Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.
First -- let's get some terminology down. The Discount Rate is, "The interest rate that an eligible depository institution is charged to borrow short-term funds directly from a Federal Reserve Bank." This is usually considered a bad move because it signals the borrower may be in trouble. Essentially, the discount rate is the rate of last resort.
This type of borrowing from the Fed is fairly limited. Institutions will often seek other means of meeting short-term liquidity needs. The Federal funds discount rate is one of two interest rates the Fed sets, the other being the overnight lending rate, or the Fed funds rate.
In other other words, this is as much a symbolic gesture as a practical one.
But the damage has been done. Bernanke has continued the the "Greenspan put" tradition. When financial markets screw-up and make a ton of bad loans, the Federal Reserve will bail them out.
As Bloomberg said:
Today's move also shows how Bernanke, like his predecessor, is prepared to temporarily abandon Fed growth forecasts and inflation objectives to offset the risk of a credit crunch. Former Chairman Alan Greenspan was known for his tendency to give financial market conditions a primary role in policy, and he came to the rescue on several occasions when turmoil struck.
`Greenspan Put'
Until now, Bernanke had shown every intention of shunning the so-called Greenspan put. He wanted more emphasis on the forecasts of the institution and policy less dependent on the whims of whoever occupies the chairman's suite.
9 comments:
Bonddad - the 'speculators' on Wall Street should be dealt with by the SEC and Congress, who should do something to stop the hooligans who invent weird composite derivative packages. NOT by someone like me, a single, midde-class person who will have to live through 'housing hell' while the big boys make a buck. I can sell my house, now that prices have gone down below what it's mortgaged for--and this isnt my fault.
It's the fault of the creeps who run the big banks and the 30-somethings who dream up fantasy investments.
Please show a little concern about ordinary people. Thanks.
Bonddad - A lot of small people are going through 'housing hell' right now, unable to sell or refi away from Option ARMS because housing prices are so low they won't reappraise, or sell for the amount of the debt.
The is the fault of the hooligan 30-somethings who dreamed up the weird derivative packages. So they're being bailed out too? Tough! I'M GLAD. I dont give a d*mn about the...but this may mean I wont lose every bit of savings I've got.
Fed policy seems to be laissez-faire until big business has a problem. Nobody cares about people defaulting and losing their houses, the Fed just cares about those that built the house of cards on low interest rates.
This rate decrease will lead to other, more significant decreases--and possible requests for tax cuts--and this will lead to double digit inflation--all blamed on the Dems in congress.
"It's a good first step," said Lehman Brothers economist Drew Matus.
Whether or not Bernancke intended it, as far as the Street is concerned, the Greenspan put is back. It's party time!
Me, I'll watch 10 and 30 year bonds for signs of a "reverse conundrum."
This is just a complete sham. These people keep spinning gold out of bullshit and they never get caught. This was his chance to end this "put" crap. A short term credit crunch where a whole bunch of the worst traders get thrown out on the street would be good for the economy overall.
This is all going to blow up one day.
First, a brief caveat - I am not a finance expert, I am a network engineer who has become interested in finance (so if I say anything wrong, please bear with me, and let me know).
Based on what I've learned over recent weeks, I understand the current situation as follows:
1) decisions to invest should be made by understanding the NATURE of the investment vehicle (not sure I'm using the right term) and knowing the RISK of the vehicle.
2) the RISK of the investment vehicle is determined by ratings agencies (Moody's, et. al.)
3) the NATURE of the investment vehicle is partially dependent on the nature of components within the vehicle (what might be called "layers of abstraction" - i.e. I might not understand what a lower layer of abstraction means, but I know what the layer I work with means)
4) it now appears that the rating of the RISK in certain vehicles (CDOs, etc.) was incorrect (e.g. EC ministers launcing investigations into the rating agencies, the ratings agencies lowering of ratings too late, the ratings agencies being paid by the institutions creating the vehicles, etc.)
5) it also appears that the NATURE of certain investment vehicles has also been miss-understood (e.g. articles about "contagion" of CDOs inside other investment vehicles, etc.)
6) since a lot of investors are now uncertain about both the RISK and the NATURE of investments (both the ones they hold and the ones they might buy) they are unable to make an intelligent decision until the NATURE of the investment becomes clear (which will take some time, since the the NATURE is dependent on knowing the RISK) and the RISK of the investment is re-rated (which will also take time because the ratings agencies need to verify the NATURE). (In Information Science we call this the "deadly embrace" scenario - two items are dependent on the availability of each other.) Normally, both items would have been determined before the vehicle would be allowed to "exist". But now, the vehicle exists and both mutually-dependent items have been called into question.
