The Federal Reserve, declaring that increased economic uncertainty poses risks for U.S. business growth, announced Friday that it has approved a half-percentage point cut in its discount rate on loans to banks.
The action was the most dramatic effort yet by the central bank to restore calm to global financial markets which have been roiled in the past week by a widening credit crisis.
The decision means that the discount rate, the interest rate that the Fed charges to make direct loans to banks will be lowered to 5.75 percent, down from 6.25 percent.
The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year.
However, it has been infusing billions of dollars in money into the banking system over the past week to keep that rate from rising above the target level.
Many economists believe if the financial market crisis worsens the Fed will soon move to cut the federal funds rate as well.
Update: There is more there also.
Bailing out the big boys once again. The economy has been srtuctured to ensure that the richest never lose, relative to the general public. “Too big to fail” comes close to guaranteeing the hegemons right to rule (and speculate), and means an erosion of ordinary people’s income and savings through inflation.
austin,
I’m no big boy, but I’ll take the bail out, I was getting killed in the market this week.
If the mortgage companies can rake in the profits, the should also take their losses when their risky loans go sour. Check out this week’s George Will column
Not a bail out at all. Just ensuring liquidity in the financil markets.
Correct, #4. Mortgage companies who had nothing to do with the high risk/high return subprime sector were getting hit because people weren’t looking past “mortgage.” Some bonds completely unrelated to mortgages were starting to get hit. The added liquidity keeps things moving while folks calm down and stop punishing the innocent, so to speak.
“Not a bail out?” Are there any other industries that get money thrown at them when cash flow is down or their stock is devalued?
It was impacting a pretty broad spectrum of industries, Reactionary. The Fed came in when it spread beyond hedge funds and subprime lendors, and brought in a wider range. I know my bond guy (I work with equities) was having trouble with the market for some industrial bonds Thursday and Friday, which loosened after the Fed’s action was rumored. Manfufacturing firms with American workforces, starting to get hurt due to building panic. Did some guys who deserve to get wiped out get off more easily? Yeah. Did lots more folks who’d done nothing wrong get saved from ruin? Yeah. And the folks who should be hurt still will be, because at the end of the day a defaulted subprime mortage still won’t provide the income to meet the intrest payments on the bonds.
[blockquote]I know my bond guy (I work with equities) was having trouble with the market for some industrial bonds Thursday and Friday, … [/blockquote]
Well tough toenails. That’s how a free market works. Intervention just begets another cycle of risky behavior. I can look out my window and see $650K, $800K, and even $1M cluster homes going up. Are there that many people out there generating enough cash flow for a $5K mortgage payment for the next 30 years? It makes no economic sense, and it is solely as the result of artificially cheap credit creating a bubble in the industry. The Fed has postponed a necessary correction but they cannot hold off economic law forever.
All the Fed did was stop the herd mentality of a stampede. The markets were fleeing anything that wasn’t backed by sovereign tax power, including healthy companies unrelated to your cluster homes. The purpose is to allow the dust to settle and rationality to return. Only short term lending to banks was directly addressed by the Fed, long term rates were left as they were. This allows banks to extend credit lines till the money markets cool off a bit. I’m starting to get the impression that you WANT a depression, Reactionary. Punish the fools for moving beyond 15th century economics and all that.
The fact that fund managers have come up with exotic instruments for bundling mortgages changes nothing, whether we are talking about 15th century economics or 21st century economics. Artificially cheap credit diverts capital to activities that are fundamentally uneconomic and require continuing interventions to stay afloat. When lenders start getting nervous and raise their rates, the malinvestment and overvaluation becomes apparent. Again, the Fed is postponing a necessary correction which makes the ultimate reckoning day that much worse.