Why the Fed rate cut isn’t working

Danzinger on Fed rate cut

By yesterday, however, the markets were moving in ways that cannot have made the Fed happy. The dollar fell — an expected result from cutting short-term interest rates — but long-term rates rose, and so did mortgage rates.”Alan Greenspan’s conundrum is becoming Ben Bernanke’s calamity,” said Robert Barbera, the chief economist of ITG.

That’s right, mortgage rates went up, not down, after the Fed cut, the complete reverse of what they wanted.

The real reason for the Fed’s 50 bp cut.

The situation was indeed critical and the cost of money had to be brought down sharply or the banks would have to sell collateral (CDOs, CLOs, etc.) in a depressed market and write huge losses in their books – If they could find a buyer, that is.

So the cost of money was brought down.

Funny, I thought these guys were all capitalists, and believed in letting market solve problems and in letting inefficient companies die so that better ones can be born. I guess not, because what the Fed did was temporarily bail out the banks – and did so without addressing the underlying problem they have. So not only is the Fed cut not working, it can’t work, because it ignores the toxic mortgage junk the banks can’t sell. But they did throw the billionaires a (leaky) life preserver, while doing precious little to help the poor schlubs who are losing their homes.

  • dj

    In the capitalism of Ayn Rand, everything is for sale– even Fed Chairs. This is quite contrary to the spirit of Adam Smith’s capitalism, which sees strong central government as an essential element.

    While I don’t agree with your assessment, it is nevertheless consistent with the philosophy of these so-called capitalists. Under Randian capitalism, when markets don’t cooperate, you buy the regulators.

  • While no fan of hers, I think Ayn Rand might well have let them die. She really did believe in a totally unfettered market.

  • Wes

    One of the talking heads recently made a comment regarding the credit crisis. Capitalism without allowing failure is like religion without sin. It is the only class in the school of hard knocks where you will always be bailed out.

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