On the verge of another Fed rate cut Update: Interest rate lowered .75 to 2.25 percent
Here we go again:
Wall Street barreled higher Tuesday as investors found relief in better-than-expected results from Lehman Brothers and Goldman Sachs, and anticipated a massive interest rate cut from the Federal Reserve. The Dow Jones industrial average surged more than 250 points.
Investors, while they’ve seen a number of huge advances amid the market’s recent volatility, appeared considerably more upbeat than in the past few days. They’re confident that when the Fed’s meeting lets out at 2:15 p.m. EDT, it will reduce the target federal funds rate by a full point, bringing it to 2 percent.
The central bank has shown it is trying everything in its power to revive the stagnant credit markets and rescue the financial industry from collapse — it already relaxed its lending practices, and has backed JPMorgan Chase & Co.’s buyout of failing investment bank Bear Stearns Cos.
Quarterly results from two rivals of Bear Stearns — Lehman Brothers Inc. and Goldman Sachs Group Inc. — also gave some solace to a market fearful about investment banks weakening further from losing bets on mortgage-backed securities. Both Lehman and Goldman posted quarterly profits that were significantly lower than they were a year ago but higher than analysts predicted. There had been particular concern about Lehman, considered the company most like Bear Stearns, and investors had sold off the company’s stock on Monday. But Tuesday, Lehman shares spiked back up 33 percent, by $10.55 to $42.30. Goldman shares rose 12 percent, by $18.47 to $169.49, while Bear Stearns shares jumped 49 percent, by $2.38 to $7.19.
There’s no telling, however, how the market will react to the Fed’s rate decision. Anything less than a full-point cut could trigger frenetic selling, while anything more could rekindle the feeling that the credit markets and economy are in worse shape than Wall Street thought.
Hans Bader at OpenMarket.org warns of the consequences:
The Federal Reserve is trying to save irresponsible borrowers from themselves by cutting interest rates to ridiculously low levels, even though that will trigger increased inflation rates (which are already rising) and bring back the stagflation that plagued the 1970s.
Amazingly enough, Congress is saying that the Fed’s indulgence towards borrowers is not enough, and liberal Congressmen and Senators want to bail out irresponsible borrowers by blocking foreclosures or writing off mortgage loans that exceed current home value (which most often happens to borrowers who made little or no down payment because they neglected to save any money for a down payment).
Such low interest rates will spark increased inflation, will further weaken the dollar (thus driving up gas prices), and will discourage international investment in America, resulting in lower economic growth and increased unemployment — the very opposite of the Fed’s goal.
International investors are openly disgusted with the Fed’s inflationary easy money policy, which seeks to artificially prop up the economy and keep American unemployment rates (which are low by international and historical standards) from rising by making it easy and cheap to borrow money (even though Americans already borrow more than residents of any other major country, and have shown little penchant for saving) in order to finance spending that is unsustainable over the long run. In the long run, they believe the Fed’s policy will result in increases in both inflation and unemployment.
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So what’s the point in continuing to hack at the Fed rate if no one is any more willing to lend the cash?
I guess I need to stop keeping all my money in my mattress, pretty soon the fluffy fellow will be worth more than all the green I’ve stuffed it with.
OT - catch MM tonite on C-Span2 at about 8:30 or 9:00 - a book tv rerun
If you need to refinance, today is the day. Seriously, except you need to have started several weeks ago.
IMHO, the Fed is doing things exactly backwards from what is actually needed, which is a rate increase and NO bailouts.
Another rate cut… yeah, that’s the ticket.
When I view the current state our country is in, I feel like I’m the only sober guy in a car full of drunks, and the most inebriated of the bunch is driving.
Excellent.
I think I might move my investments into leather good manufacturers. Why?
We’ll all have to start carrying two wallets, or humungo-purses, to handle all of the cash we’ll need for luxuries like gasoline or flour…
Domestically it’s like we’re facing a liquidity trap: no amount of new money will induce further borrowing, thus there is no accelerator for the economy.
