Tuesday, December 11, 2007
Here We Go Again...
The Fed shouldn't ease at this point. The equity market has become addicted to rate cuts. It is time to stop. The same pundits that are crying for a rate cut today are also saying that the real problem is in the money markets. They are correct on that count, that is where the real problem is. Seventy-five basis points worth of Fed Funds rate cuts haven't helped there; further cuts are unlikely to do anything on that front. If the Fed cuts rates back down to 1% and LIBOR trades at 3.5%, would these pundits consider that a success? At 250 bps spread, I would consider it a failure. The Fed need to deploy other weapons, specifically discount rate cuts combined with encouraging language to allow for use of the discount window. Here's a idea: Let the Fed cut the discount rate 75bp today and leave funds where they are. Then, we will see it that has an effect on the money markets. The Fed Funds cuts will have no effect, other than an artificial boost to stocks, leaving the markets in the same situation as we have been in since August. Lending needs to free up on the most basic level, overnight and short-term between banks, in order to open up markets and stimulate the economy on a more macro scale. This being said, I'm sure that Bernanke and Co. will not listen to me and go with the path of least resistance
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4 comments:
Bondguy, you hit the nail on the head. This Fed ease and more subsequent easing WILL NOT solve the markets ills. A Fed which had been too easy for too long helped to create the real estate bubble that is now inflicting pain on invstors, homeowners and banks.
The banks and brokers are what is trouble me. One Wall Street economist told the Wall Street Journal:
" From talking to clients and traders, there is in their view no question the Fed has fallen way behind the curve. There's a growing sense the Fed doesn't get it."
I think the Fed gets it. I agree with you that it there is no fundamental need to ease. However, the market's negative reaction to the 25 basis point cut tells me that market particpants know that there are bodies buried and where they are buried.
I have said previously that there are bodies buried and that I have mroe knowledge than some would believe about where they are. The recent subprime bailout, banks' private efforst to avoid foreclosures and exposure of investments which were incorrectly presumed to riskless to subprime are just some of the examples to which I was referring.
All in all, counting in the lack of direction and conviction in the statement, this was about the worst of all possible outcomes. The best thing that happened was it let some air out of the stock market. It is truly remarkable about how there has been so little commentary on the volatility of the equity markets this year. Truly a crazy year.
All the financial media geeks tow the equity line that the markets will bounce back soon as they "always do".
I know I shouldn't be revelling in this. My stock is down, my bonus will be next to nothing and my job is in jeopardy, but I am enjoying the pain inflicted on those who thought they found a new way (new safe way) to pickup yield. So much for packaged products and professional managers.
Bondguy, I vote for you to be Fed Chairman. Maybe our leaders should start listening to "we the people". Maybe some of us, lilke you, DO have the knowledge and experience and just may have some answers. Elected officials as well as appointees believe that just because they have the position they must know it all
Larry
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