Posted on 08/30/2007 6:27:39 AM PDT by Hydroshock
FRANKFURT (Reuters) -- The U.S. Federal Reserve is not rushing to cut benchmark interest rates because it wants to break investors of the view that the central bank is there to bail them out, an article in the Wall Street Journal said on Thursday.
Fed watcher Greg Ip, without quoting specific sources, said Fed Chairman Ben Bernanke was keen to draw a distinction between keeping financial markets ticking over and ensuring a sound economy.
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The article said there was a perception, while Alan Greenspan was chairman of the Fed, that the Fed would react to problems of financial stability by cutting rates but that Bernanke was keen to break the automatic assumption that market convulsions lead to interest rate cuts.
The Fed cut the rate it charges banks for direct loans earlier this month amid financial market turbulence but has made no change to the benchmark Fed funds rate of 5.25 percent.
"Officials acknowledge the perception of bailing out investors exists and if allowed to grow, could erode the credibility they need for keeping inflation low and encourage lax attitudes toward risk," the article said.
(Excerpt) Read more at money.cnn.com ...
>> The U.S. Federal Reserve is not rushing to cut benchmark interest rates because it wants to break investors of the view that the central bank is there to bail them out
MUSIC TO MY EARS!
I agree that the Fed is not there to bail out investors. On the other hand, it is there to keep the economy going, and I get the impression that they are oblivious to the weakness that their sudden shift toward tightness has caused.
It’s called MORAL HAZARD.
Bingo. Bad decisions have bad consequences. Government can screw this up by jumping in to bail out. If there is a soft handed way to facilitate easing this problem, I say go for it, but don’t just throw money at it.
So when the Fed raises interest rates to damage the economy, is that a moral hazard, too?
It is up in the air I agred, if I knew for sure wha ttht fed would do I would be making that play with all I had.
Raising interest rates doesn't necessarily damage the economy. Better higher interest rates, than inflation.
I will disagree with your comment about the FED shifting toward tightness. The MARKET has shifted to tightness on sub prime lending (which is a good thing IMHO). The FED has increased liquidity into the system to calm fears of a credit crunch. The Fed's main job is to fight inflation and except for times of crisis keeping the economy going is their 2nd priority. This ain't no crisis.
It is the FEDs primary job to oversee the economy for Main Street, not Wall Street.
After the Fed (Federal Reserve System) is a private company without any reserves of its own. It is supported by Congress and has its alliance to the bankers to make a profit on bank customers and Congress. They are not in business to help people but to make a profit off of people.
Your definition of what the Fed is supposed to do is nowhere to be found in the law.
Ok if a stable currency it their job then they certainly do not need to raise rates.
Lip service. Their business over the past twenty years at least has been nothing but doling out bailouts and creating moral hazard.
This is the perception the fed wants to create. However, if we see some large hedge fund seize up (like LTCM 8 years ago) and the markets go into free-fall the fed will call an emergency meeting and do whatever is necessary. I’m not saying that’s in keeping with their mandate, or whether it’s right but that is what they’ll do.
There’s too much debt in the system and a collapse in one sector will have dramatic implications in otherwise unrelated asset groups as margin calls go out. The most liquid assets will be sold to meet those calls. Certain asset classes like the CDO’s will become illiquid with pricing nonexistant as Bear Stearns found out. This debt needs to be wrung out but they want to see it done in an orderly fashion. The question now becomes, is that possible?
What they did was hand out money like crazy for 5 years, and then slam on the brakes.
What they should have done is simply ban the 50 year, 100% financing, with no principal reduction, and required a higher LTV for subprime and luxury financing, both of which are riskier from an appraisal standpoint than the average.
It's common knowledge that the Federal Reserve blames the economy for inflation. In particular, economic growth and low unemployment. Therefore, its intent is to slow the economy down (economic damage) with high interest rates. And it's well known that the economy does slow down as the Fed raises interest rates.
Better higher interest rates, than inflation.
Look at this chart and tell me how well the Fed does fighting inflation with its current methods.
Nice graph. Even has a zero baseline. Still, in some ways, a logarithmic scale may be more meaningful (in your graph, the change from 1995 to 2005 appears more dramatic than the change from 1860-1865, even though the latter represented a much larger change in relative value).
It’s not my chart. I was originally looking for a table I’d seen before when I came across it. One thing I can tell you is that the dollar in 1942 was just about equal to a dollar from 1800. All the net inflation our country has experienced has been from WWII onward. Our dollar today is only worth 5% of what a dollar was worth then. My point is that whatever the Fed does to keep the dollar stable doesn’t work. The chart shows that rather nicely and shows the time period in which our inflationary era began.
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