Post by blueneck on Aug 23, 2007 9:23:02 GMT -6
From MSNBC
Rate cuts won't cure ailing market
Ben Bernanke and his Fed cohorts will get cheap money flowing with a series of interest-rate cuts. But that won't fix the credit crunch.
Latest Market Update
August 23, 2007 -- 10:30 ET
[BRIEFING.COM] The indices remain mixed as split industry leadership now dictates this morning's action. Of the six sectors trading lower, Materials (-0.5%) is pacing the way; but that's not overly surprising given its 3.2% surge yesterday to lead... More
By Jon Markman
In a country whose populist heroes are kick-ass rebels Jack Bauer, Jason Bourne and Bart Simpson, it is perhaps only fitting that our latest would-be real-world savior is an economist and banker whose monkish beard makes him look almost countercultural.
Unlike his fictional counterparts who always save the day with a snappy remark or a chop to the throat, Federal Reserve chief Ben Bernanke is working from a terrible script that is doomed. He seems like such a nice man that it's a pity he could go down in history as the first one-term Fed chief in decades, not to mention the accidental steward of one of the world economic system's darkest periods.
It's going to take me a few moments to explain, so bear with me. Here's the problem: Last Friday, Bernanke earned a round of applause from the media by bowing to White House and Wall Street pressure and slashing the rate that the Fed charges the nation's least-creditworthy commercial banks for loans from the public till. He also allowed these sketchy banks to put up their worst loans as collateral and radically lengthened the time that they are permitted to hold onto these borrowings from the standard single day to a month or more.
In doing so, the common belief is that Bernanke provided a much-needed shot of adrenaline to the financial system. Yet this medical metaphor, which seems so apt, really misses the point. What the Fed really did was perform an imperfect version of the Heimlich maneuver on the credit markets, dislodging a blockage in one section of its windpipe only to allow the chicken bone to embed itself more firmly elsewhere.
The Fed is now about to embark on a long series of interest-rate cuts in the face of a global economic slowdown, but it has no proof that cheaper money can, by itself, unwind the worldwide credit crunch.
It could work if Bernanke and other U.S. financial officials are able to persuade the biggest institutional investors here and overseas that it will work. Or it could end up lighting an inflationary brush fire that combines with a recession to create the perfect storm of unending investor pain.
All I can tell you is that the last time this was tried in a pre-contraction environment, it failed miserably. From January 2001 to June 2003, the federal funds rate fell from 6.5% to 1% even as the S&P 500 ($INX) fell by 26%, from 1,320 to 976. The lesson: An earnings collapse beats low interest rates every time.
More here
articles.moneycentral.msn.com/Investing/SuperModels/RateCutsWontCureAilingMarket.aspx
Rate cuts won't cure ailing market
Ben Bernanke and his Fed cohorts will get cheap money flowing with a series of interest-rate cuts. But that won't fix the credit crunch.
Latest Market Update
August 23, 2007 -- 10:30 ET
[BRIEFING.COM] The indices remain mixed as split industry leadership now dictates this morning's action. Of the six sectors trading lower, Materials (-0.5%) is pacing the way; but that's not overly surprising given its 3.2% surge yesterday to lead... More
By Jon Markman
In a country whose populist heroes are kick-ass rebels Jack Bauer, Jason Bourne and Bart Simpson, it is perhaps only fitting that our latest would-be real-world savior is an economist and banker whose monkish beard makes him look almost countercultural.
Unlike his fictional counterparts who always save the day with a snappy remark or a chop to the throat, Federal Reserve chief Ben Bernanke is working from a terrible script that is doomed. He seems like such a nice man that it's a pity he could go down in history as the first one-term Fed chief in decades, not to mention the accidental steward of one of the world economic system's darkest periods.
It's going to take me a few moments to explain, so bear with me. Here's the problem: Last Friday, Bernanke earned a round of applause from the media by bowing to White House and Wall Street pressure and slashing the rate that the Fed charges the nation's least-creditworthy commercial banks for loans from the public till. He also allowed these sketchy banks to put up their worst loans as collateral and radically lengthened the time that they are permitted to hold onto these borrowings from the standard single day to a month or more.
In doing so, the common belief is that Bernanke provided a much-needed shot of adrenaline to the financial system. Yet this medical metaphor, which seems so apt, really misses the point. What the Fed really did was perform an imperfect version of the Heimlich maneuver on the credit markets, dislodging a blockage in one section of its windpipe only to allow the chicken bone to embed itself more firmly elsewhere.
The Fed is now about to embark on a long series of interest-rate cuts in the face of a global economic slowdown, but it has no proof that cheaper money can, by itself, unwind the worldwide credit crunch.
It could work if Bernanke and other U.S. financial officials are able to persuade the biggest institutional investors here and overseas that it will work. Or it could end up lighting an inflationary brush fire that combines with a recession to create the perfect storm of unending investor pain.
All I can tell you is that the last time this was tried in a pre-contraction environment, it failed miserably. From January 2001 to June 2003, the federal funds rate fell from 6.5% to 1% even as the S&P 500 ($INX) fell by 26%, from 1,320 to 976. The lesson: An earnings collapse beats low interest rates every time.
More here
articles.moneycentral.msn.com/Investing/SuperModels/RateCutsWontCureAilingMarket.aspx