at a dinner party with friends, but never received an explanation of what he really does.

The news media has stubbornly and erroneously opened your local late night news with a comment such as "Be prepared to pay more on your credit cards, Alan Greenspan has raised interest rates." Alan Greenspan does NOT control mortgage and/or credit card interest rates.

Uncle Al's job is to control monetary policy. Essentially, this means he tries to keep the economy growing at 2-3% per year, keep inflation at a reasonable level and keep the economy out of recession. This is not an easy job with an economy as large as ours.

There are several ways he tries to "control" the economy; He raises or lowers short-term interest rates that your local bank pays. He adds or subtracts money from the money supply or he simply makes an interesting comment.

If he feels the economy is growing too fast, he can 1. Raise the short term rates, 2. remove money from the economy by selling t-bonds and 3. Say he's going to raise interest rates. A fast economy is dangerous as it can cause rapid inflation, which makes everything you buy more expensive.

If he feel the economy is slowly down too quickly, he can 1. lower short term rates, 2. add money to the economy by buying bonds and 3. Say he plans to lower rates. A slowing economy is bad as it will lead to people losing their jobs.

The concept can be simplified. If you want to increase growth, people must spend more money. So make it easier for them to get it. If you want to slow growth, make it harder for people to spend money.

Uncle Al's job is often confused by the media. If you have any questions, feel free to contact us.
posted by Pac Res @ 4:53 PM  
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