7) the nature of the FED's recent actions is to increase the availability of cash to institutions whose functions are to loan money to purchase investments.
8) the problem does not appear to be on the "supply" side of the issue (money), but on the "demand" side (investors wanting to buy). It appears that the FED is trying to "push a string" - but "if the only tool you have is a hammer, then every problem begins to look like a nail". The FED is trying to fight uncertainty (fear) with the only tool they have.
These are just my thoughts - I'd like to know what you think.
First, a brief caveat - I am not a finance expert, I am a network engineer who has become interested in finance (so if I say anything wrong, please bear with me, and let me know).
Based on what I've learned over recent weeks, I understand the current situation as follows:
1) decisions to invest should be made by understanding the NATURE of the investment vehicle (not sure I'm using the right term) and knowing the RISK of the vehicle.
2) the RISK of the investment vehicle is determined by ratings agencies (Moody's, et. al.)
3) the NATURE of the investment vehicle is partially dependent on the nature of components within the vehicle (what might be called "layers of abstraction" - i.e. I might not understand what a lower layer of abstraction means, but I know what the layer I work with means)
4) it now appears that the rating of the RISK in certain vehicles (CDOs, etc.) was incorrect (e.g. EC ministers launcing investigations into the rating agencies, the ratings agencies lowering of ratings too late, the ratings agencies being paid by the institutions creating the vehicles, etc.)
5) it also appears that the NATURE of certain investment vehicles has also been miss-understood (e.g. articles about "contagion" of CDOs inside other investment vehicles, etc.)
6) since a lot of investors are now uncertain about both the RISK and the NATURE of investments (both the ones they hold and the ones they might buy) they are unable to make an intelligent decision until the NATURE of the investment becomes clear (which will take some time, since the the NATURE is dependent on knowing the RISK) and the RISK of the investment is re-rated (which will also take time because the ratings agencies need to verify the NATURE). (In Information Science we call this the "deadly embrace" scenario - two items are dependent on the availability of each other.) Normally, both items would have been determined before the vehicle would be allowed to "exist". But now, the vehicle exists and both mutually-dependent items have been called into question.
7) the nature of the FED's recent actions is to increase the availability of cash to institutions whose functions are to loan money to purchase investments.
8) the problem does not appear to be on the "supply" side of the issue (money), but on the "demand" side (investors wanting to buy). It appears that the FED is trying to "push a string" - but "if the only tool you have is a hammer, then every problem begins to look like a nail". The FED is trying to fight uncertainty (fear) with the only tool they have.
These are just my thoughts - I'd like to know what you think.
First, a brief caveat - I am not a finance expert, I am a network engineer who has become interested in finance (so if I say anything wrong, please bear with me, and let me know).
Based on what I've learned over recent weeks, I understand the current situation as follows:
1) decisions to invest should be made by understanding the NATURE of the investment vehicle (not sure I'm using the right term) and knowing the RISK of the vehicle.
2) the RISK of the investment vehicle is determined by ratings agencies (Moody's, et. al.)
3) the NATURE of the investment vehicle is partially dependent on the nature of components within the vehicle (what might be called "layers of abstraction" - i.e. I might not understand what a lower layer of abstraction means, but I know what the layer I work with means)
4) it now appears that the rating of the RISK in certain vehicles (CDOs, etc.) was incorrect (e.g. EC ministers launcing investigations into the rating agencies, the ratings agencies lowering of ratings too late, the ratings agencies being paid by the institutions creating the vehicles, etc.)
5) it also appears that the NATURE of certain investment vehicles has also been miss-understood (e.g. articles about "contagion" of CDOs inside other investment vehicles, etc.)
6) since a lot of investors are now uncertain about both the RISK and the NATURE of investments (both the ones they hold and the ones they might buy) they are unable to make an intelligent decision until the NATURE of the investment becomes clear (which will take some time, since the the NATURE is dependent on knowing the RISK) and the RISK of the investment is re-rated (which will also take time because the ratings agencies need to verify the NATURE). (In Information Science we call this the "deadly embrace" scenario - two items are dependent on the availability of each other.) Normally, both items would have been determined before the vehicle would be allowed to "exist". But now, the vehicle exists and both mutually-dependent items have been called into question.
7) the nature of the FED's recent actions is to increase the availability of cash to institutions whose functions are to loan money to purchase investments.
8) the problem does not appear to be on the "supply" side of the issue (money), but on the "demand" side (investors wanting to buy). It appears that the FED is trying to "push a string" - but "if the only tool you have is a hammer, then every problem begins to look like a nail". The FED is trying to fight uncertainty (fear) with the only tool they have.
These are just my thoughts - I'd like to know what you think.
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