Federal Reserve slashes interest rates

[Rogue 9]

The BBC

Fed slashes rates in shock move

The US Federal Reserve has cut interest rates to 3.5%, a shock three-quarters of a percentage point reduction.

Aimed at staving off a US recession, the move failed to calm investors, with shares continuing to fall sharply as Wall Street opened for Tuesday trading.

The Fed, the US central bank, said latest figures indicated a deepening of the country's housing market slump and increased unemployment levels.

One analyst said the Fed was "obviously panicked" by the threat of recession.

"Unfortunately they have no power to reverse what in my opinion is the worst post-war recession," said Michael Metz, chief investment strategist at Oppenheimer in New York.

'This is huge'

The Fed's interest move came as a complete surprise, as it was taken outside its timetabled rate-setting Open Market Committee meetings.

The last two such emergency cuts were on 17 September 2001, shortly after the attacks of 11 September, and on 3 January 2001, in the wake of the dotcom bust.

The last time the Fed cut rates as much as three-quarters of a percentage point was in August 1982, almost 26 years ago.

"This is huge," said the BBC's business editor Robert Peston.

"And it is a big risk. If this doesn't work, then people will say they have nothing left in their locker."

Analyst Jeremy Stretch of Rabobank, described the Fed's move as "a sign of panic".

"But it certainly indicates that the Federal Reserve wants to be seen as taking action over the concerns of an economic downturn," he said.

Yet despite the Fed's extensive cut in rates, US investment bank Merrill Lynch said at the start of this month that, in its opinion, the American economy was already in recession.

Another investment bank, Goldman Sachs, has also warned that recession is now likely.

Sub-prime woes

The sharp downturn in the US economy has centred on the slump in the American housing market over the past year.

Against a backdrop of higher US mortgage rates, home loan defaults and repossessions hit record levels last year, specifically in the sub-prime sector.

This industry specialises in higher risk loans to people on low incomes or those with poor credit histories.

As the sub-prime mortgage sector hit crisis point, it triggered record losses at some of America's largest banks.

It also caused the global credit squeeze, as much of this sub-prime debt was repackaged into wider debt offerings that were bought by banks and other investors around the world.

As a result, global banks are now much less willing to lend to each other, or to homes and businesses, until the full extent of the sub-prime exposure is known.

[Darth Wong]

Oh for fuck's sake, the levees are breaking. Give it up. We're in for a recession and nobody can stop it.

[J]

B.b.b..but but but the DOW is down only 1%!!
It's just a little temporary market hiccup!

[Enforcer Talen]

Heh, I woke up and my buddy (finance major) had texted this to me. Ill be watching this one closely.

[Admiral Valdemar]

The BBC economics editors are douches. They seem to follow the White House in believing there's a way out of the minor recession we may experience. Also, they referred to the credit crunch of 2007 as if the whole thing was over in the final months of that year and it's all history. The fucking thing hasn't even started! Credit cards and loans are looking better now? What planet are these people on? Merrill Lynch and Citi just LOST $10bn+ this past month!

They all see this as a re-run of the 2001 dotcom bubble, as opposed to something showing how deeply, terribly flawed capitalism is. Incidentally, it's deflation going on that's the problem. Rate cuts will do sweet fuck all about that.

[Dartzap]

The BBC economics editors are douches. They seem to follow the White House in believing there's a way out of the minor recession we may experience. Also, they referred to the credit crunch of 2007 as if the whole thing was over in the final months of that year and it's all history. The fucking thing hasn't even started! Credit cards and loans are looking better now? What planet are these people on? Merrill Lynch and Citi just LOST $10bn+ this past month!

They all see this as a re-run of the 2001 dotcom bubble, as opposed to something showing how deeply, terribly flawed capitalism is. Incidentally, it's deflation going on that's the problem. Rate cuts will do sweet fuck all about that.

Don't forget that they are the state broadcaster, they have to inform us whilst still sending us even more off the deepend into your happy place. The blogs they have on the website tend to be more similar to your opinion, though.

We might get slightly more accurate reporting from C4N later. possibly.

[Dartzap]

The BBC economics editors are douches. They seem to follow the White House in believing there's a way out of the minor recession we may experience. Also, they referred to the credit crunch of 2007 as if the whole thing was over in the final months of that year and it's all history. The fucking thing hasn't even started! Credit cards and loans are looking better now? What planet are these people on? Merrill Lynch and Citi just LOST $10bn+ this past month!

They all see this as a re-run of the 2001 dotcom bubble, as opposed to something showing how deeply, terribly flawed capitalism is. Incidentally, it's deflation going on that's the problem. Rate cuts will do sweet fuck all about that.

Don't forget that they are the state broadcaster, they have to inform us whilst not still sending us even more off the deepend into your happy place. The blogs they have on the website tend to be more similar to your opinion, though.

We might get slightly more accurate reporting from C4N later. possibly.

Pardon me, ghetto edit.

[SirNitram]

The gibbering morons who function off idealogy have only one option: Cut the interest rate. Nevermind that cheap and easy credit is how we got there. Keep cutting the rate, because they can't comprehend anything else.

[TC Pilot]

Maybe I've forgotten something since my days in high school econ, but isn't cutting interest rates really the only thing the Fed can do to try and stop a recession?

[phongn]

The gibbering morons who function off idealogy have only one option: Cut the interest rate. Nevermind that cheap and easy credit is how we got there. Keep cutting the rate, because they can't comprehend anything else.

To play DA a bit: it looks like in this case, the Fed was forced to do this not only to ensure there was enough credit in the market for properly-qualified businesses and people but also because there's dangerously low amounts of non-borrowed reserves in the banking system (as noted by J in the 'stock tanking' thread).

