The Recent Federal Cut in Interest Rates: Is it Enough to Keep a Recession at Bay?

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Long before the Feds decided to cut the interest rate, I was having concerns about our economy. I know I wasn't alone. Articles abounded, with doomsayers predicting a major recession. I kept a close eye on what was happening in my city and across the nation and didn't like what I saw. While this is a very personal take on the situation, I have made some major changes in the way we handle our finances and financial planning in many areas of our life, from housing to retirement planning. I'll discuss each area in detail and I hope you'll share your take on my take as well:

First Reason Why a Cut in Interest Rates May not Be Enough to Keep a Recession at Bay: Housing

We live in an area where housing prices never exactly soar but where they used to sell fairly quickly for market price. Now homes sit on the market longer and longer. A cut in interest rates isn't goint o change that situation right away because many people fell prey to the seemingly easy tactic of using their homes as piggy banks. We weren't one of those (although I can't say we weren't tempted). Many people bought first, second and sometimes third homes, fixed them up and resold them for a profit. They didn't make the mega-high profits of some states like Florida and California but they did fine.

Why an Federal Cut in Interest Rates Won't Change Things: too much consumer debt and not enough saving.

People need money. They can't sell their homes. They took on debt to try and fix up homes and resell them. If the cut encourages them to take on more debt it will only worsen things. We aren't planning to sell our house any time soon, not with homes staying on the market so long. We also don't plan on taking on more (or any) debt, interest rate cut or not. We just want to hang on to what we have.

What we are doing: Staying put. Paying off the house, not doing major remodeling and just keeping up with necessary maintenance and home upkeep. We are doing more of the maintenance ourselves and keeping any home loans to a minimum. We aren't putting our house at risk! We are also saving more money and spending less. We feel under siege.

Second Reason Why a Cut in Interest Rates May Not Be Enough To Keep a Recession at Bay: middle class and professional workers are being laid off, not just the lower end or service industry workers. Jobs are at risk.

Check out this article in the Seattle Times: seattletimes.nwsource.com/html/businesstechnology/2004137567_jobless22.html
It echoes what I'm seeing all over the country, including my area. More and more professional and white collar workers are being laid off, fired or having a hard time finding jobs. Even worse, when they do find another job, it is for 17% less, on average, than what they made in their previous job.

How is an interest cut going to help them? Will it boost their lowered wages and reduced spending power? It certainly hasn't done so for us! This situation was there before the interest cut soI don't see how the cut is going to offset the lower wages, lack of benefits and other factors that hurt workers today?In our town, there simply aren't enough jobs for skilled, middle-class and experienced workers.

When people are out of work or being paid less than ever, a cut in interest rates may be more of a band-aid solution than a long-term fix. I hope I'm wrong about that. I don't see it as encouraging people to pump money into the economy because many people are already in debt or don't have anything left to spend except to pay off that debt – the credit card bills, the home payments (even that second house bought as an "investment").

Also, according to some, the people who are getting nervous are not the usual bunch. According to a New York Times article, this is a panic of more than just the average Joe but of those who are involved with finances and are so-called financial experts. Check out this article for more info:

www.nytimes.com/2008/01/22/business/22stox.html

What we are doing: Making a budget so that we can live on one income if we have to. We might as well be prepared because we might just have to be. While I remain hopeful, we are all learning to think about future scenarios. We don't spend what we can't pay in cash, with rare exceptions. When it comes to creating jobs for middle-class people, I don't see that happening in huge amounts, not in my town.

Third Reason Why a Federal Cut in Interest Rates Won't Stop a Recession: much of our economy is based on consumer spending and people simply don't have the money to spend.

The reasons why they don't have money are varied. Some bought homes and didn't anticipate the slower housing market. Some went into debt and didn't save enough. Based on personal experience, I see a lot of nervous friends out there, ones who wonder how they are going to get by with less pay or who are scrambling to sell homes they counted on for retirement income – but at a loss. Some are worried about outliving their savings. Others are hard-pressed to get by. Few have enough saved to get through a recession, even with a cut in interest rates.

What we are doing: We aren't counting on huge raises each year. We keep contributing to retirement plans and emergency savings, keep most of our money in cash, not stocks, and stay the course. We never went into debt to any significant degree and we don't plan on doing so now. Who knows if our jobs are truly stable? We're too close to retirement to take on much risk.

Fourth Reason Why a Federal Cut in Interest Rates Won't Stop A Recession: Baby Boomers are being hard hit.

Here's the reality: Baby Boomers are eager to downsize, move from homes to smaller ones. The problem? They can't sell their homes. Just when they face retirement and counted on home sales as a part of their savings, they can't get the amount they need from their homes. Ouch! They also have medical expenses and when they leave their jobs, those expenses can increase, plus they pay health insurance themselves until they reach the age where Social Security benefits and Medicare or Medicaid kicks in.

What we are doing: Again, staying put. We plan on working longer, not downsizing and certainly not buying another home for awhile. We'll wait for a turnaround. It could take years. We save for health insurance, evaluate medical plans and count the days till we get Social Security. No, Social Security isn't enough to cover our expenses but we don't take it for granted, either. We plan on not having it but will be grateful if we do.