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Central banks cut interest rates

Wednesday, October 8, 2008, 6:32 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).

Quote:
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%.

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.

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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24 Comments

tmcqui01's picture
tmcqui01
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Stealth rate cut?  What's
Stealth rate cut?  What's this about a stealth rate cut?  Can anyone provide any detail on this?
cmartenson's picture
cmartenson
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Stealth Rate Cut

Good question...so much going on I've forgotten what I have posted and what I haven't.

[quote]Oct. 7 (Bloomberg) -- The Federal Reserve may have trimmed borrowing costs yesterday without actually saying so.

The central bank used power granted under last week's financial-rescue legislation to effectively set a floor under its main interest rate that's lower than the 2 percent target set by policy makers last month. The Fed may now pay interest on bank reserves while it floods financial markets with liquidity, pushing down the overnight lending rate by about 0.75 percentage point to 1.25 percent.

``Absolutely, it's a stealth easing,'' said John Ryding, founder and chief economist of RDQ Economics LLC in New York and a former Fed researcher.[/quote]

Link (Bloomberg)

Norbody's picture
Norbody
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the world responds...

wow! steve forbes concedes that we're gonna see the 30s and 70s again::

http://www.cnbc.com/id/15840232?video=881973581&play=1

and then there's a lot of blah blah blah in there. and a lot of talking heads that don't want to hear it!!

Norbody's picture
Norbody
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unstealthy

i've been saying the same thing for awhile--rate cuts mean nothing if you still can't qualify for a loan.

it's all a show...

lower interest rates, so that the people at large think you're doing SOMETHING.

then amp up the qualifications for getting financing.

and then say, "what happened?! we tried!"

i'm still having a hard time wrapping my head around how this helps THEM. who are the people at the end of the money trail? and how do they cash in?

cmartenson's picture
cmartenson
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Rut Rho!

For about five years I have been waiting for the day that the Fed held a rate cutting party and nobody came.

Looks like today could be the day....the S&P futures have already given up all of the 'pop' and are now doing a 'drop'. (Image below current as of 8:50 a.m.)

 

 

This is not a good sign....very bearish...if the stock markets crumble after this coordinated Central Bank effort it will mean that global confidence in these institutions is gone.

This will severely limit their ability to effect any meaningful change in the markets by using their old tricks and words.  Now they will have to "show me" to all the market participants.  

aczop's picture
aczop
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China's involvement

I'm still learning how our own economy works, so please forgive me for definitely not understand the world's economy as a whole, but why do I never see China mentioned when talking about the current crisis?  There are many countries I've been seeing on the list of "in (or having) trouble," but China hasn't really been on the lists I've been seing, and I can't figure out why that is?  Are they sort of their own entity and not affected by the economy of the rest of the world?  And why do they now choose to become involved?  Are they beginning to feel (or anticipate) the effect on the rest of the world's economy?  Or have they been involved the whole time, and I've missed it?  Or am I completely off base in even asking a question like this in the first place? 

Also, when I try to keep up with the market and how the US dollar is doing vs other currencies, it seems that it is compared alot to the euro, the canadian dollar, the pound, etc, but I don't really see it compared to the chinese yuan.  Is there a fundamental reason for this as well?

jdb123's picture
jdb123 (not verified)
Europe is Not buying it...
Looks like the FED is dumping large amount s of cash into the US markets ( JMO )...hoping "the world will follow" once again....Doesn't look like Europe is following, even the least bit....
cmartenson's picture
cmartenson
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Frantic stock market buying

Look at the panicked buying of stock futures at the instant of the opening of the US market (circled in green).

 

This is not a sign of health.  This is not what a 'bottom' looks like. 

I have the mental image of a car being jerked from side to side with a guardrail protected canyon on one side and a rock wall on the other.

I consider it extremely probable that these V-bottoms represent official support of the markets (the infamous President's Working Group on the markets, a.k.a. the "PPT" or Plunge Protection Team) and are therefore more prone to failure than natural market moves.

Does the PWG actually exist?  Is it just a conspiracy tale as some allege?

If so, somebody should tell the Treasury Department to stop spreading these rumors on its own website via press releases such as this one from Monday the 6th:

[quote]Washington, DC-- The President's Working Group on Financial Markets issued the following statement today:

Conditions in U.S. and global financial markets remain extremely strained. The President's Working Group on Financial Markets (PWG) is working with market participants and regulators globally to address the current challenges and restore confidence and stability to financial markets around the world.

With the passage of the Emergency Economic Stabilization Act of 2008 (EESA), Congress has granted important new authorities to the Treasury, Federal Reserve, and the FDIC. These new authorities will be employed in conjunction with existing authorities to restore market confidence by strengthening the balance sheets of financial intermediaries and improving overall market functioning.

The diversity of institutions and markets under stress, and the magnitude and complexity of the adjustment underway, requires that the tools available to policymakers, regulators and supervisors be used in forceful and coordinated ways across regulatory and supervisory agencies in the United States and throughout the world. This will involve moving with substantial force on a number of fronts. [/quote]

bsm20's picture
bsm20
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confidence AND trust

Quote:

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.