Since our economy is global however, we have a non-sequiter: a liquidity trap co-existent with inflation cause by too many dollars chasing imports (like fuel, and clothing) that aren’t interested in selling for dollars.
Nice.
And, of course, nobody ever saw this coming. Except for the ten zillion economists - including at least 30 here - who have been saying “Our leaders in DC really *are* as stupid as dirt…”
No worries. Obama will fix it. Or John. Or Hillary. Doesn’t matter who wins, given the fiscal virtuosity of these three. We can’t lose. We’ll just deficit spend our way out, right?
Wrong. It seems as if there is nobody
left on the planet who will lend us more money…
Anybody who tells you that the global economy is decoupled is in for a really rude surprise when we start paying back our enormous debt in dollars that are worth half of what they were when we borrowed them.
Maybe we can bluff our way into dodging a crash for a bit longer, but the foundation is pretty shaky here. Be it this year or next, things are going to get very, very ugly…
Well, for one it pulls more money out of bonds, money market accounts, and high interest savings accounts and puts it into the stock market. It also lowers the cost of doing business for companies. They can now more easily take on debt to expand businesses, create jobs, and begin new ventures. When they are paying lower interest rates that means they have more money going straight to the bottom line (of the Balance Sheet) and that means higher stock prices - which means all of our 401k’s will reap the benefits.
It is really the only effective tool that the Fed has to influence the economy.
You make a good argument, but often when we get in the situation where “Everyone else is wrong and I am right” it is often the best time for self-evaluation.
#7
That reminds me of this saying:
“If the only tool you have is a hammer, then every thing looks like a nail.”
I’m concerned that the bad outweighs the good here, consequence wise. And that for the sake of appearing as if they are “doing something” they are doing something that could potentially be bad.
And?
Yes, the Federal Reserve with its rate adjustments can seem like a barber who can’t quite get a guy’s sideburns to line up evenly, taking a little more off of each side until the customer ends up looking like he just joined the Marines.
But ponder the alternative: the “Suck It Up” philosophy that prevailed before the creation of the Federal Reserve produced economic cycles that not only led to recessions, but depressions:
1807-1814
1837-1844
1873-1879
1893-1898
I’d rather have the Fed tinker with rates in an effort to avoid economic disaster - even if in so doing it raises the inflation rate from time to time, or if some people might benefit from low rates in ways they shouldn’t - than to return to a laissez-faire brand of capitalism that dislocates the entire economy every quarter century or so.
So, choose your poison: the potential for higher inflation and a weaker dollar vs. the devleoping reality a financial sector meltdown with adverse ripple effects throughout the US and global economies.
It’s one thing to want to see people punished who made bad credit/mortgage/savings decisions; another thing if in one’s zeal to see them suffer, one ignores the consequences on a lot of other people of such schadenfreude.
Speaking for myself, I’d prefer to see a small percentage of knuckleheads get their nuts pulled out of the fire after the foolish decisions they made, than to lose my job (and consequently my house) in new depression or deep recession - the only “comfort” being that those same knuckleheads are in the dumps with me.
Which is why we have a Fed. Its purpose is to steal the wealth of Americans by inflating the money supply. Just look at the value of the dollars you have saved. Fortunately rather than listen to the investment weenies, I put money into gold and silver long ago.
You are taking a crises management approach. Wait for the crises, then apply the big hammer. How did the banks get the funds to give out so many bad loans? The Feds (along with “liquidity Bush”, Freddie Mac and Fannie Mae) have already failed and now resort to stealing your money by devaluing your savings to make up for their own stupidity (unless you believe it is really a conspiracy).
Notice the markets now falling because the feds ONLY reduced rates by .75 (of 3.5 percent, which actually is a about a 25 percent reduction). The Feds are now running out of bullets and Wall Street is still not satisfied.
Next comes jobs.