Maybe I've forgotten something since my days in high school econ, but isn't cutting interest rates really the only thing the Fed can do to try and stop a recession?

Yep, or at least to try and ameliorate one.

[Guardsman Bass]

My International Politics and Political Economy Professor actually expressed some surprise over this, because according to him, inflation is at a 15-year high, and usually inflation is the prime concern of the Federal Reserve. I imagine lowering the interest rates and pumping more currency into the economy isn't going to help. Can I get an "amen" for stagflation?

[J]

To play DA a bit: it looks like in this case, the Fed was forced to do this not only to ensure there was enough credit in the market for properly-qualified businesses and people but also because there's dangerously low amounts of non-borrowed reserves in the banking system (as noted by J in the 'stock tanking' thread).

Or to put it another way, Attention all Americans: please deposit $5 in your bank account

Using the fully adjusted figures there's around 66 cents for each American sitting around in the nation's bank vaults. Going by the raw figures, the banks are in the negative to the tune of ~$5 for each US citizen.

[Darth Wong]

Maybe I've forgotten something since my days in high school econ, but isn't cutting interest rates really the only thing the Fed can do to try and stop a recession?

Ultimately, the real problem is that it's a strictly delusional state to believe that the government can sustain a perpetual economic boom. At best, the government can adopt policies designed to smooth out the cycles of boom and bust somewhat (for example, raising taxes during a boom so they can pay for shit that they won't be able to pay for during the next bust), but they tend to do the opposite.

[TC Pilot]

I would hope the people running the Federal Reserve aren't stupid enough to ignore a century of economic history and think a recession can be perpetually avoided (I oversimplified in my last post).

Again, my memory of the Fed is not what it used to be, but I don't recall the government having much say in what the Board actually does (since it's part-private, part-public), so it's not like it's just an extension of the government working alongside its economic policies.

[phongn]

Again, my memory of the Fed is not what it used to be, but I don't recall the government having much say in what the Board actually does (since it's part-private, part-public), so it's not like it's just an extension of the government working alongside its economic policies.

The Fed is pretty much independent, other than the selection of the Board of Governors. Washington seems to be content to let them operate on their own.

[Adrian Laguna]

Ultimately, the real problem is that it's a strictly delusional state to believe that the government can sustain a perpetual economic boom. At best, the government can adopt policies designed to smooth out the cycles of boom and bust somewhat (for example, raising taxes during a boom so they can pay for shit that they won't be able to pay for during the next bust), but they tend to do the opposite.

The problem is that is the government does raise taxes during the bumper crop to prepare for the famine, the voters start to whine and complain about the government strangling the economy.

[PeZook]

Maybe I've forgotten something since my days in high school econ, but isn't cutting interest rates really the only thing the Fed can do to try and stop a recession?

There's also open market operations and manipulating the obligatory bank reserve, although I'm not sure the US Fed can do both of those. I'll check it later on.

[Edi]

Ultimately, the real problem is that it's a strictly delusional state to believe that the government can sustain a perpetual economic boom. At best, the government can adopt policies designed to smooth out the cycles of boom and bust somewhat (for example, raising taxes during a boom so they can pay for shit that they won't be able to pay for during the next bust), but they tend to do the opposite.

The problem is that is the government does raise taxes during the bumper crop to prepare for the famine, the voters start to whine and complain about the government strangling the economy.

Most voters are just plain morons, it's as simple as that. So their whining should be irrelevant as long as the parties in power have the best interests of the country at heart, rather than best interests of the party. Which just means the US is going to be fucked even more by its broken political system.

[PeZook]

Most voters are just plain morons, it's as simple as that. So their whining should be irrelevant as long as the parties in power have the best interests of the country at heart, rather than best interests of the party. Which just means the US is going to be fucked even more by its broken political system.

I personally think economic policy should be handled separate from elections. Democracies always use the three-tier system plus the central bank, but a big problem is that taxes always play a major part in any election, because the elected government manages taxes.

Perhaps the authority to set taxes should be transferred to a body separate from Congress, with members nominated by it?

On the other hand, I wonder if it would be possible to use slick marketing to sell the idea of an increase in taxes when necessary.

[Shinova]

If only politicians in power actually talked about the problem and made efforts to educate the populace about it rather than make vague, politically nice-sounding statements about, "Helping America, Patriotism, rar!"

[Zablorg]

Has there been any vague calculations about how long this reccession could last for?

[Edi]

If it's analoguous to the Finnish early 90s recession, several years at a minimum. In this case, it could actually be worse than that because you have so many things so seriously fucked up and there are external factors that are not amenable to change (oil being one).

[Wanderer]

Has there been any vague calculations about how long this reccession could last for?

Well I for one am prepared for Hyperinflation. Be prudent to prepare for it yourself just in case.

[The Spartan]

If only politicians in power actually talked about the problem and made efforts to educate the populace about it rather than make vague, politically nice-sounding statements about, "Helping America, Patriotism, rar!"

That's part of the problem. For much of America, to be patriotic means, in part, that you insist that there's nothing wrong. It's just the media or it's just a hiccup or whatever. If a politician tried to educate people, they'd get bored and start tuning him out to listen to the guy that's blowing sunshine up their ass.

[Surlethe]

Has there been any vague calculations about how long this reccession could last for?

As I understand it, this recession is being triggered in general by too many people defaulting on debts, and specifically by the crash of the subprime mortgage market and the sluggish housing market. The problem is that if it takes more than a year or two, it will transition perfectly into the slow oil contraction.