Wow, the Federal Reserve just cut....

[huntercgr]

the interest rate by 3/4 !!!! This will provide some water cooler action today.

[Pete]

Of course, that's the overnight, inter-bank rate. It's unlikely to affect consumer loan rates dramatically any time soon.

[Springer43]

Originally Posted by Pete

Of course, that's the overnight, inter-bank rate. It's unlikely to affect consumer loan rates dramatically any time soon.

Pete - Why is that? I've never understood the sort of indirect connection between the prime rate and the actual morgage rates offered? Why would one move up or down and not the other follow directly?

[TheRogue]

I just hope it's not interpreted as a sign of panic, that's a huge cut considering how low the actual rate is!!

[dixiefisher]

no doubt....they are really trying to save a bad down swwing I guess....is it true that wall street isn't even open????....I heard that on the radio about 6:00

[backlash442]

Market doesn't open until 6:30 a.m. Pacific Time.

I was wondering if the Feds would step in last night after seeing what Europe and the Asian markets were doing the past 2 days. I think Tokyo was down around 9% in 2 days. I thought naw not 75 bps but they sure did.

So is the economy as bad as the 75 bps cut warrant? Is it just to quell panic? Looks like it may work as the market has already recoverd 200 points from the open. As long as there is uncertainty in the market look for it to keep going lower. Market hates uncertainty. If earnings continue to be negative or more importantly forward statements then the market will continue to drop.

There may be bargins out there right now but there could be even better ones over the next few months or longer. Time will tell. So how many are bullish now??

[Bucolic buffalo]

That is great. Now if they would just give us a tax refund so we can go out and buy a bunch of Chinese made stuff the economy would be better.

[dixiefisher]

So how many are bullish now??

I don't consider myself too bullish....but, ironically the day I rolled a bunch of assets over to start my daughter's college fund....happen to be the worst day in market history in a few years.....man did I take a hit!!!....but, the next few days will be interesting to say the least......I really feel sorry for some guys who are about to retire this month..........

[SOL]

Of course, that's the overnight, inter-bank rate. It's unlikely to affect consumer loan rates dramatically any time soon.

Not true... The Prime Rate is usually pegged to the FFR at 300BPS higher (WSJ Prime Rate). Consumer loan rates, while won't dramatically fall, they will fall.

[Joe Schwab]

Originally Posted by dixiefisher

I don't consider myself too bullish....but, ironically the day I rolled a bunch of assets over to start my daughter's college fund....happen to be the worst day in market history in a few years.....man did I take a hit!!!....but, the next few days will be interesting to say the least......I really feel sorry for some guys who are about to retire this month..........

I retired on a down market with my retirment tied to variable. I got three huge raises the next three years as the market rebounded. Then took a cut when it recessed again then back up every year since. I know I'm well ahead than if I had frozen my funds. Of course I had the advice of a good Jones manager.

[Abalone]

Gold futures are up 1 % .

Lets see if I got this right.

The economy stiffles, The fed lowers the rate 3/4 % The value of the dollar plumets and Gold continues to Rise.


What next ?

[PGJPJ]

I don’t know, I’m kind of getting the feeling now would be a good time to put some funds back onto the aggressive side. Maybe drop some more money in my son’s Oregon College Savings Plan.

Things look cheap to me. I think all those Wall Street traders are scared of their own shadow. Not that the economy is great, but not this bad.

[CATCH AND EAT]

With money getting a bit cheaper I'm thinking a house or property is looking better all the time. Gonna wait a while and see if the selling market gets a bit more desperate.

Buy land, they don't make it any more.

[BARCHASER]

Dropping interest rates particularly the fed funds rate may not have much of an impact on the economy. If we are in a recession, if you are in business and your sales are down, a lower rate isnt really that much of an incentive to borrower more $. Same with the consumer, if you are worried about your job and already pretty max out on debt, a lower rate isnt going to encourage you to borrow more money.

Just as an aside, the Fed doesnt really even control the Fed Funds rate. The fed funds rate set by the Fed is "nominal" which means it is actually only a range. The real Fed funds rate is set by banks in the overnight market and can, for a time, vary wildly from the rate set by the Fed.
http://en.wikipedia.org/wiki/Federal_funds_rate

[SOL]

Just as an aside, the Fed doesnt really even control the Fed Funds rate. The fed funds rate set by the Fed is "nominal" which means it is actually only a range. The real Fed funds rate is set by banks in the overnight market and can, for a time, vary wildly from the rate set by the Fed.

