Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Interest Rate Cut - Over-reaction?
Old 01-22-2008, 11:20 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Interest Rate Cut - Over-reaction?

Am I the only one (besides UncleHoney?) to feel that the Feds are moving into dangerous new territory with today's .75% rate cut? Are things really so bad that we need to make record low interest rates even lower, just because the stock market has dropped 10%? It smacks of several things:
a) Administration wants to make sure stocks go up in an election year
b) We've become so used to rising equity markets that if the market goes down 10% we expect 'the government" to do something to fix it.
c) the longer we use these sorts of techniques to keep our over-extended economy going, the worse things will be when they finally do adjust.
d) this is the response appropriate to a financial system on the verge of locking up, not just one where stocks have fallen 10% -- are things worse than we think?
Meanwhile, the lower interest rates make the dollar weaker.

It just seems a little too much like popping a pill or taking steroids to keep the good times rolling forever. I like rising stocks as much as the next person, but I accept that markets don't always go up, and actually take some comfort knowing that excesses are being wrung out of the system. Am I just becoming totally old-fashioned to think the Feds should just chill and let things work themselves through?
__________________

__________________
ESRBob is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-22-2008, 11:39 PM   #2
Recycles dryer sheets
 
Join Date: Dec 2005
Posts: 137
No, the cut wasn't so much for stocks - that probably just gave them a good excuse. It's Bernanke's way of dealing with the zero bound problem. They difficulty they have is that Fed action has little effect these days, even with the massive cut stocks still ended up down. Put it another way, it takes about seven times the amount of credit to add a point of GDP growth as it did a few decades ago. We're drunk on credit, like a bad junkie it's just not as good as it used to be.

Anyhow Bernanke wrote a paper a few years ago on how to not follow Japan - his conclusion was it was best to avoid getting into the mess in the first place - by cutting early and aggressively. He's been unable to cut too much so far because of some lingering inflation, as I say the stock hits just give him an excuse.

Short answer - the threat is deflation and the Fed is trying to head it off. We're already seeing massive housing deflation, credit deflation, incipient consumer deflation, and monetary deflation (monetary velocity has been slowing precipitously). He needs to speed up monetary velocity at least, and hopes that lower rates will do it. Unfortunately for him, it isn't working this time very well.

Edit: speak of the devil
Bernanke to Cut Rates Further, Faster as Inflation Concerns Ebb

Bloomberg.com: Worldwide

I'll bet! Pity few teach about how to invest for deflation protection. Such investments returned about 20% the last year. One expert on such that I know earned a 600% return - I'm not kidding. Deflation can be lucrative.
__________________

__________________
danm is offline   Reply With Quote
Old 01-23-2008, 12:04 AM   #3
Thinks s/he gets paid by the post
twaddle's Avatar
 
Join Date: Jun 2006
Posts: 1,378
I don't know about "dangerous territory," but the timing was clearly a reaction to the stock market, and that's not the fed's mandate. I guess the Plunge Protection Team really does exist.

And the magnitude was pretty much what the market expected; the fed likes to do what the market expects -- surprises are bad mojo.

I liked the analogy some guy at Pimco used: "When a man needs a beer, he doesn’t need a small one … and probably not just one, either."

Although some people liked this analogy from the comments on CR's blog:
The Bernanke Fed is like a 19-year-old army trainee who's never fired a shot in anger and is suddenly dropped behind enemy lines with an Uzi. He's shaking in panic but gripping his trusty gun tight, secure in his ability to destroy whatever foe he comes across. The problem is, he fires off a half-clip in panic every time the wind rustles the trees. Pretty soon he's going to stumble right into an enemy squadron and pull the trigger, only to hear the fateful 'click-click' that indicates he's out of ammo.
And anyone who's watched a war movie knows what will happen then.
__________________
twaddle is offline   Reply With Quote
Old 01-23-2008, 12:32 AM   #4
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by ESRBob View Post
Are things really so bad that we need to make record low interest rates even lower, just because the stock market has dropped 10%?
Well, I'm not sure I can remember the last time the market gapped down 464 points or more (or the equivalent %) at the open, a bit before Bernanke's announcement hit the news. I wish we could've seen how the trading curbs did with that.

Powershares International Dividend (PID) ETF gapped down at the open over 15%. By the end of the day it was down only 1%. I wonder who, besides the market makers, had the guts to buy into that. Heck, it's the market maker's job so they didn't really need guts either.

I think Bernanke is just reinforcing the blissfully-ignorant opinion that the Fed will save everyone from their own stupidity. Or maybe the Fed has delayed far too long and the board had their own "Holy cow!" moment over the holiday weekend while catching up on their reading.

