Global Coordinated Rate Cut: Nice Try, but the Party Is Over

by: Michael Shedlock October 08, 2008    
Michael Shedlock

Michael Shedlock

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This morning the Fed, ECB, Bank of England, Bank of Canada, and Sweden's Riksbank all cut rates by 50 basis points. Japan is on the sidelines cheering.

US Futures that were down as much 4% are now in the green. Short term perhaps the market was due for a bounce, perhaps not as the day is young, but longer term one cannot cure a solvency issue with rate cuts.

Let's take a look at some of the Central Bank statements. My additional thoughts following the Central Bank statements.

Joint Statement

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Fed Statement

The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Bank of Canada Statement

The intensification of the global financial crisis is having a marked impact on all countries. In recent weeks conditions in global financial markets have deteriorated sharply, the U.S. economy has weakened further, and commodity prices have fallen abruptly.

As a result of these developments, credit conditions in Canada have tightened significantly, despite the relative health of our financial institutions. Weaker growth in the United States and other important trading partners will increase the drag on the Canadian economy coming from net exports. The deterioration of our terms of trade will act to moderate the growth of domestic demand. While the recent depreciation of the Canadian dollar will help cushion the effects of the weaker global outlook on the domestic economy, it will not completely offset them.

Below-potential growth in aggregate demand through 2009, combined with a lower profile for commodity prices, will significantly ease inflation pressures in Canada. Inflation expectations remain well anchored.

In view of these developments, the Bank of Canada decided to join other major central banks and lower its target for the overnight rate by 50 basis points today. This action will provide timely and significant support to the Canadian economy. The Bank will continue to monitor carefully economic and financial developments, along with the evolution of risks, in judging whether any further action might be required to achieve its 2 per cent inflation target over the medium term.

Bank of England Statement

In the United Kingdom, CPI inflation rose to 4.7% in August, reflecting increases in food and energy prices. Inflation is likely to rise further to above 5% in the next month or two, in large part as the full effects of already announced increases in the price of domestic energy are felt. But inflation should then drop back, as the contribution from retail energy prices wanes and the margin of spare capacity in the economy increases. Pay growth has so far remained subdued and commodity price pressures have eased, with oil prices down substantially from their mid-summer peak.

Conditions in international credit and money markets have deteriorated very markedly. Many markets are closed. In the United Kingdom, the supply of credit to households and businesses is clearly tightening further as banks seek to adjust their balance sheets. The Committee noted that cuts in official interest rates could not be expected to resolve the current problems in financial markets and that a significant increase in the capital of the banking sector would be required. The Committee therefore welcomed this morning’s announcement of a Government programme to recapitalise the major UK banks.

Data released over the past month indicate that the outlook for economic activity in the United Kingdom has deteriorated substantially, reflecting a sharp monetary contraction. Output growth slowed to a halt in the second quarter, business surveys point to further weakening during the second half of this year, and the labour market has softened. Consumer spending growth has slowed, in part as a result of the squeeze on real incomes, while business and dwellings investment have declined. Equity prices have fallen, and the further tightening in credit conditions will also weigh on domestic demand growth. The depreciation in sterling over the past year should support net exports, but the prospects for demand growth in the UK’s main export markets have worsened. The weakness in output growth at home will open up a growing margin of spare capacity that will over time bear down on inflation.

The Committee remains focussed on setting Bank Rate in order to meet the 2% inflation target. In doing so it continues to balance two risks. On the downside, there is a risk that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulls inflation materially below the target. On the upside, there is a risk that above-target inflation this year and next raises inflation expectations so that inflation persists above the target for a sustained period. During the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside. In the light of that outlook, the Committee judged at its October meeting that an immediate reduction in Bank Rate of 0.5 percentage points to 4.5% was necessary to meet the 2% target for CPI inflation in the medium term.

Swiss National Bank Statement

The Swiss National Bank (SNB) has decided to ease conditions in the money market by 50 basis points in a bid to bring down the Swiss franc three-month Libor from its most recent level of 3% to 2.5%. To this end, the SNB is lowering the target range to 2–3%.

The global financial crisis has intensified and is having a considerable impact on the international economy. The slowdown in economic activity in the US and Europe is more severe than what the SNB had forecast at its last monetary policy assessment of 18 September 2008.

