Federal Reserve slashes interest rates

[NoXion]

Now I'm basing this off absolutely nothing at all, so any flames directed at me for my ignorance will be well deserved, but by cutting off interest rates aren't they simply storing up more trouble for later?

[Admiral Valdemar]

Now I'm basing this off absolutely nothing at all, so any flames directed at me for my ignorance will be well deserved, but by cutting off interest rates aren't they simply storing up more trouble for later?

Yes. Delaying a recession indefinitely is impossible, but allowing more of that which got us into this mess to begin with is in my mind a somewhat retarded thing to do. They should be raising the rates to make saving more preferable, not slashing them. I didn't expect the Fed to go the logical route.

[SirNitram]

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.

I really have to emphasize that 'Subprime' might make a good buzzword, it's really not got much to do with this. Yes, some portion of this is 'subprime' loans which should never have been made. Then there's 'stated income' loans which shouldn't have been made. Loans issued because of 'Pride of ownership'(Second stupidest reason to issue a loan; what's worse than giving a loan because he spends time at Home Depot? 'Existing Financial Relationship With Lender'. Which means he owes you a shitload of other loans that are bad, so give him another so he can maybe keep paying on the others.). 'Interest Only Loans' that shouldn't have been made.

But it's even more than this plethora of loan types which were all ticking time bombs that the banks signed off on anyways. Real Estate bubbled up like a balloon and was egged on by all comers. A bankruptcy bill was passed making it harder for someone who can't afford their debts to renegotiate.. Leaving many to simply walk away from their homes. Even this could have been firewalled away from the rest, except that the banks bundled up all that crap debt and sold it off as highly-rated, secure investments. So now the whole economy is infested with this, and billions are vanishing down the toilet every time a bank goes to the confessional and 'writes down' a bunch of loans as unrecoverable.. Leaving lots of people holding worthless paper.

Where was the oversight? Oh right. Oversight is evil. CAPITALISM!

[Vaporous]

The markets just reversed big time. I'm somewhat suspicious of these sudden ten percent gains in Financial stocks.

[SirNitram]

My guess is it's a response to rumours the Fed will slash the rate again next week. It won't last.

[Vaporous]

It would have to be, since there's no reason for the weakest part of the economy to suddenly attract that much speculative interest when the fundamentals haven't changed at all.

[Ace Pace]

My guess is it's a response to rumours the Fed will slash the rate again next week. It won't last.

Not just, massive investment by middle eastern goverments into the failing banks.

[Ace Pace]

My guess is it's a response to rumours the Fed will slash the rate again next week. It won't last.

Not just, massive investment by middle eastern goverments into the failing banks.

Source

Snipping the good parts.

On Wall Street in the past few weeks, the sums have been bigger and the actions more benign—at least so far. This week Merrill Lynch and Citigroup became the latest to get the sovereign-wealth treatment, picking up a further $6.6 billion and $14.5 billion respectively, much of it from governments in Asia and the Middle East (see article). Sapped by the subprime crisis, rich-world financial-services groups have been administered nearly $69 billion-worth of infusions from the savings of the developing world in the past ten months, according to Morgan Stanley.




America's Congress has uttered barely a squeak as Wall Street's titans have taken foreign cash. But when credit was loose it was alarmed at the state-backed acquisitions of oil companies and ports.







Others are worried for precisely the opposite reason: that the funds are interested chiefly in making money. This would not matter much but for the sheer size that some funds have now attained. They are big enough to shift markets—as the Norwegians and Icelanders discovered. The 21st century's successors to George Soros, who made a killing from sterling's ejection from the European exchange-rate mechanism in 1992, may not be a private fund-manager but the agents of foreign powers.

[Lord Insanity]

A friend of mine sent me a link to this. It's an economics professer's opinion column on the subject. The basic point of the article is in this paragraph from it.

The Bush bailout, as well as Federal Reserve Bank cuts in interest rates, is a wealth transfer from creditworthy people and taxpayers to those who made ill-advised credit decisions, and that includes banks as well as borrowers. According to Temple University professor of economics William Dunkelberg, 96 percent of all mortgages are being paid on time. Thirty percent of American homeowners have no mortgage. Delinquency rates were higher in the 1980s than they are today. Only 2 to 3 percent of all mortgages are in foreclosure. The government bailout helps a few people at a huge cost to the rest of the economy.