Or perhaps some yet-to-be-released documents have scared Ben even more than the markets have scared the other 300 million panicky sellers.

I'm waiting to hear what Alan Greenspan thinks...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 01-23-2008, 01:27 AM   #5
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 2,398
Quote:
Originally Posted by Nords View Post
I'm waiting to hear what Alan Greenspan thinks...
He thinks it's not his fault, and you should buy his book.

2Cor521
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is online now   Reply With Quote
Old 01-23-2008, 01:55 AM   #6
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,031
I think the Fed over-reacted. I mean, we might have a recession on our hands. Might. We are not even sure yet! And everyone is scrambling like a bit of a breather after years of fantastic global growth is a bad thing. The Fed cut rate very aggressively at the first sign of slowing growth, the government is ready to line up people's pocket with "free money to go spend as they wish" (hum, I haven't heard a single politician ask where that "magic" money is going to come from when we are already knee-deep in deficits), if that's not pandering to the electorate and Wall Street contributors, I don't know what is. In a typical recession the stock market loses 28% on average. We are still far from it and I don't think we should be panicking just yet. Recessions are part of the normal economic cycle. Trying to suppress a recession only delays the inevitable. Greenspan, IMHO, tried to suppess the recession following the bursting of the tech bubble of the 90's by creating (knowingly or unknowingly) a credit/RE bubble. I am sure some people are hard at work trying to find what asset they can artificially inflate this time to bail us out of this bind. Good luck with that. It looks like we might not be able to dodge the bullet this time around and that we're just gonna have to do what all generations have done before us: suck it up. I we keep trying to suppress recessions, then one day we might very well have another depression.

And I am the only one who think that the kind of lifestyle that Americans have enjoyed in the past 10 years was unsustainable? When you see the kind of lifestyle middle class people have now come to expect (compliment of the credit orgy of 2002-2006) in a period when average incomes have barely kept up with inflation, isn't it a sign that things have gone too far too fast? When you hear of home prices doubling every three years, shoudn't you expect that at some point things have to cool down? I think we need a recession to bring us back to earth, and I think it would be a good thing. Let's get off the bubble cycle, let's get our finances (people, government and financial institutions) in order, and then we can think about building again on some solid foundations. But that requires a certain willingness on our part to feel some pain in the short term.

At least that's my 2 cents...
__________________
FIREd is online now   Reply With Quote
Old 01-23-2008, 03:52 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
I vote for recession also. Of course I am not working so perhaps my attitude isn't typical.

Obviously there is and will be pain felt by lots of people. I think if the fed can intervene to prevent a possible collapse in the complete interconnected global financial system they should. Even at the risk of making the collapse even worse in future years. Many years ago the WSJ ran very chilling series about how close we came to a financial shut down after black Monday on Oct 19,87. Bob Woodward's book on Greenspan, Maestro was even more scary.

I think of the situation that you are the manager of big dam. There is been a huge storm and the dam is about to burst and another storm is due in a few day. You've got a few choices, you can do nothing, you can tell people sorry but if we don't open the gates now and flood the town the dam may collapse complety if the next storm hits, or you can try everything in your power to keep both the dam and town from destruction. I vote for trying to save both even knowing the destruction if you fail will be worse.
__________________
clifp is offline   Reply With Quote
Old 01-23-2008, 04:05 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
It sure looks like a political move. Neither party wants to be seen as causing problems with the economy or not stepping in to help during an election year.

I am on the fence about the feds decision. One of their goals is to use monetary policy keep the economy stable. Of course, they also need to fight inflation.

Hopefully, the fed will not keep rate low once we are clear of the recession. They need to raise them a bit more quickly

The next item will be the tax rebate. Of course, the treasury is indicating it would not be able to deliver check till early summer.
__________________
chinaco is offline   Reply With Quote
Old 01-23-2008, 07:40 AM   #9
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Quote:
Originally Posted by twaddle View Post

Although some people liked this analogy from the comments on CR's blog:
The Bernanke Fed is like a 19-year-old army trainee who's never fired a shot in anger and is suddenly dropped behind enemy lines with an Uzi. He's shaking in panic but gripping his trusty gun tight, secure in his ability to destroy whatever foe he comes across. The problem is, he fires off a half-clip in panic every time the wind rustles the trees. Pretty soon he's going to stumble right into an enemy squadron and pull the trigger, only to hear the fateful 'click-click' that indicates he's out of ammo.
And anyone who's watched a war movie knows what will happen then.
Just finished reading Blackhawk Down, about the U.S. intervention in Mogadishu, Somalia, during a time when nobody in the Army had combat experience. Not good.

FireDreamer, Danm and Cliffp -- I'm with you-- I think we've become addicted to credit and it isn't going to keep delivering the high, and the lows are getting worse...