Regulus,
I’m all for a Federal Reserve system, and I am a monetarist by inclination and logic. The founder of Monetarism, Friedman, agrees with your basic precept that the lack of an effective central bank was a key contributor (along with a lack of laws that allowed all kinds of abusive behavior) to the kinds of panics you mention from the 19th century.
But Friedman also was very clear in saying that the money supply should be maintained with a steady hand, changing only when it was truly needed.
We, as a national economy, don’t need more money than we already have in circulation. In fact, we appear to have too much.
Interest rates are extremely low, but borrowing isn’t increasing. Why? Because businesses and individuals have gorged themselves on cheap money for so long that they no longer have an appetite for it.
Compounding this is the fact that a great deal of our economy is based on imports. Our clothing is made overseas. Most of our electronics are made overseas. Our gasoline is mostly imported, and is priced according to global markets.
The non-US companies that make this stuff don’t want any more dollars. They’ve been buying dollars since the 1990’s (and long before that), and they’ve had their fill.
So what happens now?
The Americans who borrowed money for houses that they couldn’t afford have been beaten up pretty badly. They lose.
The people who racked up credit debt (cards and loans), buying vacations that they couldn’t afford, and clothing that they couldn’t afford, and cars that they couldn’t afford? Those people, by and large, win. They keep the goods and the memories, and default on the payments.
The folks who lived within their means, didn’t take the fancy vacation, still watch a 27″ tube TV, but have no credit debt other than a mortgage? They lose. Big time.
Now they get to face $5 and $6/gallon gasoline, and clothing that they can no longer afford, and that plasma TV goes further and further out of reach but that’s OK since they can’t afford the electricity that powers it in any case…
The loans that our idiot politicians required (mortgages) that our foolish bankers make and our imbecile neighbors exploited? The loans were ultimately financed by China, Japan, Qatar, Singapore, etc. They lent the money to the US Government, who funded the loans to the banks (money supply), who funded the conspicuous consumption that has artificially fueled this economy for more than 20 years.
And now we have 20+ years of debt to deal with.
Don’t listen to the anecdotes that our idiotic press will feed you. Yes, there were many people who borrowed just to make ends meet, or pay medical bills. That’s a tragedy. Conversely, there were many people who were too stupid to know that they couldn’t afford the Louis Vuitton bag that they just “had to have.” And, yes, there were plenty of bankers who knew better but did this anyway - and plenty of people who work for banks that are now being blind-sided.
Anecdotes blind us to the reality. The reality lies in the statistics, and they are grim: Three years ago the USA started borrowing, in aggregate, more than we earned.
Our debt, as a nation, is staggering - and our production base has eroded steadily since the 1970’s.
Right now Bush and Bernacke have begun the same solution that Weimar Germany did, and the Pelosi/Reid Congress is behind them 100%: print money. Unlike Germany they aren’t literally running presses but are, instead, “covering” the electronic zeros and ones that represent money in our modern economy.
The net result is the same. If the Fed and the Treasury “cover” losses like Bear Stearns have, they are printing money.
Billions and tens and hundreds of billions of dollars worth, if this doesn’t stop now. They are printing money in the teeth of an already weak dollar, on an economy based largely on importation.
That, my friend, is precisely what Friedman warned against. Better to do nothing than to do the wrong thing.
Michelle, and all here,
Your trivia info for the day. Yahoo links always have a “;ylt=AnDLoNGcharstring”.
You can shorten the link by breaking it at the semicolon; i.e., truncate the link at the “;ylt=…” and delete that trailing part… and it will still work just fine.
Doesn’t make much difference when you’re embedding a hyperlink obviously, but it helps a lot when you’re just pasting the link itself.
Personally, I think that this rate cut could be a good thing… if it were accompanied by an outright ban on ARM’s and Interest Only Mortgages.
Get everyone refinanced into something sane (and if they can’t afford it, oh well, enjoy paying rent!) and then stop fooling with the money supply.
