Wednesday, October 8, 2008, 7:32 AM
World stock markets were in meltdown mode last night. Japan was off more than 10% at one point.
So the world's Central Banks got together and performed an emergency coordinated rate cut of 0.50% (50 basis points).
The central banks of Canada, China, Sweden and Switzerland [and the UK] all took similar action in the coordinated move.
The unprecedented step is aimed at steadying a faltering global economy and slumping stock markets.
The US Federal Reserve has cut rates from 2% to 1.5% and the European Central Bank trimmed its rate from 4.25% to 3.75%.
Fed Funds were already at 1.25% after a stealth rate cut. This 50 basis point cut just gets us officially closer to what was already in effect. So it will not actually change the cost of money in the US at all. Not one tiny bit. Rather, this was symbolic for the US. For the EU it does represent an actual decline in the cost of money, which brings me to my next point.
Second, I cannot figure out how a rate cut does anything at this point. Yes, so money is cheaper to borrow from the Central Banks. Okay. So what?
In order for that to be effective, somebody has to want to borrow it.
Again the Central Banks are fighting the wrong fight. Where they battled liquidity, solvency was the issue.
Now, where they are battling the cost of borrowed money, they have done nothing about the desire to borrow money.
I am quite intrigued to see China on the list of involved Central Banks. This is the first time I can recall their coordinated involvement in the actions of the world banking cartel. Welcome to the club.
Japan was not involved, because they don't have 50 basis points to cut - their monetary policy has been riding the rails right down near the zero line for years. So Japan is now saying to the rest of the world "welcome to the club!"
Despite the fact that the move was merely symbolic, the impact on the US futures was immediate and pronounced. I've never seen a 60 point pop in a 5 minute window before.
Bottom line: The world's Central Banks are desperately pulling on their main lever, with fingers crossed, hoping that it will work one more time. Unfortunately, the interest rate lever cannot fix our current ills...this was merely a psychological shot in the arm, meant to let the world know that the Central Banks are taking all this seriously. A measure meant to add confidence to an economic system that operates on confidence.
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