Friday, August 17, 2007

Fed Starts Wall Street Bailout

Just goes to show that if the market gets turbulent enough and the Wall Street people whine enough, the Fed will come in to help:

The Federal Reserve today approved a half-percentage point cut in its discount rate on loans to banks, saying that it now feels that “tighter credit and increased uncertainty have the potential to restrain economic growth going forward.” Stocks surged on Wall Street and in Europe.

The move is a significant change for the Fed, which just a few weeks ago left its benchmark short-term interest rates unchanged, citing continued concern about inflation, and it signals that policy makers may be prepared to cut interest rates more quickly than earlier thought.

The discount rate at which the Fed lends money to banks it considers creditworthy was lowered to 5.75 percent, from 6.25 percent. That rate is still higher than the benchmark overnight lending rate between banks of 5.25 percent.

“In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably,” the Fed said in a statement. “The committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”

The cut in the rate applied to banks that seek funds at the so-called discount window of the Fed appears meant to assure banks that may be having trouble raising money from one another or the capital markets that the Fed will do everything in its power to make sure there is plenty of cash available and at low rates.

Bonddad notes that use of the discount rate is really limited and that this gesture is mostly a symbolic one but also says that "the damage has been done. Bernanke has continued the the "Greenspan put" tradition. When financial markets screw-up and make a ton of bad loans, the Federal Reserve will bail them out."

It seems like it's only a matter of time before the Federal Reserve cuts the benchmark overnight rate from 5.25% to 5% or even 4.75%.

Which annoys me, frankly.

It just goes to show that the clowns on Wall Street ALWAYS have a safety net no matter how stupid or greedy they are.

UPDATE: The Dow rose as much as 320 points on the Fed news, is now up about 148. The dollar has dropped, however. If the Fed lowers interest rates here in the U.S. while other central banks across the world are raising rates, many think the dollar will continue to drop.

I guess that should help with the trade deficit.

Even if you will have to take a wheelbarrow full of dollars over to Europe to buy anything.

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