When things go bad for the Dow, is rate cuts always the answer?

Question

I mean, it seems to me that everytime the stock market has a bad month or a couple, the Fed has to jump in with the promise of a rate cut--and everything goes back to the way it was:

Stocks go higher and every trader is happy.

Is this the answer to dealing with an obviously weak economy and a weak dollar--coupled with a housing meltdown and high oil prices?

More rate cuts? We all know what happened when Greenspan kept rates artificially low for several years: A housing bubble that burst.

(And please don't tell me that the economy is "strong". We all know that it isn't. We've been riding a high of credit debt and mass overspending by consumers to keep ends met for years now, along with higher energy prices, stagnant wages, and higher costs in healthcare and living. Those of you who believes otherwise--clearly haven't been keeping up on the latest news.)

Answer 1

"When things go bad for the Dow, is rate cuts always the answer?" No.

In July, companies started reporting their second quarter’s earnings. Many financial companies were taking write-down’s for bad mortgages they had on their books.

You see, for the past couple of years, money was being loaned out like candy. The mortgages that backed these loans were bundled into what is called a CMO (collateralized mortgage obligations), and stamped with “backed by the US government” and then the CMOs were sold through investments banks throughout the world.

Some so-called safe investments like money market accounts were found to be holding some of the CMOs, and when the CMOs started to be discounted in price, that is, the CMOs were not worth as much, because many of the mortgages started to go into foreclosure, investors started to lose money.

Other problems came up as well, for example, tons of CMOs were being held by financial companies around the world, sitting on their books, and what the CMOs were being valued at on the company’s books turned out to be too high, that is, they were priced at a price that the company could not get if they decided to sell the CMOs. Obviously, this was not good; it meant that many balance sheets for many financial institutions may be overstated.

Spreads between Treasuries and junk bonds started going up, meaning that investors demanded more money for the risks they were taking on with subprime loans. Also, the insurance that bond investors paid to insure their junk bonds started going up a lot.

All this put strain on the junk bond market and subprime mortgage market, which in turn put a strain on the leveraged buyouts that were going on in the stock market, which were mostly funded by junk bonds, and a strain on the mortgage market, that lately, had become more and more subprime. All this when the housing market was already having problems.

Still more problems, there would even be more defaults and foreclosures, since many mortgages were ARMs, and the adjustment of those ARMs, would be adjusted up since short-term interest rates were higher, many holders of those ARMs would not be able to make the new, higher payments. Moreover, they would not be able to refinance because their house’s value had declined. Meaning, the problems with housing and the mortgage market would likely get worse.

You had a global sell off in the stock market, with the DOW going from 14,000 down to 12,700.

On the day it hit around 12,600-12,700 the Fed had an emergency interest rate cut of the discount rate of ½ point, and then on September 18 when the Fed had its normal meeting they cut the Fed funds rate by ½ point as well. Also, throughout the meltdown of Dow 14,000-12,600, the Central Banks around the world injected about $700 billion worth of “liquidity” into the bond market worldwide.

By liquidity I mean they printed money, dollars, Yens, Euros, and then took the money and bought some of these “bad loans” through the open market in hopes of stabilizing the market. That is, the Central banks from around the world, printed money and bought up some of the bad loans made by financial institutions.

Why, because the Central banks thought that if they did not, it could turn into a systematic problem, that is, a problem, that if let go, could bring down the global financial markets.

Why did they cut interest rates, to stabilize the global bond market. Also, if the housing problems continued in the US, the global bond market could still have serious problems, by cutting interest rates, they lowered short-term rates, which may help some of those who would see their mortgages reset. That is, if short-term interest rates were lower, when a mortgage was reset, it would be reset at a lower rate, still higher than the original rate, but not as high as it would have been if the Fed had not lowered.

One may ask why did the Fed not lower months ago, that is a very easy answer. If you lower rates, that would make the already weak dollar even weaker. Also, inflation could be more of a problem. The CPI was already a problem for the Fed, that is, the Core CPI is 2.3% and the overall CPI is 2.8%, both higher than what the Fed wants, which is why they were not lowering before.

And for those of you who don’t think there is a problem with the dollar or inflation, then why, after the cuts, is gold $775, oil $89, and the dollar index at an ALL TIME LOW of 77.5.

The Fed is in an extremely difficult period, huge trade imbalances, huge budget deficits, a credit crunch, a mortgage meltdown, a housing recession, a slight up tick in unemployment, and a slowing economy, which all means lowering interest rates, but on the other hand (which is why Truman wanted a one-armed economist) they have the CPI, both the overall and core higher than what they want, the dollar index at an all time low, and commodity prices going through the roof, which would mean an interest rate hike.