As a slight off topic observation, I find it somewhat intriguing that the host website has columns ranging from Pat Buchanan to Hillary Clinton and even Benazir Bhutto. Could it be this site actually offers a broad and diverse set of veiwpoints? Maybe I'm just being too optimistic.

[SirNitram]

My guess is it's a response to rumours the Fed will slash the rate again next week. It won't last.

Not just, massive investment by middle eastern goverments into the failing banks.

Ah yes. Remember what got us this round of economic mess? Greenspan preaching that if we paid off the debt and ran a surplus, eventually, we'd have to put money into the stock market? THE US GOVERNMENT WOULD OWN STOCK IN COMPANIES. PANIC. SOCIALISM.

Middle Eastern companies own sizable chunks? Oh. Ho hum. Ignore the man behind the curtain.

[Admiral Valdemar]

Soros is ripping holes in the US economic plan. He knows his shit. Defy him at your peril.

[Lusankya]

The paper today said that the inflation Australia is at 3.6%, which is greater than America's interest rates.

Now, clearly America's inflation isn't the same as Australia's, but when it's in the realm of possiblity that inflation is higher than official interest rates, isn't that a Bad Thing? As in, "banks lose money by giving you loans"-level bad?

[phongn]

Now, clearly America's inflation isn't the same as Australia's, but when it's in the realm of possiblity that inflation is higher than official interest rates, isn't that a Bad Thing? As in, "banks lose money by giving you loans"-level bad?

That rate isn't available to consumers or businesses - it's the rate the Federal Reserve itself loans out money.

[J]

I'll have to look up the numbers to be sure, but as I recall the US core inflation rate is around 2.5% for 2007, rising towards the end of the year. This doesn't include energy & food so I'm not sure how this compares to or if it can be compared to Australia's inflation rate.

Taking energy & food into account, various estimates have pegged the US inflation rate at anywhere from 5-8% for 2007.

[Edi]

Energy and food are such basic factors in inflation that any figures that don't include them are worthless. The fact that they have been omitted means that the US government is trying to blow smoke up people's arses to cover the truth of the situation.

[Gerald Tarrant]

Energy and food are such basic factors in inflation that any figures that don't include them are worthless. The fact that they have been omitted means that the US government is trying to blow smoke up people's arses to cover the truth of the situation.

No. Core inflation is a policy measure the Fed uses to guage the size of the money supply. Food and energy prices are removed due to higher volatility in those areas. Specifically oil is currently at a high price unrelated to the size of the money supply. Food's prices can change due to trade related issues or a multitude of things which have nothing to do with how much money is being printed. When the Fed talks about core inflation (inflation minus food and energy prices) it is solely interested in how the money supply is affecting prices.

Other inflation measures exist, this is from the BLS

All items.......... .2 .1 -.1 .3 .3 .8 .3 5.6 4.1
Food and beverages .5 .3 .4 .5 .3 .3 .0 2.3 4.8
Housing........... .3 .2 .0 .3 .2 .4 .3 3.8 3.0
Apparel........... -.6 .4 -.5 .3 .0 .8 .2 4.1 -.3
Transportation.... -.2 -.3 -1.2 .1 .4 2.9 .5 16.3 8.3
Medical care...... .2 .6 .5 .3 .6 .4 .3 5.1 5.2
Recreation........ .0 -.1 -.1 .3 .3 .1 .0 1.8 .8
Education and
communication.. .0 .2 .3 .1 .4 .1 .3 3.0 3.0
Other goods and
services....... .3 .0 .1 .4 .2 .3 .3 3.0 3.3
Special indexes:
Energy............ -.5 -1.0 -3.2 .3 1.4 5.7 .9 37.1 17.4
Food.............. .5 .3 .4 .5 .3 .3 .1 2.4 4.9
All items less
food and energy .2 .2 .2 .2 .2 .3 .2 2.7 2.4

Link

All of these are published. I therefore must disagree with your assertion that the government is attempting to be dishonest in this area. Finally the core rate isn't useless, it's probably the most reliable measure of money supply growth.

