Tuesday, September 18, 2007

Helicopter Ben Throws Deep

The Fed drops the funds rate a full half a point and the discount rate too. I didn't think they would do it. But CNBC and all the wall street weenies were squealing because their stock options were sinking rapidly and then the Brits were lining up at the banks pulling their money out so Ben and company rode in to the rescue.
One function of the central bank is to provide liquidity and be a lender of last resort in times of panic. So the Fed probably did have to act. But bubblevision has amplified the problem beyond all recognition. I fail to see how lowering the rate on a loan one can't get a bank to make in the first place changes anything. But that is just me. The stockmarket loved it. The Dollar did not. ( chart on the left is the SP500 etf and to the right is the Eurocurrency etf ) I guess only time will tell if Bernanke will have the luck of Greenspan or of William Miller.

Accrued Interest has pertinent remarks on the rate cut. I agree with him except for one thing. I believe there is a risk of moral hazard. But it is not the subprime borrrower who will be effected. It is the investment banker community who learns that the fed will always come to the rescue. Those are the guys who coerced the rating companies in to giving a pass to these motley securities and then sold them to every sucker they could find.

Update: I linked to the wrong charts so have replaced them with charts from Stockcharts.com.
Some reactions to Fed rate cut:
Calculated Risk
Aleph Blog
Crossing Wall Street


Anonymous said...

You know what pisses me off about that "moral hazard"? Wall Street has been cashing these huge salaries and bonuses, claiming that they deserved them because they were taking huge risks, when they squealed like a bunch of little girls and got Daddy Ben to bail them out.

They are taking as many risks as employees of the US government, and I don't mean the troops either.

When the US economy weakens as a result of the continuing debasement of our fiat currency, I don't expect them to take their lumps along with Joe Sixpack.

BBL Jr said...

anonymous has it right. If the Fed is going to always bail the financial manipulators out then there is no check on their behavior. I work in the financial markets as a trader on the exchange floor. Facing and managing risk is a governor on market behavior. removing that risk guarantees excesses. I believe Bernanke is very aware of this issue and was reluctant to appear to be bailing out the investment banks. But the pressure obviously became to great. Wspecially when a bank run started on Northern Rock in the UK.