The Banking System is Worse Than Expected & Fed Gives Another Rate Cut

December 12th, 2007

The banking system is clearly worse than they want you to think. Not too often do the major central banks coordinate with each other, but they are now. This is a sign that all investors should take notice of. Not only are they coordinating, but they are injecting money into the system and have been doing so for a while now. I wonder what would happen if they didn’t coordinate and inject money into the system…

Fed Gives Another Rate Cut

A few days ago the Fed gave another interest rate cut - a lot of investors consider this a Christmas present - but nothing more than a band-aid to hold things over ’till the New Year is over. I wrote an article in September that I basically said if they start dropping rates and that doesn’t work, it will make the entire situation worse (article: Fed Cuts Rates & My Intuition Tells Me It Won’t Work Out As Planned) . This scenario will be worse off than if they had done nothing (not dropped rates) and let the economy go down a little…

If they didn’t drop rates they would have several things going for them:

1. They would still have the option to drop rates and that would give some investors some ease of mind and some safety (as rates could still be dropped if things got too bad).
2. The Fed could of gave speeches in which it said times were generally good and there was JUST a slight problem with mortgages… That could be their reason for not dropping interest rates. The mixed economic reports that are coming out could be used to validate their stance (also note that the negative reports probably wouldn’t be as bad if the USD wasn’t dropping so fast). They could announce there are some areas which are having modest declines which are part of a natural and healthy economic cycle - Everyone knows the housing industry is cyclical and would be fine with it - but they could point to industries that are doing well as well. By not dropping rates they wouldn’t be showing any major weakness - instead they are taking extreme measures which tell investors and the rest of the world the problems are MAJOR. Central banks are panicking - what kind of a signal does that give?
3. The value of the dollar wouldn’t drop so dramatically… one of the big problems going on is the fact that all these rate drops are causing the dollar to fall and all commodities are rising as a result… the falling dollar is quickly becoming a worse problem than the slight decline the economy was headed for. The dropping dollar is making the economy more unstable and now they have TWO major problems on their plate instead of one.
4. I truly believe the U.S. could have passed a few laws to help people with sub-prime mortgages secure financing when their mortgages come up for renewal and that would stop bankruptcy problems due to re-financing… and the Fed wouldn’t have needed to cut rates to do so. Everyone that would borrow money and buy a home (or spend it on vacation/renovations/etc) due to low interest rates have already done so… the housing was going to slow down no matter what. The interest rate cuts would NOT and could NOT stop a slowdown from occurring. They thought they could stop it from happening and they’ve made the entire economy unstable to do so. The price of oil, timber, gold, silver, metals, food.. well, the price of all commodities are rising and that will hurt the buying power for everyone in the U.S.!

This latest Fed decrease will do no more good than the last and this failure for the economy to positively react to drops in interest rates will cause more panic and show more weakness. The economy was going to show some weakness regardless of a rate cut, but an economy that doesn’t react positively to a massive rate cut is considered much weaker (and due to a falling USD, it is much weaker)! Now that interest rates are this low, what more options do they have? Lower it some more which in turn will cause the USD to fall some more, which in turn hurts the U.S. economy, consumer and corporations? They are running out of options!

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