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It is different this time

Fed Urged To Cut Rates Or Face Recession

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http://news.independent.co.uk/business/new...icle2921895.ece

The Federal Reserve heard a plea for a full percentage point cut in US interest rates in order to forestall a recession, as central bankers debated the fall-out from the housing market slowdown.

The US central bank's annual symposium in the quiet mountain town of Jackson Hole, Wyoming, has this year been dominated by the questions of if and how monetary policy should respond to changes in house prices. The event has been scrutinised as never before by investors and economists for clues as to how the Fed may act at its next rate-setting meeting on18 September.

The Harvard University economist Marty Feldstein, who heads an independent group that charts US business cycles, arrived at Jackson Hole to deliver a warning that sharp declines in house prices in many areas of the country could trigger a much broader recession, if the Fed did not act.

Lower rates may trigger a period of high inflation, which would have to be dealt with over time, but this was the "lesser of two evils", said Mr Feldstein, whose National Bureau of Economic Research is the recognised arbiter of whether the US is in recession. "The economy could suffer a very serious downturn," he said. "A sharp reduction in the interest rate, in addition to a vigorous lender-of-last-resort policy, would attenuate that very bad outcome."

Mr Feldstein made a case for lowering the overnight lending rate between banks to 4.25 per cent from 5.25 per cent to cushion the economy from the fall-out of defaults on so-called "sub-prime" mortgages, home loans handed to people with poor credit histories.

Desperate solutions for desperate times. Strange how they are all trying to save the day but, unfortunately, not the future. BOE should also get ready for same plea or face recession!

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Strange that he said inflation was the lesser of two evils. There's no way that's true. Unchecked inflation destroys economies and societies to the core - witness Zimbabwe and others at the moment and recall Germany's experience in the late twenties.

A mild recession can cut away much of the dead wood and enable fresh growth.

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Strange that he said inflation was the lesser of two evils. There's no way that's true. Unchecked inflation destroys economies and societies to the core - witness Zimbabwe and others at the moment and recall Germany's experience in the late twenties.

A mild recession can cut away much of the dead wood and enable fresh growth.

It's very simple indeed. By just changing a number on a computer (the Fed funds rate), you can not really avert physical misery forever. In the same way, goods and services finally always have to be paid in goods and services. Just stuffing China with paper Dollars won't work.

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If the USA cuts the interest rate by 1% then thats a 20% reduction and it's fair to say it will reduce the value of the fiat $ by 10% or more.

America has been smart to spread it sub-prime around the world but it's currency is being sent home by the ton load as it is and with so many counties wanting out of the $ as a reserve currency it's a fair guess that a further reduction in the purchasing power of the $ will force their hand.

People were hurded towards property and now they are being pushed to buy gold but i'm staying in the middle of the field and stocking up on food and will show the sheep dog that i too have teeth.

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The same guy makes the case for dropping rates before house prices begin to fall as a recession avoidance tactic. So, all speculative bubbles defended by easy credit. Genius.

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Unemployment is at all time lows, manufacturing at all time highs and the SM is soaring. The only people that are hurting are homeowners. IMO, the Fed may hike .25% as the data is very strong. Same here.

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It is clear now that the situation is completely out of control.

So now the speculators and banks get a bailout and those who have worked and saved get shafted.

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So have I got this right

Investment Banks : FED help us, we borrowed loads of money to invest in what we didn't research properly and we got our fingers burnt. So now we want to borrow more money at less interest to make up for it.

FED : No worries you guys were just unlucky I am sure you won't repeat the same mistake.

Me : :blink:

Is this a true reflection or have I over simplified this matter? A bad borrower is someone who generally needs to borrow more to pay back what they originally borrowed. How can anyone justify lowering the interest for them to repeat their mistakes?

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It is clear now that the situation is completely out of control.

So now the speculators and banks get a bailout and those who have worked and saved get shafted.

That is exactly my fear. Why should my prudence be punished? If the FED, BoE etc lower IR's, thats like saying "silly boy, you'd have been better off lieing about your income, buying an overpriced asset and taking the risk....we'll look after you"

Personally, I think the FED and the BoE should stick to controlling inflation - surely thats the main aim? At least then, the workers and responsible people reap what they sew.

If inflation kicks in, anarchy awaits. It is like telling the masses "borrow all you can, fuel growth at all expenses, and we'll inflate the debt away". Farcical.

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The currency markets have already factored in a rate cut of 0.5%.

The real question is what will happen if the Fed doesn't cut by 0.5 but say cuts by 0.25% or perhaps nothing at all?

Edit: realistbear, bernanke would be lynched on the streets if he raised a quarter point!

Edited by visaria

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Unemployment is at all time lows, manufacturing at all time highs and the SM is soaring. The only people that are hurting are homeowners. IMO, the Fed may hike .25% as the data is very strong. Same here.

I nice thought but I'd put money on it going the other way

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From the point of view of the consumer (standing at the end of the chain looking back towards the central bank).

Credit spreads widening from 100 bps to 250 bps are equivalent to a 1.5% increase in the base rate.

lcdx_graph.gif

As they did this summer.

Consumer rates have effectively rose

from 4.5% in Sept 03

to 5.5% in Sept 06

to 8.25% today in Sept 07.

Edited by ?...!

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http://www.markit.com/information/affiliations/abx.html

BTW, I posted this in a new thread which never appeared. Some of you may be interested in seeing the price (or the index price) of the sub prime bonds you may be hearing about.

BBB- are sub prime (I expect this to go to zero) while the AAA stuff will probably decline to BBB-.

Thanks for that visaria... my, my some of those graphs show quite some dips. For the uninitiated like myself may I ask, are the prices here priced to models or are they actual (i.e. traded) market prices? Thanks in advance.

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Unemployment is at all time lows, manufacturing at all time highs and the SM is soaring. The only people that are hurting are homeowners. IMO, the Fed may hike .25% as the data is very strong. Same here.

I disagree RB,I think they WILL cut...only 25bp's but it's symbolic.

considering the consumer accounts for 2/3 of US GDP it's smart to keep them spending.

..However,the longer term will mean HIGHER IR's...it's putting off the evil day,but it's what helicopter Ben said he would do.

Time to inflate and get those printing presses into overdrive!!!

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