The Swiss economy is also affected by these developments. Economic growth for 2009 will be weaker than expected at the last assessment. In view of the improved inflation outlook, as a result of the economic downturn and the low oil prices, the SNB is now able to loosen its monetary policy reins.

The Swiss National Bank will continue to provide the Swiss franc money market with liquidity in a generous and flexible manner. It will keep a close watch on developments in the financial markets, so as to assess their impact on economic activity and the inflation outlook and be able to react swiftly, if necessary.

Sweeden's Riksbank Statement

The Executive Board of the Riksbank has today decided to cut the repo rate by 0.50 percentage points to 4.25 per cent. The global financial crisis threatens to reinforce the current slowdown in economic growth with diminished inflationary pressures as a result. Several central banks are today announcing reductions in policy rates in a coordinated action to dampen the consequences of the ongoing financial crisis.

Weaker economic growth in Sweden

The Executive Board of the Riksbank makes the assessment that economic growth in Sweden is slowing down and that inflationary pressures are diminishing as an effect of the financial crisis. This has led to higher interest rates for companies and households, lower capital wealth and increased uncertainty. The Riksbank’s forecast for both inflation and GDP will therefore be revised down.

The labour market is also showing clearer signs of weakening. The downturn in economic activity and lower oil and other commodity prices indicate that inflationary pressures will be lower in the future.

Although developments in Sweden to some extent differ from those in other countries, a cut in the repo rate is warranted here. The fact that the cut is a joint action together with other central banks increases confidence and the likelihood that it will have positive effects. Closer analyses and forecasts of developments in Sweden will be presented after the Executive Board’s next monetary policy meeting, which will take place on 22 October.

ECB Statement

The Governing Council of the ECB, by means of teleconferencing, has taken the following monetary policy decisions:

The minimum bid rate on the main refinancing operations of the Eurosystem will be reduced by 50 basis points to 3.75 %, with effect from the main refinancing operation to be settled on 15 October 2008.

The interest rate on the marginal lending facility will be reduced by 50 basis points to 4.75 %, with immediate effect.

The interest rate on the deposit facility will be reduced by 50 basis points to 2.75 %, with immediate effect.

In the euro area, upside inflationary risks have recently decreased further. It remains imperative to avoid broad-based second-round effects in price and wage-setting. Keeping inflation expectations firmly anchored in line with our objective and securing price stability in the medium term will support sustainable growth and employment and contribute to financial stability.

Bank of Japan Statement

The Bank of Japan welcomes the policy decisions made by six central banks and hopes that these actions will contribute to securing the stability of both the financial systems and economies of these countries.

In Japan, policy interest rates are very low and the monetary conditions remain accommodative. On top of that, the Bank has engaged itself in decisive actions of liquidity supply, ranging from the uninterrupted provision of ample yen liquidity in the market to the introduction of US dollar liquidity operations. Against this background, Japan’s financial market has been stable in comparison with those in other industrialized countries.

It is of utmost importance for every central bank to maintain stability of financial markets amidst the ongoing financial turmoil. The Bank of Japan will continue to do its best to secure the stability of financial markets through money market operations while staying in close cooperation with other central banks. From this perspective, Governor of the Bank of Japan has instructed its staff to swiftly examine possible ways to further enhance the effectiveness of monetary operations, including those pertaining to BOJ reserve system.

Global Recession Headed Our Way

The world is heading for a global recession and a sure bet is that it will be blamed on a subprime crisis in the US. The reality is the greatest liquidity experiment in history is now crashing to earth.

The root cause of this crisis is fractional reserve lending, and micromanagement of interest rates by the Fed in particular and Central Banks in general. The Fed started the party by slashing interest rates to 1%, but Central Banks everywhere drank the same punch to varying degrees.

The Greenspan Fed lowering interest rates to 1% fueled the initial boom, but like an addict on heroin, the same dose a second time will not have the same effect. The Fed, the ECB, etc. could have slashed rates to 0% today and it would not have mattered one bit.

The reason is simple: There is no reason for banks to go on a lending spree with consumers tossing in the towel, unemployment rising, and rampant overcapacity everywhere one looks with the exception of the energy sector.

Consumers are tapped out, not just in the US, but in nearly every country on the planet. We had our party, and a fine party it was. However, the party is over and the bill is now past due. The price is a global recession. That price must be paid no matter what Central Banks do.