Not quite...

This is a simple explanation since I'm in a hurry;

The rate cut is a target set by the FOMC. The target is acheived by purhasing back government securities to increase the money supply and lower interest rates. (Not the only way but the most widely used tool in the Fed's open market operations)

There isn't flucation in the FFR or the Prime* rate between any of the 8 meetings/yr...

*WSJ defines the prime rate as "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks."

[PapaHog]

3/4 point... Too little too late.

The fed needs to be proactive not reactive.

[Silver Hilton]

The federal reserve rate is really more of a signal to the economy than anything else. It represents the rate that the Fed charges banks for a short term loan, and is used as a way to squirt more funds into the economy. You can tell from the stock market today how much confidence anyone with business sense thinks about it.

Overall interest rates are driven by supply and demand. The Federal Reserve and US treasury control the money supply in the longer run by manipulating the amount of money in circulation. This is more than just dollar bills, and the mechanism is a bit complex to try to explain here (essentially the treasury buys and sells US T-Bills, adding or subtracting money from the money supply, most of which is bits in comuters somewhere). But what happens is they try to control the growth of the money supply to a faster or slower pace. It's nearly always allowed to grow, though. If the money supply is too small for the level of economic activity, people start bidding the price of money up, which is the same as being willing to pay more for a loan, eg, a higher interest rate.

The problem with lowering interst rates, or increasing the money supply, which is the same thing, is that history is quite clear that this leads to inflation over the long term, which is probably why the stock market took a dive. If Bernanke follows Arthur Burn's style (fed chairman of the 70's) and tries to guide the economy by throwing money at it through low interest rates, we'll likely see rising inflation. That's not good for the people with money. It's good for people who owe money.

This portends a cycle like the late 70's, early 80's. Low interest rates, with inflation, followed by a need to tighten the money supply, in which rates will skyrocket, and people will moan. However, after those rates skyrocket, the stock market will likely do well again, followed by housing. It'll take 10-15 years, though.

My thoughts, which are worth just what you paid for them.

[Dave G]

3/4s of a point is huge. I was just telling the wife an hour ago, watch, they will lower the prime to a point that everyone can refinance their homes to get out of the housing foreclosure disaster. Once we get out of that, up will go the prime. I got my home at 4.99, so a little in lower and I will be in business myself to refinance the home.

[backlash442]

"The problem with lowering interst rates, or increasing the money supply, which is the same thing, is that history is quite clear that this leads to inflation over the long term, which is probably why the stock market took a dive. If Bernanke follows Arthur Burn's style (fed chairman of the 70's) and tries to guide the economy by throwing money at it through low interest rates, we'll likely see rising inflation. That's not good for the people with money. It's good for people who owe money.

This portends a cycle like the late 70's, early 80's. Low interest rates, with inflation, followed by a need to tighten the money supply, in which rates will skyrocket, and people will moan. However, after those rates skyrocket, the stock market will likely do well again, followed by housing. It'll take 10-15 years, though."

SH, the Fed lowered rates after 9-11 how many times? Yet inflation never really reared it's ugly head. Even now inflation really isn't much of an issue since they toss out food and energy. Sure it's up but they say it's relatively tame excluding the afore mentioned food and energy. The market took the dive because it doesn't like uncertainty plus earnings aren't that good. It also made people wonder just how bad things are if the Fed was willing to cut rates by 75 bps.

If rates skyrocket as you suggest the housing market will not do well. As peoples rates adjust upward (not everyone is going to be able to get into a 30 year fixed) they are going to get hammered with higher payments. Also the late 70's and early 80's saw CD's paying out 18% and higher so that definitely wasn't a period of low interest rates. The market will do well if earnings warrant it.

I do agree that you could be looking at 10 years or more for the housing market to recover. Just look at how long it took for Texas and Ca. to recover from the last down turn. Ca. peaked in 89 and didn't stop going down until 96. Took another 4 years or so to get back to the 89 levels.

Market should rebound tomorrow. HK is up over 5% and Tokyo about 2%. Could be a dead cat bounce though.

[Abalone]

They announced that another cut is on the way next week.

To really stimulate growth we'd be better off investing in infrastructure..

