Fed Cuts Discount Rate by 50bps!!!
As my good friend (ok met randomly near the NYSE) Jim Cramer just said on CNBC this is what the markets needed to prevent a financial meltdown. Dont get me wrong this didnt fix the problem, it just is a way for the US financial system to relieve some pressure (reduce borrowing costs).
I used to work for WaMu so I know that the FED generally looks down on a company that consistantly borrows from the FED at the Discount Rate since it inidcates that the institution is having liquidity issues with its peer banks on borrowing terms. What this now means is that ANY bank can borrow pratically as much as they want from the FED for the next year until the housing downturn rights itself.
Essentially this just lowers Banks cost of capital and allows them to be more flexible to corporate borrowers since the FED now has their back instead of treating Banks like a red headed step child.
There will be a 25bp cut in the FED Funds Rate on Sept 18th. Mark my words!
I used to work for WaMu so I know that the FED generally looks down on a company that consistantly borrows from the FED at the Discount Rate since it inidcates that the institution is having liquidity issues with its peer banks on borrowing terms. What this now means is that ANY bank can borrow pratically as much as they want from the FED for the next year until the housing downturn rights itself.
Essentially this just lowers Banks cost of capital and allows them to be more flexible to corporate borrowers since the FED now has their back instead of treating Banks like a red headed step child.
There will be a 25bp cut in the FED Funds Rate on Sept 18th. Mark my words!
Comments
Point is, they need to keep the values up long enough for big interests to get out of their positions. I do like this quote from CNN.
Expect to see Countrywide start offering 2/28s once again next week.
I think this is much more scary.
They were trying to keep a bank, or several, solvent.
There was a run on Countrywide BANK yesterday. There are rumors that WAMU is having trouble as well.
Even talk of runs on banks is very, very bad.
I'm short CFC, but I think Ben absolutely needed to do this.
You simply have to do anything possible to avoid large bank failures.
Sadly, Countrywide might still end up closing eventually. But it won't be in a panic and it won't cause a run on other banks.
Whether the Fed action is going to result in bubble 2.0 for the US is doubtful. When the UK reserve bank intervened in 2005 global liquidity was much higher. The Fed doesn't have this advantage in 2007.
Actually, I think you are right. I've been worried about just this kind of scenario for a few months now, but for some reason I didn't really think of it as being such a high risk.
How about the bright side. People with no $$$ can't make runs on banks right? So basically, there are just like 8 of us competing to get our money out.
Personal piggy bank: Empty
Housing ATM: Closed
Bank ATM: First-come, first-served?
Must . . . not . . . panic . . . must . . . drive . . . to . . . bank . . . right . . . now . . . (tires squealing)
:roll:
But what will they do next week when markets resume their free fall?
No worries. We were like this guy.
Being a hang glider heading towards the lake was ok, but you've got no where to go but down.
Now we are this.
Do you notice the rocket on that hang glider? That's what the Fed just did, they added a rocket to our hang glider. No way we'll have any problems now!
:P
Was mainly done to provide liquidity to Banks that are covering loans they cant sell in the market, like banks that are losing money out the WaMu (new word for "out the wazzu").
I was talking with a WaMu person in the know, and she told me the most recent Long Beach (LBMC subprime) packeaged loans had ZERO offers yesterday. Which means they have to put them in their own portfolio...they expect the same results for the next several months. She also told me that they were about to get bought by JP Morgan...ok maybe that last one's a lie, but it has been a strong rumor for several years.
Who would have predict that
Is it worse to have the dollar slightly weaken or the credit markets to sieze up totally...sometimes there are nessisary evils in what you do to stabilize the system.
Actually finance, that looks like a rhetorical question, but I think it really is the question of the day. Is dollar inflation worst or is it worst for the people who made losing bets to become insolvent?
If we're talking about one flipper, who loses solvency, we tend to think the market is working correctly when he becomes insolvent and then forecloses on all the houses he's flipping.
When we talk about a small business that makes a bet on the wrong technology, we tend to say its right that they go under, because making wrong bets is punished by capitalism.
When it's a big company that makes a bad bet, we hesitate. Capitalism says they should go under and be replaced by something better, but those are a lot of jobs. Maybe we'll bail them out?
When it's the larger market, we say 'who could have known this was a bad bet?' There's a lot of people begging to be bailed out, so maybe that means it's worth doing.
So which is it? Is capitalism a failure? This question may never be answered.
The answer is that capitalism is fine, and everyone always wants to be bailed out of their mistakes (save feature in video games anyone?). The ONLY difference is how many people are begging to be bailed out. I would say we should let the system seize up so long as we can get money back to people who deserver it. Who deserves it? If you're money is in a federally insured savings account you get it back. Everyone else....
But unfortunately, we live in a world filled with politicians who see it as their job to "help". When the media focuses on those "poor" people losing their homes, you can count on politicians to come to the rescue. And it won't matter how you and I feel about it.
If you didnt' know that was sarcasm, then you really do watch too much CNBC
Here's how it works:
she cites donald trump as an expert. what could surprise you beyond that?
On RCG, not quite a month ago:
All of a sudden, it's become Saint Ben's primary job to bail out the RE industry...
As for the credit meltdown, my theory is that as long as the FED takes baby steps to repair the market (like reducing the Dicount Rate but not the Fed Funds Rate until next month) are prudent and nessisary to prevent a recesson. As long as they dont reduce rates to 1% we will be fine, lol.
The one difference between the stock market now and in 2000 is that the P/E ratio in 2000 was something like 25 for S&P 500 or 35 for the NASDAQ. In 2007 the P/E ratio for the S&P is about 15...thus the strong fundamentals of the economy dont indicate that a large crash is pending since companies are at a relative historical valuation.
This 10% correction was mainly due to financial lending reasons, which means that the bull market is still intack as we are about even on the year for appreciation on most stock exchanges.
the bull market may be "intack", in a sailing sense. but I doubt it is intact. bull and bear markets are about psychology - not where we are vs. the beginning of the year, and 1/2 point change to the discount rate doesn't do much to change that. risk premiums are still yawning wide. the carry-trade will start to unwind even faster. oil prices are going to go up another $5-8 a bbl. and cnbc will continue stupefying the masses. perhaps you saw the piece on barrons today that claims you can make money just by being long the S&P and shorting the stocks your buddy Cramer recommends?
Ardell: I don't give a rat's ass about the fireplace. Look at my granite countertops.
E: Your house is on fire. That trumps granite countertops.
A: I worked for the Fire District for 20 years. They always overreact. Boy, is it hot in here.
E: Ardell, your house is on fire and you are going to get lifelasting scars and tissue damage.
A: You don't understand fire. Granite doesn't burn. What are those sirens I hear?
E: The counters that support the granite do. Get out of the house.
A: The Fire Dept will save me. There is a hydrant 1/2 mile away and they have a 1/4 mile hose. Is someone barbequeing?
E: I'm outta here. I hope your insurance is paid up. In the future, don't play with kerosene and matches.
A: Stay on topic. Granite sells. I'm thinking about upgrading to stainless. Why is everything orange?
The "strong fundamentals of the economy" you're talking about are all propped up on the rapidly imploding credit bubble. What happens to a stock when the "E" in "P/E" starts to come down?
Bye Bye E.
Bye bye market gains.
excellent point.