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This article has 28 comments:

  •  
    Oct 08 12:30 PM
    As much as I wish it wasn't true, this article seems to hold water. In this climate, lower central bank rates do not automatically equal growth. In fact, the recent series of attempts to shore-up, bail-out, or just throw money at the economy could backfire by inspiring more fear than confidence. Many will draw the conclusion that unprecedented desperate measures must mean unprecedented desperate times are upon us, and I do not hope for, but fully expect to see further contraction as a result.
    Reply | Link to Comment
  •  
    Oct 08 12:40 PM

    October 8, 2008


    Raising the level of insurance on bank deposits is like pouring gasoline on a fire.

    By: Art Consoli

    There are many reasons why this financial crisis occurred but every one ultimately comes to rest at the throne of the banking industry. The banks did a poor job of making loans: mortgages, credit cards, and automobiles.

    Congress and regulations can’t make the people who run banks smarter or get them to do a better job. The only thing they can do is to examine the role they play in allowing the industry to continue to do a poor job.

    What Congress did to encourage poor performance was to provide depositors with insurance on their deposits. This eliminated measuring the banks’ performance as a criterion for obtaining working capital. What other businesses are able to obtain their inventory (in the banking industry, the inventory is money) without regard to how well the business performs? Does any depositor check the financial statements of a bank before he or she gives it money? No!

    All depositors look for is the interest rate. The only thing we want to know is how much is the bank going to give us for using our money. And the higher the interest rate, the more we give them. And who wants the most money? The banks that are doing the worst. They want - no, desperately need - the most money. And why do we not care how well run the bank is? Because we know the government will give us our money back if the bank fails. Yes, I know there are limitations but they can be circumvented.

    Certainly deposit insurance helped restore confidence in the banks during the depression, but now deposit insurance has outlived its usefulness. By allowing poorly-run banks to obtain deposits the FDIC allows them to stay in business

    Take away deposit insurance and depositors will become much more interested in how well a bank is run. Poor performers won't get deposits and well-run banks will get all the money they can use.

    AND properly managed banks won't have to match the higher interest rates offered by the poorly run banks. Yes, as a depositor I want high interest rates but what I don’t want is a bank putting my money at risk in poor investments. And isn’t that the only way a bank can pay high interest rates? It has to loan my money to less capable borrowers and more risky projects; those who will pay anything to get their loans.

    In addition, good banks won't have to pay the cost of deposit insurance Remove this expense from the bank’s operation and they will be more profitable. Banks will be better investments for those who want to buy their shares.

    If the government does provide the bailout then it better quickly begin to get its house in order. The days of free spending are over. Serious cuts will be required for our country to get back on the productivity, prosperity track. AND one of the first places to reduce costs would be to eliminate the FDIC.

    With no FDIC we would save the cost of that department and we would cut the tie that binds the government to the financial institutions. Banks would have to compete and perform. The market would deny those that are poorly run the funds they need to continue.

    Providing deposit insurance is just another form of subsidies. And when we subsidize anything including poorly-run banks don’t’ we "insure" that we will get more of them.
    Reply | Link to Comment
  •  
    Oct 08 12:48 PM
    Who needs deposit insurance on demand accounts anyway? Why is the bank loaning out money that is supposed to be available "ON DEMAND"? Bank runs reveal a dishonest banking system.
    Reply | Link to Comment
  •  
    Oct 08 01:07 PM
    "The root cause of this crisis is fractional reserve lending, and micromanagement of interest rates by the Fed in particular and Central Banks in general."

    Amen, Amen, Amen.

    Notice how important "confidence" is to our economic system?
    This generally means someone is being "Conned".
    Reply | Link to Comment
  •  
    Oct 08 01:23 PM
    Art your analysis on insured deposits assumes that no one is watching the hen house. We do have banking regulators and they do audit banks all the time, so someone is checking up on them. What deposit insurance does is protect depositors. This protection reduces the risk of a run on the bank by a bunch of depositors acting on rumors as opposed to a true assessment of the bank's solvency.
    Reply | Link to Comment
  •  
    Oct 08 01:25 PM
    "Michael Shedlock, in your opinion, the end of the world coming?

    Get a life, you blithering idiot.."

    Instead offering insults, how about some insights?

    MS is surprisingly spot on and when I read his thoughts and combine them with others I trust for reasonable insight; I'm better prepared for the future.