[Alan Bolte]

Now, if the government were to pretend cost-of-living increases and core inflation were similar, that would be dishonest.

[brianeyci]

Even the most liberal, forward thinking talking heads on business shows talk like this:

"There is always the tendency during crisis to invest in the completely safe -- the government bonds, the GIC. But the cost of living is growing far faster than the rate of inflation, and the key to successful living is investing in the money market--"

Etc., etc. How can these guys live with themselves saying shit like this? Is it actually true, or do they don't know enough facts about how the bubble will burst and people will lose all their savings? The fact that everybody is already living far above what they're worth doesn't enter these talking heads' minds.

I thought bank runs are pretty much impossible -- doesn't the US have deposit insurance on less than 100k?

Finally, there is a short story I read as a kid about a guy who made a fortune in the years before the Great Depression. He kept in the market to the last second, right up to Black Friday, convinced that if he sold he'd be doing his country a disservice and propagating fear. He became a pauper in a few minutes. Anybody remember the name of the story? I want to take another look at it, and I believe it is rather famous.

[Illuminatus Primus]

Energy and food are such basic factors in inflation that any figures that don't include them are worthless. The fact that they have been omitted means that the US government is trying to blow smoke up people's arses to cover the truth of the situation.

Oil and food prices are going up for reasons other than excess money supply, or traditional inflation.

[Stravo]

Business news sources were crowing about a 600 point turn around on the DOW yesterday and pegging it squarely on this interest rate slash. I think a one day rally is hardly going to turn things around but in this time seems like any good news is held onto for dear life by these guys. And then what bugs me is that when the Recession is finally declared (probably months into it) they will then harp on any little negative thing.

And I'm a little sick and tired of every recession/slow down being touted as possibly being the worst since the Great Depression almost as if we're yearning to go back to that time.

[The Grim Squeaker]

And I'm a little sick and tired of every recession/slow down being touted as possibly being the worst since the Great Depression almost as if we're yearning to go back to that time.

Look at how America came out of the Depression compared to the rest of the world . Hard to blame them

[Ace Pace]

Business news sources were crowing about a 600 point turn around on the DOW yesterday and pegging it squarely on this interest rate slash. I think a one day rally is hardly going to turn things around but in this time seems like any good news is held onto for dear life by these guys. And then what bugs me is that when the Recession is finally declared (probably months into it) they will then harp on any little negative thing.

And I'm a little sick and tired of every recession/slow down being touted as possibly being the worst since the Great Depression almost as if we're yearning to go back to that time.

The Dow might be going up, but the USD is going down.

[J]

Even the most liberal, forward thinking talking heads on business shows talk like this: <snip>

Those talking heads are useless, every time I see some financial "expert" or analyst on TV I quickly roll my eyes and flip to the next channel. CNN, Business Channel, they're all useless for getting at the facts, their only use is letting you know how financial "experts" think.

I get most of my financial news from TheOilDrum.com, or The Automatic Earth blog, where they actually have fact based analysis.

I thought bank runs are pretty much impossible -- doesn't the US have deposit insurance on less than 100k?

Sure, but where does the money come from when banks have no money in their vaults? Besides, it takes time for the FDIC to process claims, and one of the things the government may decide to do is to inflate the currency into worthless paper by the time the claims are paid out. One possible scenario would have the banks putting strict withdrawal restrictions in place while the government ramps up the printing presses into overdrive, by the time you can yank it out and use it, that $20k in your bank account is worth around $200. I don't think it'll be nearly that bad, but I do think a significant devaluation is possible.

[Edi]

And the fed slashed interest rates again, this time it's down to 3%. They seem to be in full panic mode.

[Admiral Valdemar]

They can slash only so far. The effects are being delayed, not destroyed. For the first time, the banking system has reserves in the negative figures. Only the Fed printing money like crazy with constant Bernanke helicopter drops of liquidity is keeping the system from collapse.

As I say, the capitalist system we have is broken. Severely.