The Fed Blinked: Now, What?

With news this morning that the Fed is cutting the Fed Funds rate by three-quarters of a percent, it’s official: Things are worse than they seem with the economy.

Trouble, as has been pointed out here previously, is the “what if they give a party and nobody comes” syndrome. In this case, what if they do a big-bath cut and it doesn’t help?

They got the answer pretty fast: The consumer is doing horribly. The value of their homes, especially in the most inflated parts of this country, has deflated. The availability of credit via their homes or other sources has deflated. The value of their 401ks and IRAs has deflated.

Here’s the problem: Even if rates once again fall to boom-era levels, credit standards have tightened to the point that even a hefty tablespoon of sugar won’t help the medicine go down. And don’t go thinking everybody will refinance as mortgage rates slide. Unfortunately, their homes may not appraise out. Batten down the hatches: Ain’t over yet for the bad news — or the Fed.

DAMAGE REPORT
Riding out a bear market
Index Tuesday YTD
Dow -1.1% -9.8%
Nasdaq -2.0% -14%
S&P 500 -5.6% -18%


http://blogs.marketwatch.com/greenberg/2008/01/the-fed-blinked-now-what/

If they want us to buy their junk.

Of course, they don't care. This was deliberate. I'm still betting that they'll run the economy into the ground to roll out the Amero.

Time will tell.

running around like Chicken Little after drinking 2 pots of coffee.

Even if it is to happen, all that doesn't mean it's a BAD thing in the end?

When Bushco does it, it's ALWAYS a bad thing in the end :evilgrin:

As for why I mention it, far too few people understand where dollars come from. they don't know that the Fed could fix this in a second. That's an important fact, IMO.

Besides, do you really think they'll let us trade out our dollars for equal Ameros? I doubt it...

care to expound?

and 'Fordism' was coined to refer to that. To my mind, that sort of employment-driven consumption economy has been the basic model since then; it's the last twenty years that have seen that change to squeezing employees and yet somehow expecting that goods would still be bought (I guess that's why they had to move to an free-trade, export model).

That was my point of view on how an economy should work, but what do I know? :evilgrin:

n/t

I think it illustrates your point perfectly. (We have the worst ratio of profits to employee salaries since before the 1929 crash).

We're in an inflationary environment with weak job growth and productivity gains. It's something akin to stagflation. Stagflation is brought about by energy price instability, such as what we are seeing now. The 1970s is a prime case of stagflation with the Oil Embargo and the Iranian Revolution. There is no tool in the Fed arsenal to combat stagflation while fuel prices are unstable except simply to freeze interest rates until the instability passes.

However, once fuel prices do stabilize and one sees that inflation is still high, you begin raising interest rates. Right now, the Fed really should not have cut interest rates. The recession is coming, but cutting rates further is only going to turn it into a recession that's even more inflationary than it would've been.

for a loaf of bread, then it's great. If your interest rate is fixed, and your income rises with inflation, then your debt will be relatively smaller.

The move cut the Fed funds rate, the central bank’s target for overnight interbank interest rates, to 3.5 percent, from 4.25 percent. It was the biggest percentage point cut in almost 23 years

http://www.nytimes.com/2008/01/22/business/23cnd-stox.html?ex=1201669200&en=7c83a71da901fbe0&ei=5065&partner=MYWAY

That's been part of what's driving inflation now. With this rate cut, and the expected one next week, inflation is going to go up even more. Bernanke might have just fired up the printing presses, the effect would have been the same thing.

This administration is making all the wrong moves. First their stimulus package trial balloon last week. Eight hundred dollars per person isn't going to go a long way to stimulating the economy, especially since most folks will use that money to pay off debt and bills, not go out and get a plasma TV or such. But hey, just charge another 150 billion on our tab, our grandkids can pay it off.

Now this move by Bernanke, sure, it might have postponed a huge drop in the markets today, but the thing is that the fundamentals of our economy suck right now, and no matter how many cuts you make, you can't change that reality. All you're doing is throwing the problem of inflation into the mix.

We need to face facts, economically this country is fucked. We've got a huge load of national debt. Most people have huge loads of personal debts(ten thousand is what is carried on the average credit card tab:wtf:) Jobs are disappearing, especially well paying jobs. Housing sector bubble is popped, and going to remain that way for at least a couple of years or more until the inventory of houses is soaked up. Consumer confidence is down and likely to get worse. All these and more in terms of fundamental economic factors are tanking, and they won't be picking up until some major problems are fixed. Sadly, neither this president, nor any of the major contenders for being the next president have come up with any plan to implement positive long term solutions. Instead, they're all offering band-aids and help for corporations in some sort of bizarre trickle down.

Frankly I think that we're screwed, and going to remain that way for a long time.