Repair our Hwy system, Rebuild Bridges, Build solar farms anything that puts large sums of money back into the economy. That is the real way to Stimulate

[BARCHASER]

You got that right. I was a bank examiner for 36 years for the OCC, 1967 -2003. Retired now. Real Estate markets can take a long time to recover. And then there is the spillover risk from the current residential credit market problems, to coml credit markets, coml real estate developments lose tenants, credit crunch etc. Banks tighten up underwriting concentrating on working out problem loan portfolios (they dont want to add to their problems with liberal underwriting). And then there is the weak dollar and decreasing rates wont help the dollar much and a weak dollar is inflationary. The last time we had a similar go around 1985-1992, the coml and residential real estate sectors had a rolling recession that hit dif parts of the US at dif times. I worked on some banks in Texas, Arizona, So Cal and the NE during that time. And then there is late 70's style stagflation, another horror story. But things could be different this time, do you think? Duh!

Originally Posted by backlash442

"The problem with lowering interst rates, or increasing the money supply, which is the same thing, is that history is quite clear that this leads to inflation over the long term, which is probably why the stock market took a dive. If Bernanke follows Arthur Burn's style (fed chairman of the 70's) and tries to guide the economy by throwing money at it through low interest rates, we'll likely see rising inflation. That's not good for the people with money. It's good for people who owe money.

This portends a cycle like the late 70's, early 80's. Low interest rates, with inflation, followed by a need to tighten the money supply, in which rates will skyrocket, and people will moan. However, after those rates skyrocket, the stock market will likely do well again, followed by housing. It'll take 10-15 years, though."

SH, the Fed lowered rates after 9-11 how many times? Yet inflation never really reared it's ugly head. Even now inflation really isn't much of an issue since they toss out food and energy. Sure it's up but they say it's relatively tame excluding the afore mentioned food and energy. The market took the dive because it doesn't like uncertainty plus earnings aren't that good. It also made people wonder just how bad things are if the Fed was willing to cut rates by 75 bps.

If rates skyrocket as you suggest the housing market will not do well. As peoples rates adjust upward (not everyone is going to be able to get into a 30 year fixed) they are going to get hammered with higher payments. Also the late 70's and early 80's saw CD's paying out 18% and higher so that definitely wasn't a period of low interest rates. The market will do well if earnings warrant it.

I do agree that you could be looking at 10 years or more for the housing market to recover. Just look at how long it took for Texas and Ca. to recover from the last down turn. Ca. peaked in 89 and didn't stop going down until 96. Took another 4 years or so to get back to the 89 levels.

Market should rebound tomorrow. HK is up over 5% and Tokyo about 2%. Could be a dead cat bounce though.

[dixiefisher]

This market is tough to watch these days.....at least my negative math is getting stronger...whew

I have a question though....some of the analyst last night said they thought the fed 'step in' was the wrong move....and that we should 'take our medicine'. what ya think???...was it a bandaid move??....too me it looks like we are in for a long rough stretch....and no 'stimulus' package is going to turn anything around quickly......

[BARCHASER]

I think they had to. If they didnt and things got worse, there would be hell to pay. The Fed would then be held responsible if things got worse. They had to do something and it may also be an attempt to shore up the real estate mortgage market. It will take awhile to work out of this mess. Rate cuts and fiscal stimulis is kind of like a drug, it can kick start things but then again maybe not. We are so much part of the "global economy", more dependent on other countries than in past recessions.

Originally Posted by dixiefisher

This market is tough to watch these days.....at least my negative math is getting stronger...whew

I have a question though....some of the analyst last night said they thought the fed 'step in' was the wrong move....and that we should 'take our medicine'. what ya think???...was it a bandaid move??....too me it looks like we are in for a long rough stretch....and no 'stimulus' package is going to turn anything around quickly......

[backlash442]

Well got the bounce. Lets see if it holds or is indeed a dead cat bounce.

Fed chose the lesser of two evils; inflation or recession and they chose recession. Again how serious is this down turn and what do they know that we don't? Guess we'll find out when they publish the minutes of their upcoming meeting.

