Why on earth the FOMC would want to undo any of the work by Treasury with a rate cut? The whole idea of letting Lehman die is to reintroduce the concept of risk and eliminate some of the Moral Hazard  fostered by prior bailouts.

The current market bet is that a 25 or even 50 basis cut may occur at tomorrow’s Fed meeting.

That would be ill advised.

We have survived the initial impact caused by the collapse of Lehman Brothers (LEH). AIG is certainly in trouble,  as are Wachovia (WB) and Washington Mutual (WM) and others.

The Fed would be well served, with rates now at 2%, to keep some powder try for the latter innings of this crisis.

Unless we are looking to emulate Japan’s 15 year recession, a ZIRP/pushing on a string policy would not be advantageous.

Category: Bailouts, Federal Reserve, Fixed Income/Interest Rates, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “A Disastrous Rate Cut ?”

  1. John(2) says:

    Alan | Sep 15, 2008 1:57:55 PM

    Alan with due respect the patient has cancer, Gorelick is athlete’s foot. I don’t like to tell you this but the current Republican administration have just taken more power over the direction of the financial part of the economy than any govt since the days of FDR. And in fact all industrial economies are govt directed to a greater or lesser extent. You also seem to have a thing about F/F as the source of all evil and that their being allowed to expand is why this has all happened. Well I’ve also got news for you, Paulson/Bush and co have just signed off on a substantial expansion of their mortgage book over the next couple of years. Nor are they going away whatever anyone may say because they are an essential lubricant of the retail mortgage market which supports housing sales of around 7.5 million in a so so year. I’m afraid I find a lot of the comic book imagery with paper heroes and villains very odd given that this is a financial blog.

  2. johntwo:

    “You also seem to have a thing about F/F as the source of all evil and that their being allowed to expand is why this has all happened.”

    you have a nasty habit of putting words into other people’s mouths.

    it’s a weak rhetorical trick, replete with logical fallacies, that are the crutch of weaker minds.

    I suggest you give it up, and stand on your own.

  3. Posted by: Bruce | Sep 15, 2008 2:06:33 PM

    Bruce,

    I hear ya about the BBA, though, if we really want that, I think it’s necessary to cut the FedRes out of the USTreas financing picture and scrap their currency monopoly a.k.a. Legal Tender laws.

    That Duopoly is the textbook example of Addict and Pusher. Can’t cure one w/o separating him from the other..

  4. CNBC Sucks says:

    Anybody have any thoughts on the dollar trade given the original topic from BR? Sorry to bring it up again.

    Just saw the Meredith Whitney interview with Barforomo. There was some catty tension there. I forgot to add Whitney to my list of “audio on” guests on CNBC.

  5. Bruce says:

    Mark,

    It is just an idea, around a long time, whose time has come….I sound like a broken record, and people may tell me to shut up..but if families and counties and states have to have a balanced budget…

    Uncle Same needs to too…..

    It is really only common sense.

    And those of you who say, yeah, but we need something immediately…well, there ain’t no wonderful solution right here and right now…we got out of the airplane and the chute won’t open…the balanced budget amendment means the same thing won’t happen to your children…

    or your grandchildren.

    Bruce in Tennessee

  6. wnsrfr says:

    Does anyone else here think that GLD looks like a good buy here? I’m kinda surprised it hasn’t gone up more than it has…

  7. HCF says:

    > Anybody have any thoughts on the dollar trade given the original topic from BR?

    My opinion on the dollar trade topic… I think if the Fed cuts, the short term reaction is falling against GBP/EUR. I don’t think that will hold, however, as it’ll be economic weakness pulling down all fiat currencies against gold and other precious metals (i.e. dollar is just as good/bad as Euro or Pound b/c the same shit is weighing on all of them). Other metals (industrial metals) and most commodities suffer asset deflation. Maybe the only currencies to rally will be Swiss franc (a safety play?) and high-yielding currencies (AUD perhaps?). Precious metals rally because we all like shiny things (as well as guns, booze, and girly magazines).

