Emergency FED rate cut...on a SUNDAY night...whats going on?

Bloomberg.com: Worldwide

The forcing through of the Bear Sterns deal at 2 USD and now this. They wanted to get this stuff done to stop a potential collapse in the financial markets before they open. This is desperation, and it looks like the FED know the situation is really bad. They are destroying the currency and causing serious inflation. This is going to work for a very short time, and make the problem much more serious. The bubble has burst and they should let it deflate.

Human Action, Mises wrote:

The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.[1]

and...

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.[3]

Dire situation....

Trying to prevent the waterfall from starting in Asia

Edit: Daily "stick save" doesn't appear to be working since US Futs have reversed down and Yen is very firm.

3.25

Not only did the FED cut again on a weekend they also opened up the discount window to Investment Banks for the First time since the great depression.

High interest rates didn't cause the problem so why should cutting them solve it?

0007 said:

High interest rates didn't cause the problem so why should cutting them solve it?

Click to expand...

Your right it wont. I personally believe less (Gov) is more and the strong will survive. It's a good old recession going on.

Besides the Fed Cut 1.25 in a short period @ Jan expirations and the Banks werent passing on the cuts. NO ONE is lending. All US companies are hunkering down for the long haul.

Just look at TGT, they sold off % of Credit card receipts just to raise cash for the prolonged recession. First time TGT has ever done that.

Lucky,

Bush doesn't have much longer in office, Bernanke's future doesn't look too bright. Maybe the Fed will go 'all in' - "Fck it, 2% off".

Grant.

grantx said:

Lucky,

Bush doesn't have much longer in office, Bernanke's future doesn't look too bright. Maybe the Fed will go 'all in' - "Fck it, 2% off".

Grant.

Click to expand...

Thats what Cramer just asked for (on CNBC).

lol I hope so, I can refinance some college loans then.

Jim Rogers has just said these actions will lead to the demise of the FED. JIm Rogers has been very right about alot. he said Citibank would go to 5USD and people laughed at him on Bloomberg, CNBC...they aint laughing now. He is also up 400% on his commodity account since 1999. Band aid after band aid is only making this situation much worse. Look at every case where money was printed at this rate...

Long term play...when interest rates bottom...and inflation becomes worse than the 7-10 % its at now, start to build up long positions on interest rate futures...retire by the beginning of next decade...?

tradewinds said:

Long term play...when interest rates bottom...and inflation becomes worse than the 7-10 % its at now, start to build up long positions on interest rate futures...retire by the beginning of next decade...?

Click to expand...

Agree there TW. But what's your view and timescale for US rates dropping and then bottoming? The next 2 years or so?

This is a hunting ground for the Buffets of the world.

luckyd1976 said:

Get ready for a USDollar carry trade lol

Personally I think this is alittle overblown but it's still historic.

Some are arguing that this is a Deflation not inflation so expect to keep US rates low for awhile. (ie... Japan) longtime low.

I feel after this all shakes out 2-3quarters We are setting up for a good US turnaround. Besides many Corp books (nonFinancials) are flushed with cash and earning were good. Now rates are Exremely cheap.

Click to expand...

Well,it has been both. Deflation came first, that was what has taken us to this stage of inflation. I mean deflation is a positive...who doesnt want their money to have more purchasing power. However there is one situation where deflation is a disaster. Especially defaltion of assets.That is when there are high levels of debt in an economy. So you see originally deflation was bothering Bernanke back in 2005. He was worried about house prices falling, asset deflation when debt levels was astronomical...so his answer was to keep printing money, and keep inflating this monster bubble by way of credit expansion. Now even though the FED raised rates to 3.75% in 2005, this was still way below the unofficial level of inflation which was 5%, and also below the nominal GDP growth. So even though the FED was raisng interest rates, money supply continued to grow at unprecendeted rates. Credit growth in real estate grew by 17% that year, bank credit by half a trillion. Basically credit grew 4 times faster than GDP. For every dollar produced, 4 dollars were added to debt. This serious credit growth caused inflation, leading to even higher interest rates and then at higher interest rates "the cheap"debt became unmanageable for too many Americans. When the US consumer and the US subprime market started to feel the squeeze, asset deflation set in again.

Housing started to drop...inventories went up and the house bubble burst

Scary stuff....?


