Sunday, October 26, 2008

A time for love a time for hate a time to pause and hold the rate

Now everyone is looking for another coordinated rate cut.

The Fed is not the ECB's leader dog for the blind
But the Fed has much lower rates that those at the ECB and the BOE. The Fed already is far ahead of those banks in cutting rates. The last coordinated rate cut gave some cover the ECB, a single-mandate central bank (and for inflation, not growth) that still has inflation well over its ceiling rate. But having broken the ice with one coordinated cut it should not need the Fed to hold its hand for subsequent cuts.

Aren't the risks now clear? Why does the ECB have to play follow the leader with the Fed?

It may be good for you but it is RIGHT for ME?
Moreover why should the Fed cut rates any more at all? Is it really a good idea or just something left over from the Alan Greenspan Gee-I-thought-that-was a-good-idea-era?

Rate cuts are not all sunshine and roses
The last Fed rate cut did not exactly lower market rates. Long term rates are higher on balance. Mortgage rates to consumers are higher. Some cut...

And, get this: the impact on consumer incomes will be negative. This is even more of an issue as more investors move OUT of stocks into interest-bearing instruments. Why lower rates that lower income to consumers especially when banks are not passing through the rate reduction to borrowers? I dunno... I don't buy the idea that it is to help or to re-liquify banks since so much already is being done for them.

Hey! How about doing something for someone else that might make a difference?

With junk bond yields 1,000 to 1,500 basis points above comparable maturity tresaury yields isn't it more to the point to do something to impact spreads?

ABOUT LENDING SPREADS.......................
Out-sized lending spreads mean banks aren't lending. If they were firms would borrow from banks instead of suffering under such large spreads in the securities markets. Has the risk in the economy really ballooned that much, or it it only that bad if BANKS DON'T LEND? So, is that a self-fulfilling aspect of the crisis? By lending banks are making the economy riskier and that is cause for higher spreads.

Aren't spreads more of an issues at 10% points to 15% points than interest rates at just under 4% for 10-Yr T-notes and at 1.5% for Fed funds? You don't need a PhD to see that.

There is much more to be gained if banks can be cajoled to lend than if rates are cut by some minor amount (1.5pct points at most - at MOST) AND...with the fruit of that cut unshared. Besides, the more you cut the Fed funds rate, the closer you get to the infamous zero bound. At some point the fact that you have cut by so much with no effect (or negative effect, as happened last time) and that you have almost run out of room to cut any more, could become bigger problems than lower rates are a help. Think ABOUT THAT...

Still think the Fed should cut?

I don't.

COC just is not the problem (cost-of-credit)...

Just stringing us along?
It's time to put the focus elsewhere. We have done/are doing a lot for banks. It's time to give them incentives to lend maybe to help house-owners or to stem foreclosures. More rate cuts are just more of the same medicine that has not yet worked. Are we pushing on a string? If so, should we push harder or do something to stiffen the string so the pushing will have effect?

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