While I’m not a huge fan of Bernanke in this mess, I will say that cutting the funds rate by 0.5% wouldn’t do much in this environment.
The simple fact is that banks don’t want to lend to each other. Setting the target rate for this activity is pretty futile if the banks won’t engage, or (if you look at the spreads) the market indicates that the Fed would be pushing on a string if they did lower rates.
The Fed cannot squander their credibility. If they cut the funds rates and the market doesn’t follow... the Fed has far bigger problems than they started with.
For now, the targeted lending programs are the better way to attack this problem.
And, I’d add, the way they handled AIG is better than what they’ve done before. They’re charging confiscatory rates (LIBOR+850bp) for that $85B. You could probably get a better rate from Tony, Sal and Luigi, albeit they probably don’t have $85 billion sitting around.
They’re charging confiscatory rates (LIBOR+850bp) for that $85B. You could probably get a better rate from Tony, Sal and Luigi, albeit they probably don’t have $85 billion sitting around.