So now he has cut rates again, and is trying to prop up the market and bail everyone out who made a 500,000 dollar mortgage 32 times over before getting any of the debt paid back.

Now that the banks and the consumer and the government are indebted to the eyes balls we have low interest rates, no liquidity and high inflation (aka,stagflation)

Interest rates in the longrun will have to increase alot more than they were before they started to bring them down. High debt levels will be there for years with higher interest rates which will mean low or negative growth... this is a pretty dire situation for the general public....


Who knows really when this carnage will end. No one could really pick the top, so a bottom will be hard to pick also. The derivatives time bomb is still ticking also, give it 3-6 months to implode.

Tradewinds,

What exactly is meant by 'printing money'? Is it simply that (from the printing presses) but has nothing to back it (what should it be backed by?). If all this excees money is flooding the country, how is the damage - actual or potential - manifested.

Grant.

grantx said:

What exactly is meant by 'printing money'? Is it simply that (from the printing presses) but has nothing to back it (what should it be backed by?). If all this excees money is flooding the country, how is the damage - actual or potential - manifested.

Click to expand...

He doesn't mean the creation of actual bills, but rather the addition of bank reserves to the system. When the Fed adds reserves to the system (generally through open market operations) it increases the base from which banks can create loans. By extension, that increases money supply.

Of course, if the banks aren't willing to actually make loans and/or individuals and businesses aren't interested in taking on additional debt, then all the fresh new reserves pumped into the system is meaningless. That's why to really know what's going on with money supply you need to track bank lending.

Rhody Trader said:

Of course, if the banks aren't willing to actually make loans and/or individuals and businesses aren't interested in taking on additional debt, then all the fresh new reserves pumped into the system is meaningless. That's why to really know what's going on with money supply you need to track bank lending.

Click to expand...

Remember the FED's emergency weekend cuts Jan. 21st (SocGen weekend) 1.25% cuts from then to Mid Feb and Real nominal Main streeet rates were higher. Mortgages Averages went up 6.16-6.25 (no one is passing it on.) I dont expect a big cut today from the Fed. Those actions in Jan-now have proven the fed cuts arent working. But the financials now have the FED PUT (30Bil for Stearns mortgages with no Mark to Market requirements) and thats all the markets will need at this time for confidence to return. I expect 25-50 basis only today.

luckyd1976 said:

Remember the FED's emergency weekend cuts Jan. 21st (SocGen weekend) 1.25% cuts from then to Mid Feb and Real nominal Main streeet rates were higher. Mortgages Averages went up 6.16-6.25 (no one is passing it on.) I dont expect a big cut today from the Fed. Those actions in Jan-now have proven the fed cuts arent working. But the financials now have the FED PUT (30Bil for Stearns mortgages with no Mark to Market requirements) and thats all the markets will need at this time for confidence to return. I expect 25-50 basis only today.

Click to expand...

The most recent cuts have finally steepened the yield curve, which has been something I think the Fed's been after all along here. Unfortunately, I think that steepening has come more from inflationary concerns at the long-end than something positive.

I would love to see the Fed do something totally unexpected. Make my job as an analyst much more fun. :cheesy:

John,

Thank you for the clarification re money supply.

And Lucky,

Isn’t it the case that mortgage rates have risen because they reflect the (increased) yield at the long end (30 year) of the curve?

John,

Why would the Fed want a steeper curve – to attract buyers for its bonds?

Grant.

grantx said:

John,

Thank you for the clarification re money supply.

And Lucky,

Isn’t it the case that mortgage rates have risen because they reflect the (increased) yield at the long end (30 year) of the curve?

John,

Why would the Fed want a steeper curve – to attract buyers for its bonds?

Grant.

Click to expand...

I can't remember where Mortgages are tied to honestly. Are mortgages tied to 30yr???

LOL I always thought everything was tied to profit. (Libor +3.5%, Prime +10%, etc...)

But the Fed wants a steeper curve so the Banks and financial centers can make $ and keep the economy flowing. Besides selling higher interest rate Treasury Bonds, Banks are the ones that borrow on the cheap from the curve and lend out on the longer higher rates.

Lucky,

Thanks for the info.

I suppose if banks borrow cheap money, sit on it waiting for the long bond yield to rise, then say, "Sorry Mr X, the yield on the long bond is up, therefore your mortgage repayments are up". A cynical form of 'yield pick-up', possibly.

Grant.