Wednesday, October 29, 2008

The placebo: WORD

Do it
Take it
Cut it
...or not

It won't make any difference.

Rate cuts no longer can solve this problem. But sometimes placebos have an effect. Maybe this one will. But maybe just maybe the effect will be bad...

Fed should do more... or... err... well, on second thought, maybe not...
Some argue that the in time hike these the Fed should do more. But the US has a gapping hole in balance of payments that capital flows need to fill. The dollar is the important reserve assets and is is doing better than GOLD recently. I would not want to see that change. And cutting rates too deeply could lose confidence or get inflation expectations higher. The US is not Japan. We can't do what it did, we can't take the risks that it did. WE ARE the world's main reserve asset. We are the Dollar. (Sounds a bit like Denzel Washington saying 'We are the Titans!' doesn't it?)

Think ahea
We need to keep perspective and think outside the box. There are repercussions to things done for our domestic market. Had the rating agencies THOUGHT outside the box when wrapping high ratings on houses bought at high prices and no money down without income checks they should have wondered what would happen if prices started retreating? NOT thinking ahead can be really costly.

Biz as usual or not?
The economy is in a recession and so for a while bankers will find that pulling their heads under their shells will come naturally. But government capital has been inserted in banks and the government and Fed need to instill in banks the notion that something is different. This is not Biz as usual.

To what end?
Cutting rates well past prudence is not the way to go. The last Fed rate cut achieved next to nothing Prime rates did fall, money market rate scattered and some were barely lower for a while. Capital market rates and mortgage rates rose. Lowering rates to lower interest costs for banks makes no sense.

Banks as roach motels
The banking system as like the roach motel for rate cuts. Lower rates go in but they never come out. Enough has been done for banks. The Fed needs to work to get banks to cut the spreads they are lending under. That is the travesty. There is more juice to be had in getting market spreads lower that in cutting rates.


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