It seems to me that there is plenty of desire to borrow money, but precious little to lend it.  The underlying problem is a fundamental lack of trust/confidence in the system.   Neither institutions or people want to lend money if they don't think they will get it back (plus interest, as you have often pointed out).  The world can be full of money, but if everybody is afraid that everybody else is going my default (pick your example here...Lehman, Iceland...), then the cost of that money can be zero and nobody will make the loan.  So, you're right, confidence is needed, but I think more so on the lending side than on the borrowing side.  Until confidence and trust is restored, very few lenders will lend without guarantees, and the world economy will continue to circle the bowl.

 

 

ajparrillo's picture
ajparrillo
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Not quite...
Institutions will still "loan" because they are the targets of bailout packages.  The borrowers, in this situation, still end up with debt so there is reluctance to borrow in this financial situation.  The real situation is not a lack of confidence, it is a lack of production that would even begin to pay back the debts in this warped economic system.  The only way to "save" this current system would be to work labor to the bone in terms of production....assuming there was a market to buy these products...which there is not.  As indicated by the Crash Course, this unregulated magical economy has drastically overshot and out paced reality.  Increased confidence as a fix is a myth.
gregroberts's picture
gregroberts
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Naomi Wolf Give Me Liberty
 I found this on Freedom Force, an interview with Naomi Wolf where she says that this economic crisis will cause Bush to take over as dictator. I've been thinking lately that this is a possibilty, he has the power to do it. I've also been seeing mention of a banking holiday popping up on the internet, might want to get prepared for the possibilty of that, get some cash, fill your car up with fuel, some extra food, etc.
Woodman's picture
Woodman
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Problem was too much confidence and trust

My take the present problems are because there was too much confidence in the future, by both leners and borrowers, that we could just keep growing and growing despite uprecedented population growth, debt, peak oil and other resource constraints, and environmental degradation.  But I still hear mainstream investment folks saying ride out the storm, long term growth will bring the market back over time when this calms down.  Political leaders are only talking the need to maintain our modern standards of living.  To restore my confidence I need to hear our political leaders explain they truly understand what is going on and that we start planning to make massive changes in our consumptive lifestyles. 

switters's picture
switters
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The truth hurts
[quote=woodman]

But I still hear mainstream investment folks saying ride out the storm, long term growth will bring the market back over time when this calms down.  Political leaders are only talking the need to maintain our modern standards of living.  To restore my confidence I need to hear our political leaders explain they truly understand what is going on and that we start planning to make massive changes in our consumptive lifestyles. 

[/quote]

And that's exactly what you'll continue to hear.  It's well known that any politician who suggests anything that leads to a reduction in the standard of living simply will not get elected or re-elected.  Americans, for the most part, are currently far too addicted to their way of life to willingly give it up.  Politicians know this so they tell us what we want to hear.

The other issue is that our leaders are people just like the rest of us.  They are just as vulnerable - if not more so - to the mainstream rhetoric which states that this is just another cycle in a long history of cycles.  I honestly do not think that Obama or McCain believe that our civilization has peaked and we're headed for a long descent into deindustrialization.  They believe, like many others, that we're facing another severe crisis after which we will resume our inexorable growth and expansion.  To their credit they've acknowledged that this crisis is worse than anything we've faced since the Great Depression, but how could they ignore that?

If Obama stood up and said, "Folks, I'm here to tell you that this is the end of the American way of life as you know it" - which is essentially the truth in a nutshell - do you think he would get elected?  Dennis Kucinich, a rep from California, got closest to telling it like it is during the primaries and they didn't even let him debate.  

The truth is ugly right now, and few people want to face it.  Especially politicians. 

mainecooncat's picture
mainecooncat
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Kucinich
Kucinich is from Ohio
switters's picture
switters
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Oops.  Brain lapse.  Yes,
Oops.  Brain lapse.  Yes, he's from Ohio - thanks for catching the goof.
john50's picture
john50
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Trust based on reality not avoidance

Thanks Woodman - I think you nailed the big picture. The markets will fall and financials will crumble until the Nations are humbled enough to seek a new system - rather than hoping to sidestep this mess without any consequences and get righ back to doing the unsustainable. I put the bottom around 2014-16 based on demographic experts and socioeconomic cycle expert models.

Central Bankers are panicked over deflation right now. Pulling the interest rate card is not effective when a freefall is underway. They see us following Japan in 1990 or worse. After Nikkei lost 10% last night, and is about 25% of the 1989 high, nearly 20 years later Japan has not overcome the excesses from 60's-70's expansion policy.