[Silver Hilton]

Originally Posted by backlash442

SH, the Fed lowered rates after 9-11 how many times? Yet inflation never really reared it's ugly head. Even now inflation really isn't much of an issue since they toss out food and energy. Sure it's up but they say it's relatively tame excluding the afore mentioned food and energy. The market took the dive because it doesn't like uncertainty plus earnings aren't that good. It also made people wonder just how bad things are if the Fed was willing to cut rates by 75 bps.

And Dick Cheney sez that deficits don't matter, either.

The issue isn't interest rates per se, it's how they are maintained. To get interest rates low, there has to be a supply of dollars to allow loans to be made at the rates. Otherwise, the rates will rise. The Chinese helped us by pumping dollars back into the credit markets, essentially loaning us back the dollars we sent them in trade. They are now allowing their currency to rise, and have had the snot kicked out of them financially as the dollar has declined in currency markets. How long do you think they will take those losses?

The fed lowered rates throughout the late 60's and 70's, and then the oil shock hit. Inflation was rising from the late 60's when they were worried about 2, 3 and 4% inflation (sound familiar?), and then took off when oil skyrocketed, (sound familiar?) Monetary policy/effects work through long time frames. The fed themselves note that inflation is creeping up. Saying that it's only in oil and food misses the point, because gas and food are two of the three things that you kind of have to have.

Add to this the federal deficit. In order for the government to pay the bills that are accumulating, one of three things has to happen:

1) taxes wil need to rise to historically high levels

2) the economy whas to massively grow while maintaining current tax levels

3) prices need to rise so that the real value of the debt declines in proportion to the economy.

I'm betting on number 3. In the long run, the deficit has to get resized to a reasonable proportion of the economy, or the economy will fail. See for example Argentina, or Germany post WWI.

As someone else noted, those who do not study history are likely to repeat it.

[fishbait]

Well the Fed cut rates, the stock market liked it but mortgage rates took a dive and are headed back up. Already had 2 mid day price adjustments.

Don't ya just love wall street..........

[BARCHASER]

Monetize the debt? Yup, thats the age old trick when debt gets too heavy, just pay it back with cheaper dollars! What a joke!

One positive note, all these writedowns are coming out of the CMOs, subprime mtge backed securities, for wall street firms and the non bank BHC Subs that Citibank and some others have. I havent seen much to indicate the malaise has spread into the general economy. I still correspond with guys who are active bank examiners. They tell me that the loan loss reserves are still adequate and credit quality in the Commercial and CRE portfolios is OK. Consumer credit quality is another matter however, sinking pretty fast.

Speaking of Citibank, under Sandy Weil it became much less of a commercial bank and much more of a wall street investment bank. But they are still a BHC and subject to Tier 1 and risk based capital rules. That equity sale to the arabs and sovereign funds took place awful fast. I wonder if they may have been down to the minimum numbers for the capital adequacy rules.

If economic problems spread to the general economy and commercial bank loan loss reserves have to be replenished, capital adequacy can be an issue and serve to restrict new credit. Wait and see.

I was surprised that BofA bought Countrywide. But then, that was the nature of the old Nationsbank, they took risks. Nationsbank really got started buying all those busted banks in Texas in the 80's, and then they pretty much bought everything in sight including BankAmerica. And now they have almost 10% of all commercial bank deposits in the US.

Nice discussion.

Originally Posted by Silver Hilton

And Dick Cheney sez that deficits don't matter, either.

The issue isn't interest rates per se, it's how they are maintained. To get interest rates low, there has to be a supply of dollars to allow loans to be made at the rates. Otherwise, the rates will rise. The Chinese helped us by pumping dollars back into the credit markets, essentially loaning us back the dollars we sent them in trade. They are now allowing their currency to rise, and have had the snot kicked out of them financially as the dollar has declined in currency markets. How long do you think they will take those losses?

The fed lowered rates throughout the late 60's and 70's, and then the oil shock hit. Inflation was rising from the late 60's when they were worried about 2, 3 and 4% inflation (sound familiar?), and then took off when oil skyrocketed, (sound familiar?) Monetary policy/effects work through long time frames. The fed themselves note that inflation is creeping up. Saying that it's only in oil and food misses the point, because gas and food are two of the three things that you kind of have to have.

Add to this the federal deficit. In order for the government to pay the bills that are accumulating, one of three things has to happen:

1) taxes wil need to rise to historically high levels

2) the economy whas to massively grow while maintaining current tax levels

3) prices need to rise so that the real value of the debt declines in proportion to the economy.

