Its take a lot, but today was eyebrow raising. That bastion of free-wheeler-dealing market capitalism (US) broke one of the golden rules of economics and finance. While most if not all central banks do occasionally intervene in money markets through OMO (open market operations), its rare to intervene through the weapon of interest rates as happened today with the Fed rate. And the the intervention is basically nonsensical.
Back in 1991, George Bush Snr was Prezzo and just about to go into election with the economy in doldrums. He lost to the charisma kid aka serial trouser dropper from Arkansas with his "its the economy stupid" slogan. Then came the era of low interest rates (read cheap credit), Internet driven and Chinese/Japanese/Korean-funded US growth. Times were good as house prices went up and money rolled in. Banks had so much money that (like Kenyan banks today), they had to start lending to the common US low income earners. Some got mortgages that they won't have had in a million years. To help the banks , hedge funds came along and bought the mortgages off the banks who then could go back and lend some more funny mortgages. On the corporate-side, we had private equity groups borrowing from (yes you guessed it), banks to do highly leveraged company buy outs. That why we are where we are today. Basically, irresponsible lending.
The Fed cut US interest rates despite worries about inflation-hence my nonsensical comment above.
5 comments:
Supposedly like everything else the American interpretation of capitalism is self serving, though i noticed the European C. Bank did also did something of the sort, so dont know who is the better one in this case.
On this side of the sea, at least the chancellor has reassured investors not to panic
Maina, Even before the Fed cut the discount window rate, the WSJ reported that the federal-funds interest rate traded below the Fed's target at some points of the day -- even coming close to zero at times.
I can't fathom credit-less US economy. Credit is one of the main pillars of the prosperity in the US. Come what may, chucky (the US consumer), has to continue spending to grow the US economy. That is the job of the Fed.
Though it seems certain that the Dem's will form the next govt, the republicans will want to contain the current mess until after elections to limit the political damage.
I wouldn't didmiss the Feds move to cut the discount rate as nonsensical although i do get your point.
The move wont affect consumer interest rates but it will certainly bail out cash strapped businesses such as mortgage co that have been having trouble meeting their short term needs.
During their last meet, they weren't too concerned about economic weakness from the subprime fiasco as they were about inflation. that will all change. A rate cut next month of the federal funds rate is inevitable!
Its called the barneke put
JM-Yes ECB was caught up in this fiasco. Bank of England told banks they won't get bailed out. Also note that the UK FSA had already warned banks that if they couldn't trace their mortgage loans, they shouldn't be securitising them.
Ssem/Fedha/Alexcia-This is a bit like you lending me money, I go put in a pyramid scheme which promptly goes belly up, then I come to you for more. Please read this post http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/08/liars_loans.html and comments. PS-was done today.
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