I would be relieved to hear more honest assessment from leaders, rather than the denial and propaganda to maintain hope in the status quo. It would be refreshing for new voices to stand up and say, "Start Saving and preparing for a simpler lifestyle". Is the end of the consumer age so bad? It may be a blessing to not define happiness by SUV and Plasma TV purchases. Unfortunatley, change will be forced on the World, because leaders lack the character and discipline to deal with problems at the earlier stages. Lessons of History are about to be repeated. Humans are not much smarter than the bacteria in the bottle, are they?

mizbear's picture
mizbear
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I know we are out of the

I know we are out of the way a bit, but we had some unexpected action on the part of the Reserve Bank on Tuesday.  The first Tuesday of every month sees the Reserve Bank - the equivalent of the Federal Reserve in the US but with a couple of key differences - review the cash interest rate for Australia.

The pundits were all predicting a cut of 0.5% - they actually cut rates by a full 1% which shocked everybody.  The last time there was such a huge drop in one hit was 1992 when we were recovering from a period of interest rates up around the 17% mark.

Our stock market rallied on the back of their announcement, but once again it has plunged.  The AUD against the US dollar has been riveting too.  Not more than 8 weeks ago One Aussie dollar was buying 97cents US.  This morning it's dipped below 70 cents and is sitting at 66c.  The Australian Stock Exchange opens at 10am and I'll be interested to see what happens.

Davos's picture
Davos
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Stealth

Hello tmcqui01:

 I can't comment for Chris but I assume he is speaking of the "Fed's" Discount window. Basically they have auctioned off BILLION's below their rate and that is why this is symbolic.

Smoke and mirrors, like their name. And many, many experts believe that the Fed controls mortgage rates... 

EndGamePlayer's picture
EndGamePlayer
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China's Involvement

Aczop-

China has some "sheilding" from the outside markets and (it's my understanding) only moves money into outside markets through Hong Kong (which maintains the British baking system). It had limited funds invested compared to Europe and the rest of Asia.

Another reason China seems unaffected by the "crisis" is because if "debt is a claim on future human labor", then China is the richest country in the world with over 3 Billion people.

Lastly, China is a country coming out of commuism so the debt ratios don't match up to the debt to human ratios we see elsewhere in the world.

My guess is at this stage of "coming out" they may be realizing industrializing China could have a really down side.

Still the world can not be economically dominated if China is not within their control so I see some point where they (the central banking system . .AKA shadow government)  will try to add pressure.

China is often under estimated and if they are as smart as I think they are, they will do a quantum leap in technology and surpass  the need for oil, gas and central banking. China and India may well devlop beyond our expectations in the next 10 years.

EndGamePlayer's picture
EndGamePlayer
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unstealthy
[quote=Norbody]

i'm still having a hard time wrapping my head around how this helps THEM. who are the people at the end of the money trail? and how do they cash in?

[/quote]

Right Norbody, this is all a made up "crisis" since the average investor can't manipulate the market like this - it gets too obvious. This is exactly how you would want to play it all out if you are going for economic domination of the industrial world. Once you "get your head around" that, it becomes what Chris detailed and plays out all in perfect harmony.

Who is at the end of the money trail? Check out: www.zeitgeistmovie.com/ for complete details.

Don't worry if you can't handle the truth - it is a very hard pill to swallow.

Ray Hewitt's picture
Ray Hewitt
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Keystone Kops
The Feds are so stupid, it would be funny if it weren't real. Whatever Cox, Bernanke, Paulson, Congress and Bush do makes matters worse. Then the Plunge Team comes in to forestall an appearance of panic in the markets. This has the makings of a stampede for the exits over the dead bodies of these clowns. The G7 are supposed to be holding an emergency meeting this weekend. If market panic continues to spread, their last option is to shut them down.
machinehead's picture
machinehead
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Posts: 1077
Octuple-plus Ungood

Even worse, after a globally-coordinated rate cut, the S&P closed down on the day, thanks to a telling final-hour slide.

VIX is at an eye-popping "Heinz 57," so the sucker is going to keep bouncing like a motocross bike on a washboard road.

Nevertheless, the "market's" Bronx cheer in response to this desperate central-bank Hail Mary pass is horror-show bearish. The "market" may need to test the Oct. 2002 low at some point. That would be 777 on the S&P index.

Gotta love the way they manage it down 5% per day, instead of just letting it fall 25% in one day on record volume. Managed markets don't clear. Remember that, Ben.

Dr. John's picture
Dr. John
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The Financial Crisis Explained

A very basic explanation, easy to understand...

 

http://www.youtube.com/watch?v=_o4IcNbfPMA

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eternal sunshine
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Who wants to borrow?
[quote=cmartenson]In order for that to be effective, somebody has to want to borrow it.
[/quote]
In the UK we are being told that this move is to free up lending between financial 
instituitions
[quote]Robert Peston on his BBC Website Blog
The emergency action by the authorities to reverse the direction of
the global economic supertanker away from a seriously impoverishing
economic downturn also includes the lending of taxpayer's money to
banks on a mindboggling scale.<br>This is absolutely essential, if 
banks aren't going to dramatically reduce what they lend to 
households and businesses and to ensure that at least some of the 
reduction in official rates is passed on tocustomers.[/quote]
Rightly or wrongly we do apparently have potential borrowers unable to access
credit here in the UK

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