I'm betting on number 3. In the long run, the deficit has to get resized to a reasonable proportion of the economy, or the economy will fail. See for example Argentina, or Germany post WWI.

As someone else noted, those who do not study history are likely to repeat it.

[backlash442]

SH, so how bad was inflation during the past 7 years? It wasn't. Even when Greenspan started to ratchet them up starting in 00 inflation wasn't really an issue either. He really did it to kill "over exuberance" than anything else imo. Don't get me wrong I'm well aware of the cost of food and energy and have said as much; inflation is tame if you don't have to eat and drive to work. But bottom line it still is relatively low right now.

I've said on other threads watch what happens if the Chinese let the Yuan float and or stop buying US Treasuries. I also stated that I have a friend that works for a large mainland BD and he said they need to get permission to write about the treasury issue from the central government (how sensitive is that?). Therefore nobody will write about it. Of course if you are a Quai Po/Lo then you can write all you want but just don't say anything to negative or you might not get an allotment of the next round of Chinese A shares.

Oh and how long has the US been operating at a deficit? It doesn't matter as long as there are buyers of US Treasuries. Stop buying and then we face a problem.

[Silver Hilton]

Originally Posted by backlash442

Oh and how long has the US been operating at a deficit? It doesn't matter as long as there are buyers of US Treasuries. Stop buying and then we face a problem.

The chinese have been heavy buyers of Treasuries over the last several years, and have just had the value of their purchases cut by 30% due to the decline of the dollar. If you were them, would you continue to buy/hold treasuries? I think it's naive to expect that situation to continue, but that's just one guy's opinion.

The US has been operating at an increasing deficit since 2000. We were operating at a surplus at the end of the Clinton years. Interestingly, the amount of our current annual deficit is about the amount of our interest payments on the debt. In other words, if it wasn't for the deficit spending of the past 7 years, we wouldn't have a deficit now, and the Chinese wouldn't have cheap T bills to buy, because the supply would be constrained.

Call me crazy, but I just don't see how anyone can say that deficit spending doesn't matter. It has it's time and place, but it also has it's costs, which will be borne by our kids. I think it's irresponsible and reprehensible to continue to spend dollars we don't have, and plan to do so indefinitely. That behavior led to the French revolution, if you want to think about consequences.

[BrianMaguire]

Originally Posted by Abalone

Gold futures are up 1 % .
Lets see if I got this right.
The economy stiffles, The fed lowers the rate 3/4 % The value of the dollar plumets and Gold continues to Rise.
?

Exactly, gold is a neutral way to value currencies against each other. If gold is worth X Euros and Y Dollars, and the dollar falls in value to the Euro (we printed a boat load of them to buy oil and garbage from China on our giant credit card) but the Europeans did not then gold is still worth X Euros and y+change dollars. So gold rises in dollar terms but not in other currencies.

[BCF]

Originally Posted by CATCH AND EAT

With money getting a bit cheaper I'm thinking a house or property is looking better all the time. Gonna wait a while and see if the selling market gets a bit more desperate.

Buy land, they don't make it any more.

You should be scared....we agree.

BCF

[JustCallMeDave]

This conversation was going on delightfully as it discussed our current economic situation, up to the point where someone made it partisan. You'll find that most all of the posts after that point have been "disappeared". Granted there was some content worth merit in there; however, every post removed had a definite partisan statement in it so the entire thing has been removed. I don't feel like playing "patchwork postings" and surgically removing the garbage.

There was a suggestion that post #29 above was partisan, regarding the figures from 2000 forward. I am here to tell you that providing the published fact that our deficit spending has increased dramatically since 2000 is not partisan.

Now, let's get back to the interesting discussion at hand without the political jabs. It was going just fine.

P.S.: To those who stated that you would not get away with it if you had posted the same thing, you're right. Nobody does, at least they don't once we find out about it. Thanks go to the person who alerted this thread so that I could pass some time until Woot listed their next product. It's 10 o'clock so I'm outta here.

[edit] A DYSON VACCUUM? *sigh*

[fishbait]

Well the Fed is meeting right now and will anounce any rate changes tomorrow.

Should be another interesting week.

[CATCH AND EAT]

Originally Posted by BCF

You should be scared....we agree.

BCF

Does'nt scare me a bit brother. We probably agree on more than we want to admit.