Things don’t look that good for the Fed or the economy. And no, interest rates cuts are not a panacea like the vast majority want to believe.

Answer 2

In my opinion (an this is shared by others), the Feds are trying to ease the risk of a recession. We're already seeing some of the effects now, but only in certain sectors, namely housing.

The problem with the housing market can't be blamed on the Fed. Greenspan didn't cause lenders to make loans like the Option-Arm. Nor did he force sellers to become greedy and ask for more than their house was worth.

Did he make those options available to people? Yes, but he didn't cause the bubble to inflate or subsequently burst.

The idea now is to restart an idled engine before complete momentum is lost.

If we go into full blown recession, millions of jobs will be lost and major reconstruction of our economy will need to occur in a couple of years.

That kind of situation isn't great when our dollar isn't worth much to other countries as it is.

So no, it's not the only method, but it's one that should help lessen the damage of greedy americans who over extend themselves.

Answer 3

I think cut rate is inevitable for the economists or federal financial strategist to renormal the investment in stock market and housing market. The main reason is that the investors can borrow more and more to invest (gamble) in the games of stock and housing markets, those investors are included lots of smart investors from financial institutions, bankers and,probably the number two richiest man in this world. All these investors are having the same economic syndrome of "greed-selfish-fear". They don't give a damn to the other peoples and nations who can't afford to play these games but need to share the same staggering inflation of every daily necessity. Even though many smart-assed Hong Kong investors are aware the stock markets will go clash soon as an inevitable process, they still go on invest because they are addicted to it. They are all having the same economic disease. As many Americans are dipped into the social and highcost heathcare problems, they certainly can't cope with the higher cost of energy and staggering inflation. Many stock promoters keep on sending me good written articles about how to make more than one million US in three to five years with qouted statistics of invested names of stocks and earned profits of the individual. One sender indicating the crude oil will raise to 100 US per barrel soon. Another promoter said that America should invade Iran to pop up the oil price.
I personally think that the housing prices should go down at least 60% lessen in Hong Kong, US and Canada. The stock markets should go crash in North America and Hong Kong accordingly. This god mercy process can help the many out of the hardship of proverty and save a lot of lives, too. Why the Amreican dollar is weak? I think the American debts are heavy and need a better export too. The stronger dollar and higher interest rate is a better way to stabalize the "home economy" in a no war and no extra way of making extra big monies by using new betting styles of wagering in horse racing and particularly the stock markets to attract those no so smart gamblers. The bubble economy is the symbolof Hong Kong misfortune to the majority poor but good to fewer riches.

Answer 4

No, it is not always a good idea. Although the purpose of most interest rate cuts is to boost economic growth at times when growth is too slow, the purpose of the recent rate cuts is to avoid or delay the bursting of the housing bubble, by making it easier for those who borrowed or lent irresponsibly to refinance loans.

The downside of the cuts is that they reward the irresponsible behavior that created the housing bubble in the first place, and because cutting rates lowers the value of the dollar and increases inflation, they punish those who earn salaries or keep savings in dollars.

The current, moderate rate of economic growth is such that rate cuts were not needed. Cutting rates to avoid the political pain of a bursting housing bubble, at the expense of further devaluing the dollar and fueling inflation, is a bad idea.

* I respectfully disagree with Nate. The Fed is absolutely responsible for the housing bubble. In order to avoid necessary pain when the stock market bubble burst in 2000, the Fed imprudently cut rates to historic lows. Those cuts fueled the rapid run up in house prices, which made exotic mortgages necessary to squeeze borrowers into ever more expensive housing. When Greenspan cut rates too low in 2000, he traded a stock market bubble for a housing bubble. Cutting rates now is just repeating the same mistake.

Answer 5

uncomplicated. it relatively is a tax hike! From the la cases: "The wide parameters of Obama's plan contain reducing the effectual tax fee -- the actual volume firms pay after tax breaks are deducted -- to no better than 25%, down from the present 32%. however the equipment could seek for to develop $250 billion greater from firms over the subsequent 10 years." in this doubtful financial gadget, does it relatively make experience to function yet a million greater reason for firms and their jobs to bypass away the u . s .? Why could no longer he purely decrease the loopholes and the corporate tax fee so it relatively is a ruin even proposition?

Answer 6

Can't add much to Market's answer. I've been saying for a couple of decades now that America's entire economy has been running on imaginary money and eventually it would catch up to us. It has, and the result isn't going to be pretty!