    Of course, I am just an armchair economist, so it’s just fun the sit back and speculate. Good topic, CNBC!

    Disclosures: long GLD, FXF (and suffering for it until today =) )

    HCF

  8. brion says:

    Doctrinaire republicans like alan have been bred these last 8 years to withstand all attempts at objectivity. They are ubermen, masters of the universe, the smartest guys in the room and entitled beyond belief. They are nothing but crony capitalists dressed up in Ayn Rand’s trampsuit.
    Barry’s blog draws them inexplicably in like fly’s to honey.

  9. CNBC Sucks says:

    1. HCF – thanks. Would I be correct in assuming then that you expect ECB and BOE to ease at some point, or is that a necessary condition for your trade to play out?

    2. Would love to hear any other thoughts on the dollar trade.

    3. Can someone please tell CNBC its currency ticker at the top is bass ackwards? The “Euro / US$ 1.4278″ should be “US$ / Euro 1.4278″; same for the other currencies. This makes the indicator arrows confusing.

    4. Whoever overly politicized this blog with his “VOTE FOR OBAMA” rants, I would like to kick his ass.

  10. KellyD3 says:

    “And I’ve been putting out fire with gasoline”
    David Bowie – Cat People

  11. batmando says:

    http://www.youtube.com/watch?v=ZhFwElijFIw
    They’re driving long nails into coffins
    You’ve been having sleepless nights
    You’ve gone as quiet as a church mouse
    and checking on your rights
    The boss has hung you out to dry
    And it looks as though
    they’ll punish the monkey
    and let the organ grinder go

    You’ve been talking to a lawyer
    Are you going to pretend
    that you and your employer
    are still the best of friends?
    Somebody’s going to take the fall
    There’s your quid pro quo
    They’ll punish the monkey
    and let the organ grinder go

    Here comes a policeman
    He won’t be sidetracked
    He’s asking about a smoking gun
    He’s after the facts

    It’s a quiet life from here on in
    You’ve dropped your poison cup
    The telephone is ringing
    But you’re not picking up
    Time’s up, Sir Lord Flunkey
    And everybody knows
    they’ll punish the monkey
    and let the organ grinder go

  12. batmando says:

    http://www.youtube.com/watch?v=ZhFwElijFIw
    They’re driving long nails into coffins
    You’ve been having sleepless nights
    You’ve gone as quiet as a church mouse
    and checking on your rights
    The boss has hung you out to dry
    And it looks as though
    they’ll punish the monkey
    and let the organ grinder go

    You’ve been talking to a lawyer
    Are you going to pretend
    that you and your employer
    are still the best of friends?
    Somebody’s going to take the fall
    There’s your quid pro quo
    They’ll punish the monkey
    and let the organ grinder go

    Here comes a policeman
    He won’t be sidetracked
    He’s asking about a smoking gun
    He’s after the facts

    It’s a quiet life from here on in
    You’ve dropped your poison cup
    The telephone is ringing
    But you’re not picking up
    Time’s up, Sir Lord Flunkey
    And everybody knows
    they’ll punish the monkey
    and let the organ grinder go

  13. Bruce,

    re: “And those of you who say, yeah, but we need something immediately”

    those people have brainwashed by Keynesianism passed off as Economics.

    also, they’re deluded into believing that ‘the Gov’t’ has ‘money’ of its own.

    they never appreciate that Gov’t spending is a Tax increase, either Direct, or Indirect(through Inflation), that always costs the least among us the very most.

    Every action they demand, via Gov’t, contradicts, in effect, the mantras they espouse as justification.

    It’s funny that we get called out as ‘heartless’ y ‘out of touch’…

  14. a different chris says:

    >those people have brainwashed …we get called out as ‘heartless’ y ‘out of touch’…

    Dude, you… you… take an economics course, for god’s sake. I don’t know what to do with a post in which every sentence except for the last is completely, utterly wrong. And the last is exaggerated and frankly pretty damn whiny.