    Thanks to MS and others, I moved all of my 401K into much safer investments while the DOW was in the mid 13,000's.

    The way I see it, "blithering idiots" like Michael have spared me a loss of about $165,000.

    Thank you MS and others:)
    Reply | Link to Comment
  •  
    Oct 08 01:29 PM
    Kudos to Seeking Alpha contributors for warning of these problems for months while the establishment news outlets stuck to happy talk until a couple weeks ago.
    Reply | Link to Comment
  •  
    Oct 08 01:40 PM
    Capitalism has thrived with banking its centerpiece for 300 years, not 7 or 35 or 95. No, the fault does not lie with banking.

    As for the comments about sound banking this and checking up on them that, you won't have any banks. You don't deserve any banks, all you do is trash them.

    This is readily fixed if the authorities just stop listening to the populist luddites demanding bankers be slaughtered and actually help them. It won't help the populists either way, they will pay regardless. If they use capital they will pay its full costs, if they won't pay them then they won't have any capital to use.

    How to fix, easy, just act like a for profit institution and arb the epic spread between financial bonds and treasuries. If people want folding money for their claims, give them what they want. In the meantime, make it profitable to lend to a banker again.

    The experiment of blaming your heart for your heart attack and cutting it out and burning it, is and always was hopeless.
    Reply | Link to Comment
  •  
    Oct 08 02:14 PM
    "No, the fault does not lie with banking." JasonC

    It appears it does lie with banking. But why should this be surprising? Fractional Reserve Banking started out as a dishonest cheat. Eventually, bankers bribed and pressured governments into legitimizing it. Beside being based on fraud and theft (via inflation) it is also responsible for the so called business cycle as the Austrian economist point out.

    Honest or at least stable banking is possible. We should return to "free banking" and competing currencies but this time with no government involvement other than enforcement of the usual laws against theft and insolvency. Fractional reserve banking might even work since bank runs would keep it in check.
    Reply | Link to Comment
  •  
    Oct 08 02:19 PM
    WoW great article. I think you hit the nail on the head.

    One world economy? One world government?
    Reply | Link to Comment
  •  
    Oct 08 02:21 PM
    No doubt that the credit crunch and global slow-down are behind the nose-dive in stocks, but I'm surprised no one is commenting on the Obama-Effect. As Obama stretches his lead and a Dem sweep has become more and more likely, the stock market has swooned.

    Say what you want, but Obama is no Bill Clinton, especially not with a Dem Congress. We're heading toward a Chavez/Ayres/Alinsky style of anti-business socialism, and traders and investors want out.
    Reply | Link to Comment
  •  
    Oct 08 02:21 PM
    The mega failures of fractional reserve banking and fiat currencies are well established throughout history. Every civilization rose out of wealth measured in gold and fell as gold was replaced by paper.
    Central banking is not the “heart” or “centerpiece” of Capitalism. It is a parasitic cancer. It’s a weapon of mass destruction in the hands of fiat fools.
    The massive market interference by central bankers is 100% responsible for this collapse.
    Reply | Link to Comment
  •  
    Oct 08 02:45 PM
    Wow, you're calling for a global recession? You must be the first person to make that daring call? How on earth did you have the foresight to see through all the good news lately to discern an impending recession. HERE'S SOME ADVICE - TELL US SOMETHING WE DON'T KNOW.
    Reply | Link to Comment
  •  
    Oct 08 03:06 PM
    Everyone knows the stock market does better under democrats. And that these insane right-wing ideologues caused this disaster. Is it a coincidence that the last two military/tax cuts for the rich binge Republican administrations [Bush and the sanctified Reagan] left us with CRUSHING debts, deficits and a pauperized economy by raiding the social benefits of the majority and sucking the blood out of our economy to funnel to their cronies in the military-industrial complex and the government-banking system.

    Free market indeed! Thugs who bankrupt the country, steal our money, give it to already rich cronies (Rumsfeld, Cheney) not real entrepenuers. Not to mention make us hated all over the world by killing innocent third world children to generate MORE money for the same cronies even as the debts eat out or real ecnomy.

