2008-01-23

Panic at the Fed

From CNN:

NEW YORK (CNNMoney.com) -- Even though the Federal Reserve slashed its key federal funds rate by three-quarters of a percentage point in an emergency meeting Tuesday, Wall Street is still betting that the central bank will lower rates again next week.

The Fed will hold a two-day meeting that wraps up on Jan. 30. And according to futures listed on the Chicago Board of Trade, investors are pricing in a 100 percent chance of at least a quarter-point cut, to 3.25 percent, and a 66 percent likelihood of a half-point cut, to 3 percent.

"There is a legitimate chance of another cut next week. The Fed wants to stay in front of things and at this stage, they'd rather err on the side of having rates be too easy than too restrictive," said Jack Ablin, chief investment officer with Harris Private Bank.

... More

I haven't been too worried about the economy. Sure, the markets have been falling, but that's what they do. They move one step backwards and two steps forward. Especially since we've seen a run up in recent months, it's to be expected. Perhaps the economy could use a recession to reset itself and prepare for stronger growth in the future.

Further, I'm in the market for the long term. I've got some time to recover from any losses.

But then the Fed cut rates. Now, I'm am not so sure.

There is a fine line between bold moves to demonstrate leadership, and flailing panic.

Cutting rates by an amount not seen in 15 years, and doing it a week before you were planning to cut rates anyway, strikes me more as the latter.

Further, out latest economic woes occurred in part because it's been too easy to get credit. The country's consumer economy is balanced precariously on mountains of credit card debt that has in recent years been turned into mortgage debt.

People who historically could not have gotten mortgages for normal priced homes were able to get short-term cheap mortgages on absurdly priced homes.

Now, as the country starts to wake up with a hangover from the heady mortgage and credit card policies on the recent years, what does the Fed do?

Does it have the country eat a healthy breakfast?
Does it have the country drink a bunch of water?
Does it make us pop a couple of aspirin? ]
Does it crack open a packet of Alka-Seltzer?

No.

The Fed has the country slam a bottle of Tequila.

You know, if a big part of our problems were caused by too much cheap credit in the economy, maybe, just maybe, dumping a whole bunch more cheap credit into the economy, might not be the best long term solution.

On the other hand, may the credit card companies will start sending me 0% balance transfers again, and I once again play at credit card arbitrage.

2 comments:

mikster said...

I think it was a panic mode, feel good decision to lower the rate. Too many people are over extended on credit as it is. I expect a rocky year ahead. (I'm in sales and have noticed quite a drop off in sales in the last 3 - 6 months.)

Steve said...

I think the last statement there in your article was the key. I have always believed that the people in the leadership position in this country are there because they have the ability and, deep down inside, the desire to do whats best for the country. A lot of people laugh at that notion, but think of this.

What you just presented was a good side and a bad side to this cut. Some people will use it to open new lines of credit they neither need nor deserve. Others will be financially responsible and use it to their best long term advantage.

I would disagree that the easy availability of credit is what has lead to this. While it has been available, no mortgage ever pulled a gun and forced someone to sign it. Yet we hear this line of easy availability every day, because it's easier for a politician to say that than to come out and say the truth. And what is the truth?

This recession is caused by the financial irresponsibility of the American people. What the Fed has done is given us a tool we can use to fix that, or the rope we could use to hang ourselves. Which choice we will make is entirely up to us.

Is it panic? Perhaps. Could it help? For sure. Will it? We'll see.