Saying that "[f]inancial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the Fed this morning cut its "discount" rate by 1/2 point, from 6.25% to 5.75%. According to the Washignton Post:
In addition to lowering the discount rate, the Fed also said it would allow qualified banks to hold what are traditionally emergency, overnight loans for consecutive 30 day periods, and that it would continue to accept "home mortgages and related assets" as collateral -- another direct nod to one of the root causes of the current market disturbance."These changes will remain in place until the Federal Reserve determines that market liquidity has improved materially," the Fed said. "These changes are designed to provide depositories with greater assurance about the cost and availability of funding."
It will be very interesting to see if this move calms the stock markets down. My guess is that it will, temporarily, but that the major structural imbalances - housing market, credit industry, fiscal and trade deficits - remain and that we're in for a rough ride for a while longer.
P.S. This is the first major test for new Fed chairman Ben Bernanke, and to put it mildly, everybody's watching!
[UDPATE: As of 9:52 am, the Dow is up 240 points. Will this rally continue throughout the day?]
There has been something interesting in the past few weeks - the mortgage rates for jumbo mortgage loans (> 417,000$) have increased by nearly a full point. But in the DC area, nearly all homes are above this limit unless you go way far out into the suburbs. I have no idea what this actually means in practice, or whether the Fed rate cut will change any of this.
Nevertheless, so much for "free" markets. Notice how the (Republican)finance gurus have a tantrum every time some one tries to regulate them or their pet companies in the name of the public good or to protect the defenceless little guy... but then these same big boys scream bloody murder for instant help when their trillion dollar mistakes come home to roost--- why, they might not get their billion dollar Christmas bonuses! Of course, they are "too big" to be allowed to go under.
Heh, heh: the rewards of this world are sure unequal. How much help is the foreclosed little guy getting, tell me.
Also note that in concert with Bernanke, Treasury Secretary Henry Paulson (formerly of Goldman Sachs) has been pulling out all of the stops to support the markets via a semi-formal President's Working Group on Financial Markets. It seems that Paulson got the Big Boys together on August 1st to coordinate a reversal of a big market decline on that day. The rally during the last hour of yesterday had the same smell about it. Paulson's orchestrations, together with Bernanke's half-point cut in the discount rate, boosted the market to an early morning surge today.
Note that the Fed is extending the term of the normally overnight discount repurchase agreement loans up to 30 days, and it is accepting a "broad range of collateral," including "home mortgages and related assets." Is this code-speak for bailing out the subprime investors? Bernanke is clearly worried. Seriously worried.
Bernanke and Paulson at least seem to recognize that they have a potential crisis on their hands. They are using every monetary and market-manipulating tool they can find. Will they succeed in propping up the markets?
And if Bernanke and Paulson do succeed, will the result be to the benefit of the country's economy and working classes? Or will it be primarily to the benefit of the Big Players: the hedge fund managers, the derivatives aggregators, and the highly-leveraged investment bankers?
For an interesting perspective on the risks posed by these highly leveraged markets in subprime securities and derivatives, check out Nouriel Roubini's analysis from Wednesday.
As to the "rally" ... the impact will be measured over months not one day ... the numbers I've looked at place the bottom at 10,500 ... and after that it is a full blown market crash ...
It's also important to remember that despite the tax giveaways, low interest rates, little to no oversight of banks and financial institutions, and adding more than 3 TRILLION DOLLARS in additional national debt ... the market impact can only be described as abysmal ... the policies of Republican trickle down economics failed under Reagan and it's a failure under Bush. Some of the proof follows:
#The Dow Jones Industrial Average on January 20, 2001 was 10,578 ...adjusted for inflation that value in today's market with no gain would be 12,385 (currently 12,979)
#The NASDAQ on January 20, 2001 was at 2,758 ... adjusted for inflation and with no gain the value would be at 3,229 (currently 2,487)
I say screw the hedge funds; you bought junk debt, you eat junk debt. See you Dom Perignon guzzlers at the discount beer aisle at Safeway.
Given the real risk of recession, I would not be surprised if Bernanke follows fairly quickly with at least a quarter-point cut in the fed funds rate, from 5.25 percent down to 5.00 percent. Depending on the data he is sifting through, perhaps he might even cut the fed rate a half-point, just as he has cut the "overnight" discount rate from 6.25 to 5.75 percent in one swift blow.
But here is the hard place on the other side of the rock: with some troubling inflation numbers to account for, Bernanke may fear that a sharp fed rate cut will serve to accelerate the decline of the dollar and may even result in a withdrawal of foreign investment, for Japanese, Europeans, Chinese, and even Gulf States may decide to shy away from purchasing U.S. debt instruments (commercial or Treasury) or equities in a declining market.
Who would then finance our over-consumption, as the Japanese and Chinese have been kindly doing for so many years?
-And I am still getting those 1% load offers in the mail. I still see signs on the side of the road for 3% loans. It's all obviously crooks preying on the vulnerable.