    Reply | Link to Comment
  •  
    Oct 08 03:07 PM
    You are bang on target.
    Reply | Link to Comment
  •  
    Oct 08 03:24 PM
    I agree with Art Consoli's post except for one thing. Most depositors can't measure a bank's performance, so market forces won't be at work to reward good banks with deposits and punish incompetent ones with withdrawals. Private companies grade bank performance and bank solvency, but can you trust them? Besides, how do you know how many billions banks have in "off balance" sheet garbage? A federal regulation could force banks to provide easy to understand basic financial information and a financial performance grade for each bank to be posted at each bank. But, who these days trusts the regulators or agrees with government's selection of financial. The whole house of cards is glued together based on trust, and when credibility is gone, so is the house of cards.
    Reply | Link to Comment
  •  
    Oct 08 03:47 PM
    The consumer is tapped out, but I disagree entirely with your cause. At the root of things, the average worker is FAR OVERTAXED. You need to look at the long view to see this building over decades. It is how we have become a credit-driven economy. The first hurdle is now too high for the average person to jump over...and thus the 2nd or 3rd is barely cleared or not at all. Translating the metaphor: we have now reached a point where most average households watch 30-40%+ of their gross income go to the Federal government (first hurdle). Then there are state taxes, property taxes, sales taxes, vehicle registration, fees for burning or disposal of "special" garbage. The list goes on and on, ever-building, never lessening. Is it any flippin' wonder that we can't make the bloody mortgage payment??

    The solution: cut the overgrown government to the core, and drastically cut taxes for *everyone*!! That first hurdle needs to be alot lower so that the hurdlers can keep running --> have some discretionary income left over to both save and spend -- that's how we get growth without ending up over-indebted!!

    The Paulson plan (as well as both candidates' economic plans) calls for socialist bailouts of banks and homeowners. It WON'T WORK. Maybe short term. But not in the long term!! Because all it amounts to is more bloating of government...higher spending...and re-greasing things for renewed lending...how often did you not hear all the talking heads talk about needing to get the credit markets working again, or we'd all perish?? That's *exactly* the problem!! Why are we reliant on credit?? Well-run businesses don't need short-term credit. If it's not turning a profit...LET IT FAIL!! Those are businesses that aren't getting it done to begin with. Seizure of the credit markets is not the cause of their going down!

    Quit the socialism...it does NOT work!
    Reply | Link to Comment
  •  
    Oct 08 04:27 PM
    "Free banking" would allow private deposit insurance. A private company would, of course, charge reasonable premiums and monitor the banks it insured carefully.
    Reply | Link to Comment
  •  
    Oct 08 04:31 PM
    For those crying socialism, you must not have any idea what that word means - look it up, it does not simply mean high taxes. The current crisis is more a function of oligarchy than anything else. In fact, had we had a clear separation of government regulation/ownership from that of competitive business capital we would not be in this mess. This current crisis is in direct proportion to crony capitalism and predatory lending - corporate welfare....fare thee well.
    Reply | Link to Comment
  •  
    Oct 08 04:48 PM
    "Crony capitalism", yes. Bush and Company seem to think that "businessmen"... can spend government money better that bureaucrats. Bush, you dummy, the idea is to shrink government so business can prosper in the private economy.
    Reply | Link to Comment
  •  
    Oct 08 05:14 PM
    A little too dire, nasty for maybe a decade, but not the end of the world.

    Personally I am going to take a decade off and spend a little of my hoard, if it does not come back by then I will starve, or become a nun. Point is: we each must have a plan. Z
    Reply | Link to Comment
  •  
    Oct 08 08:41 PM
    BSexposer,

    MS was predicting a housing/credit-bubble induced worldwide recession 3+ years ago. Feel free to trawl his archives if you don't believe it: globaleconomicanalysis.../

    The only major point on which he and like minded bloggers differed was whether or not it would be an inflationary or deflationary recession.
    Reply | Link to Comment
  •  
    Oct 08 10:59 PM
    don't you think all those brilliant minds understand that lowering rates won't work if banks don't have the money or appetite to lend. They understand things are going south in a hurry and are trying to do anything they can - take it for what it is and move on.
    Reply | Link to Comment
  •  
    Oct 09 12:42 AM
    I continued to be amazed at how naive the world press and people's are.

    What started all this mess?

