Saturday, August 18, 2007

Fed Move Changes The Mood, Doesn't Fix The Problem

From CBS Marketwatch:

NEW YORK (MarketWatch) -- Stocks will remain volatile next week, although with more of an upbeat tone than in recent times, as investors weigh the effectiveness of the Federal Reserve's surprise cut of its discount rate, a move widely seen as an attempt to diffuse this summer's credit markets crisis, analysts said.

The central bank's key fed funds rate, which directly impacts short-term bonds, was left unchanged at its current level of 5.25%.

"The move by the Fed [Friday] morning was important but it was largely symbolic," said Mike Malone, trading analyst at Cowen & Co. "It will serve to reduce volatility in the coming week but there is still a tremendous amount of uncertainty out there."


"The one thing that [central bankers] showed is that they're flexible," Malone said. "In the event that credit markets would deteriorate further, it's now reasonable to assume that they would act and that helps to reduce the uncertainty and the volatility we've seen in recent weeks."

"But we're not out of the woods yet," he said. "There is the potential for additional shoes to drop," or more bad news coming from financial institutions across the globe.

It really all does depend upon how many more homes get foreclosed and how many more hedge funds go bust.

It could get really ugly.

Goldman Sachs says the Fed will drop interest rates to 4.5% by year's end from the current 5.25% to solve the mortgage mess.

Will that be enough to save millions of overleveraged homeowners with adjustable rate mortgages they can't afford?

And what will happen with inflation after Helicopter Ben Bernanke starts showering the country with cheap money at the same time that central banks around the world are expected to raise interest rates?

I mean, isn't that kinda a mixed message, especially since so much of the inflation is being imported?

Unless of course the other central banks simply follow Helicopter Ben's lead and cut rates as well.

Hell, maybe cheap money IS a god-given right.

Life, liberty, the pursuit of happiness, and cheap money.

Gosh, the Founding Fathers REALLY were prescient.

And btw, if Helicopter Ben rides to the rescue of naive, stupid and/or greedy investors (not to mention naive, stupid and/or greedy homeowners who bought homes they couldn't afford with money they didn't have), what kind of moral hazard does that set up for the future?

As Peter Tosh once sang, We're a bubblin' hot, hot, hot!!!

I am watching a totally different response here in Australia. It will be fascinating to see which is more efficacious.
I hope the bulls are right. I fear they are not. it will take a while to see. The 2006 mortgages don't reset until 2008.
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