Lower rates, dollar lower, oil higher, inflation higher. Hummmmm
So … are we all going to die?
Because the tone of this thread just makes me want to huddle in my closet and pray the sky doesn’t fall.
I’m not being sarcastic … I have a genuine fear.
Can the US come back from this?
As Lou Rukeyser used to say, I have three guests on tonight’s program who will prove how brilliant they are by completely disagreeing with each other!
RIP, Lou; I would’ve loved to hear what you’d be saying right now.
The Fed’s going to inflate the US out of a possible recession so much that everything is going to cost more than it did the week before: this includes food and fuel. When will the Fed come up with a concrete plan to boost the dollar?
Stacy,
History is a wonderful thing; history is a scary thing. It all depends upon your view, and where you think we are going relative to it.
Regulus points to some points in history known as “panics” that were very real, and very painful. The Depression is well documented as being unpleasant for just about everybody. Even so: babies were born, birthdays were celebrated, and life went on.
I don’t think anyone refers to the recession under Ford and Carter as “the good old days.”
With that said, I wouldn’t take counsel from my fears, either.
Be fiscally responsible, personally.
Write your congresspeople and let them know “enough with loosening the money supply.” They can’t fire Bernacke, but they can certainly give him some strongly worded advice.
Live your life. Be in love, if you can. Laugh often.
Economics is the dismal science, for sure… but chocolate goes a long way in countering it.
I hear ya, Stacy. I too have a lot of misgivings about a possible recession or downturn in the economy. I don’t own a home (though someday I’d like to), I’m a small time investor, and I’m just trying to save for retirement/rainy day fund to weather this storm. I’d thought I’d seen it all as a military spouse but I guess not.
I think both the federal government and the American citizen in general have too much dependence on debt. Debt fueled this “housing bubble” or whatever you want to call it. People (bankers) who should have known better used the sub-prime loans/debt to package more attractive collateralized debt. Many Americans don’t believe in saving anymore. Nor should they if the Federal government is leading by example.
I’ve seen my mother lose a good job at NCR because of foreign competition. My father was born during the Great Depression. From his parents he learned how to save his money and from him I learned the value of a dollar. I’ve been working since I was 16 and never forgot my father’s experience.
I think that a lot of people (both Wall Street and investors) are panicking and letting it get the better of them. There’s talk of greed, betrayal, and the pointing of fingers which are fueling this emotional maelstrom right now. It’s enough to knot your stomach unless you haven’t already reconciled yourself to the fact that there will always be up and down economic cycles…
The lower rates are good for everybody, not just irresponsible homeowners. Inflation is still very low by historic standards. Oil prices are up mostly because of supply and demand issues, not the sinking dollar. If the dollar was too strong then the trade deficit would be worse and people would complain about that and outsourcing, etc. Lowering rates got us out of the 9/11 / tech bubble recession and will eventually work again. It takes time though. The mistake the fed made was to raise rates too far and too fast without taking into account the delayed effect that higher rates would have on the economy because of resetting mortgage rates. That killed the real estate market, and the effect is still reverberating through the economy. It’s easy to say let’s raise rates and have a full blown recession with lots of layoffs, unless you’re the one getting laid off.
Plus, my mortgage rates are variable and it’s nice to see the savings every month : )
Stacey, good advice from RobM1981. And that’s not simplistic advice, it’s thorough. For people who didn’t buy more house than they could afford, low-interest loans were/are a great deal. All the houses coming on the market now at lower prices represent an opportunity for those who have been saving a down payment. Buying out the multi-millionaires at Bear Sterns with your tax money is a huge abuse of power in my opinion, but you personally needn’t live in fear. All you young people out there, take some Econ classes for electives. And as your grandmother would have said, save for a rainey day.
Something awful bad must be going on to lower interest rates that much. My confidence as a consumer is at a low ebb. I won’t buy anything.
Imagine the prime never rising above 3% and 2.5% of that going into the treasury.