    Well, let's think - there was only thing that has a common theme for the last 4 years globally...It started here, for the most part, true...but it was credit, although it was money...yep..the great sucking sound of moeny being torn out of the US consumer's pockets- by, no doubt the Bush Team - you know the newly merged up big oil buddies as the price of gasoline begin to rise in late 2004. This was followed by his other close buddies - the Goldie Boys who started the Commodity Index Funds, that drove up the price of oil starting in late 2005, to astronomicla heights through mid-July of this year...so the money left the pockets of the world consumers to flow to OPEC coffers...

    So, no money in the US, then Global System and hence the largest credit crisis in the history of the world. Every Hard Spike in Oil Prices has resulted ina Global Recession...and judging by the severity of this year's spike...the Global Recession/Depression will be (and already is) quite severe. Sub-prime, mortgage defaults and failed US and Euro Bank failures, stock markets tanking...are just the symptoms of the Great Drain. NOTICE that ALL of these problems are in the Oil Consuming Nations....Not the Oil Producing Countires, Not The Arab Banks !

    Thanks Bush and Cheney, Thanks Goldman Slacks and Paulson, the World, if and when it recovers...will never be the same...the POWER has now "SHIFTED" to the East, and you helped the SHIFT occur 4 years ahead of schedule - a schedule that the Mayans Predicted 5K Years ago....

    Dig in guys...its going to get even more inetersting!
    YG
    Reply | Link to Comment
  •  
    Oct 09 06:00 AM
    quote: "Everyone knows the stock market does better under democrats. And that these insane right-wing ideologues caused this disaster."

    I'm no fan of Bush, but if we don't know how we got here, we don't know how to avoid repeating our mistakes.

    Apparently, few seem to know about Robert Rubin (Clinton's Secretary of Treasury) and the *hugely* instrumental role he played in getting us here. Here's a quick education on the matter:

    Rubin discovered a great accounting trick. He discovered that you could take the Social Security "surplus" and add it to the Treasury's balance sheet, and in its place you could write IOU's to Social Security. (Remember Al Gore's SS "lockbox"? This is what he was referring to.) So Rubin, through this accounting trick, created tons of extra liquidity out of thin air. (Rubin himself has written about this) This huge liquidity in turn led to the NASDAQ bubble.

    When that bubble crashed, we should have paid the piper.

    But instead of paying our dues, Greenspan dropped interest rates to artificially low levels and we traded the stock bubble for the housing bubble. Now that's collapsing, and it seems our due can be delayed no longer. But make no mistake about where this all started: it started in the 90's, long before Bush took office.
    Reply | Link to Comment
  •  
    Oct 09 02:41 PM
    Mish: As usual you display your ability to display the obvious for review.

    The world produced for an American consumer that knew no restraint.
    Is there any Nation we had a positive trade balance with??

    The American consumer lived a "why wait to enjoy" when I can just wait to pay. There was unlimited credit for the asking.

    The Bankers discovered leveraging and packaging junk paper for sale under a (not yet explained) AAA rating to the unwary. Bonuses rolled in like tsunamis.

    No one cared about inflation or fiat currency to meet the needs, you merely fudged the numbers.

    Now everyones surprised we were feeding a Tiger behind all that smoke and now he's emerging----Hungry!!!.
    Thanks again Mish, you smelled Tigger all the time. And his name is "The laws of economics" bait him at your Peril!!
    Reply | Link to Comment
  •  
    Oct 09 03:30 PM
    Real good article, but I think it misses the "special interest" nature of the rate cut which was not helpful. It sure won't be for the spread in mortage rates.

    Countries like Germany have guaranteed all deposits and the FDIC has temporarily raised coverage to $250,000 to get cash back to the banks. The change is POD coverage from "eligible beneficiaries" to anyone including your cat is even more important - you can load up on insured amounts and long term.

    But that isn't good for equity markets. So I think the rate cuts, yes coordinated, were lobbyied for to get money back to the stock markets.

    An example: on Tues morning, Wamu was offering 5% on 12 and 13 mos. CDs. Then the Bernancke speech, and within hours, Wamu reduced the rate to 4%. After the coordinated rate cut was announced on Weds., Wamu cut the 12 mos rate to 3%!!!! Two percent in two days!! The hope is to combine consolidation of banking with less options to lower savings rates and force some of the money that will go into MM and CDs with the enhanced insurance protection back into the markets. Whether this will work, who knows under the real economic conditions, but to me it demonstrates how political the economic process continues.
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