    Esp. for a person who I am sure will quickly assure me about how rich he is.

    The best I can say is “You keep using the word (money,taxes) — I don’t think it means what you think it does.”

  15. HCF says:

    > Would I be correct in assuming then that you expect ECB and BOE to ease at some point, or is that a necessary condition for your trade to play out?

    In my opinion, I think the key is not so much ECB/BOE easing, but asset deflation. I expect that the LEH/AIG/etc. fallout leads to a lot of de-leveraging. If that process continues, coupled with negative economic news (employment, etc.), then all non-precious metal commodities should deflate and ECB/BOE will suddenly have the cover they need to cut rates (and debase their currency in the process).

    My long FXF/GLD thesis kind of rides on:
    1) fear of major fiat currencies
    2) perception of safety of gold and Swiss chocolates/knives/watches/currency
    3) no major interim term directional play in major currencies (USD/EUR, EUR/JPY, etc.) because of common ailments between all

    To be honest, though, I have such a small % in those. I’m really playing the long SKF, FXP, EFU angle the most. I was previously solidly in the “inflation” camp, now moving towards the “deflation” camp, so really I’m just trying to find things that will work no matter what color the shit that hits the fan is.

    HCF

  16. VG says:

    There’s no point in keeping your powder dry when all boats are sinking into a high-pie of deep doodoo.

    Or to put it more clearly:

    When you have ten thousand nails that need pounding, you need something that looks like a hammer. Quick

  17. Bruce says:

    Only twenty minutes until I get to see Cramer eat crow…think I’ll open a nice Merlot and turn on CNBC for a few minutes…

    S and P lowest since 2005 today.

    Bruce in Tennessee

  18. cnbcsucks says:

    HCF – thanks for that. I don’t necessarily buy the complete deflation (due to other factors beside deleveraging) leg of your argument, but I value the broader picture on currencies and your thoughtful underlying thesis.

  19. HCF says:

    > I don’t necessarily buy the complete deflation

    Actually, neither do I, at least not enough to bet the house on it. It’s just my theory that all people have a tendency to linearly extrapolate, esp. in absence of better information. So if de-leveraging causes even temporary across the board fall in commodities, I’m convinced central bankers will point at it go “DEFLATION!” Either way, this is fascinating to watch… =)

  20. Posted by: a different chris | Sep 15, 2008 4:57:47 PM

    a d c,

    if you would, spell it out for me. re-reading what I posted, I might have drawn too straight a line through the sphere, but the intent’s clear..

  21. terminal says:

    For those who haven’t yet gotten or read the memo from this Weekend at Bernie’s, the rules have changed. There will be no rate cut tomorrow from the Fed.
    Today’s large add leaves the market awash in funds, and the Funds close today was uneventful.
    Of course the distrust among the players makes repo between difficult and impossible for non Treasuries.
    Similarly the CDS market is not functioning. Most of the pricing is coming from dealers marking their own books.
    On the other hand, if the panic into Treasuries continues, along with falling commodities and non-weakening dollar, this will be a de facto rate cut from the market.

  22. brion says:

    It’s funny that we get called out as ‘heartless’ y ‘out of touch’…

    Posted by: Mark E Hoffer | Sep 15, 2008 4:18:58 PM

    “heartless” because right wingers inevitably fail to recognize the repercussions, knock-on effects and general unintended consequences of their bullshit pie in the sky policies. You folks tend to fuck up other peoples lives, survey that wreckage, then solemnly declare therein lies the proof of your superiority to “the rabble”.

    “Out of touch” because after 8 years of enactment of your neo-con pipe-dreams, the country is, as predicted, a hollowed out, smoking hulk!

    “Trickle-down” econ policies ALONE are worth your admission to the freak show tent of american political history.

    “I know Chad, let’s fatten the rich and the CORPulent…. What could POSSIBLY go wrong?” lol

    Some of us on the Left have longer memories than others.
    We KNEW on inauguration day 2000 when W. stuck his oily hand on the Good book that the ensuing lightning blast would strike, not the man, but the entire country.
    Thanks for the memories winger.

  23. Posted by: brion | Sep 15, 2008 9:04:49 PM

    Confuse me, not, with being a ‘neo-con’.

    You’re ascribing, to me, many things I had nothing to do with and many things I’ve never supported.

    I did say, to restate: those people have been brainwashed by Keynesianism passed off as Economics.

    also, they’re deluded into believing that ‘the Gov’t’ has ‘money’ of its own.

    they never appreciate that Gov’t spending is a Tax increase, either Direct, or Indirect(through Inflation), that always costs, the least among us, the very most.

    Every action they demand, via Gov’t, contradicts, in effect, the mantras they espouse as justification.

    to add: they cripple those who they pretend to heal. my friend, if gov’t intervention was the panacea that it is sold as, this world would be a radically different place.

    and with that:

    It’s funny that we get called out as ‘heartless’ y ‘out of touch’…

    because I want people to be Free to choose, for themselves, in Liberty, and, not, shod, by the State, to travel the Road to Serfdom.

  24. brion says:

    apologies Hoffer-i saw the quote out of context….

    I’m just apoplectic at what the right, in collusion with a handful of bankers and an enabling Fed, has done to this country…..
    I’m afraid this time they’ve REALLY screwed the pooch.

  25. Richard Kline says:

    When the only thing you have in your toolbox is a nail gun, everything looks like a target, including your own foot and the public’s expansive arse. A rate cut now is playbook ‘smart’ but field position stoopid. It’s a waste in terms of it’s impact, and it will only hurt the $ at a time we need to keep that as stable as possible. Ben & Co., please say no, not now.

  26. rational says:

    Hopefully Buffet will work out a deal for AIG and the Feds have a bias towards backing depository institutions, think WaMu and Wachovia.

    I don’t think it is in Buffett’s interest to bail out AIG or anyone else for that matter. Remember he has been warning the country about derivatives and about a weak us dollar for the last four years. Buffett’s interests are better served by letting the irresponsible idiots crash and burn. There is still plenty of denial around Wall Street and Main Street.

  27. brion,

    no probs, these people, that you mention, are beyond description and without remorse.

    we need to be careful though, the ‘left’, or (D)’s, themselves, are no saviors, they’ve been aiding and abetting this ghastly scene. Pelosi’s tenure, over the last year and a half+, is just the most recent example of it..

    past that, though, there are good ideas, and good people to be found on both sides of the aisle-as we now know it. we better, if we care anything about this Country of ours, find a way to stand together…the rest is an old adage..

  28. rational says:

    We are entering very interesting times here. It is safe to say the house of derivatives is coming unglued at a fast pace and given the size of the notional exposure (several tens of trillions of dollars for each of the top few banks/brokers; yes, trillion with a T) and the lack of disclosure surrounding derivatives, a lot of shit will hit the fan. The Fed is obviously working overtime to prevent this, but these are the same folks who brought us this disaster. Why do we trust them to know how to fix a mess they didn’t have the wisdom to prevent (despite warnings from the likes of Buffett and scores of others)?

  29. Clint Golden says:

    As a casual observer who is not in the “Trade” but is merely the president of Me,Myself & I, Inc. (a bigger entity then Enron at this time), it amazes me that many of you posters who are more knowledgeable then I in these matters, waste time giving each other Monkey bites over where the the fault lies regarding this clusterfarked financial mess.

    It is not a result of Republicans or Democrats. In this situation (as with many situations), there is only one party affiliation and that is the “Green” party and by “Green” I don’t mean Birkenstock wearing, tree-humping, carbon credit trading, moss-backed Oregonian Evironmentalists.

  30. Tom says:

    Any add’l liquidity so created will be hoovered up by the banks with zero relief for consumers, so no real effect beyond a brief rally.

    At that, any liquidity created won’t be enough to make any real difference for the banks.
    Like said above, when all you’ve got is a hammer…