But I guess if the alternative is global market meltdown, then we need a whole case of beers, or at least as many as we've got. I don't know if deflation is the new worry, though -- seems only last week we were all worried about inflation. Yes the value of our stocks and homes may be 'deflating' but that isn't deflation -- its all about food, energy and baby cribs pricing. And those are going only one direction - up.

I guess if this weren't an election year, I'd be a less suspicious of the ulterior agenda for politicians to get votes by using up our capital and borrowing our kids money so they can appear to be saving us from down markets.

Twaddle, interesting point that the markets were expecting the .75% move -- wasn't it just a few weeks ago the markets got another cut which was understood to be unusual and the last one? As a parent, I'm all too familiar with this scenario -- the more you give, the more they expect.

Nords -- Greenspan's been getting some huge consulting contracts from investment houses to tell them what he thinks will happen -- I always wonder if the Fed kept him on the internal memo circulation as a courtesy? ;-) Maybe he gets to call up Ben and find out what he's thinking? If not, he's got access to the same information as the rest of us, albeit with more credibility and experience at figuring out what it all means...
__________________
ESRBob is offline   Reply With Quote
Old 01-23-2008, 08:18 AM   #10
Full time employment: Posting here.
 
Join Date: Feb 2007
Posts: 595
I believe in a free market economy. I also believe that history has shown that the more a govt tries to regulate, monkey with, or FIX a free market economy, the results are often not good, and not what they intended. Just like most of us on here, my 401k portfolio is way down right now... I am guessing I am close to -10%. And of course I do like the fact that in the short term, the fed rate cut will probably help out. But I also think that in the larger scheme and in the longer term, this was not a good move. I believe that if the fed did not interviene, things would have been worse for a while, but then come back, if a bit more slowly. But that would tend to make the growth more sustainable in the future.
__________________
armor99 is offline   Reply With Quote
Old 01-23-2008, 08:22 AM   #11
Full time employment: Posting here.
Retire Soon's Avatar
 
Join Date: Nov 2005
Posts: 655
I would hate to see what the markets would look like this morning in the absence of rate cut. It's 9:20 A.M. E.S.T. the day after 3/4% rate cut and this is what we have in world markets (Asian markets were up, but they're closed now):

Germany: -4.66%

U.K: -3.2%

France: -4.69%

U.S. Futures

S&P: -37.9

Dow: -218

NASDAQ- -68.5

Can you imagine what these numbers would look like this morning without FOMC emergency intervention?
__________________
Retire Soon is offline   Reply With Quote
Old 01-23-2008, 10:34 AM   #12
Thinks s/he gets paid by the post
OAG's Avatar
 
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,598
Probably like they will look in about 10 days or so after the next rate cut on 1/30. Better to die quickly than suffer for a long time; if you are going to die anyways.
__________________
Vietnam Veteran, CW4 USA, Retired 1979
OAG is offline   Reply With Quote
Old 01-23-2008, 10:45 AM   #13
Full time employment: Posting here.
Retire Soon's Avatar
 
Join Date: Nov 2005
Posts: 655
It's interesting to note that the Bank of England voted 8 to 1 to hold interest rates steady.
__________________
Retire Soon is offline   Reply With Quote
Old 01-23-2008, 11:24 AM   #14
Moderator
Walt34's Avatar
 
Join Date: Dec 2007
Location: Eastern WV Panhandle
Posts: 16,494
Quote:
Originally Posted by ESRBob View Post
c) the longer we use these sorts of techniques to keep our over-extended economy going, the worse things will be when they finally do adjust.
Yes, I also think it's dangerous. "The piper will be paid" eventually, inexorably, and with certainty. This country might be able to put it off for another 100 years or the whole thing might crash next month; I have no idea. The only question is how much it's going to cost.

One thing I remember from a business law class is that there are only three ways out of debt:

1. Pay it back
2. Declare bankruptcy
3. Die
__________________
I heard the call to do nothing. So I answered it.
Walt34 is offline   Reply With Quote
Old 01-23-2008, 12:23 PM   #15
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Quote:
Originally Posted by SecondCor521 View Post
He thinks it's not his fault, and you should buy his book.
Eh, Andrea's just getting tired of him hanging around trying to figure out what he's going to do all day! Maybe he should write a book... oops.

Quote:
Originally Posted by ESRBob View Post
Just finished reading Blackhawk Down, about the U.S. intervention in Mogadishu, Somalia, during a time when nobody in the Army had combat experience. Not good.
Yikes-- are you sure you want your oldest to see that laying around?!? My nephew the Army Ranger cried during that movie.

Quote:
Originally Posted by ESRBob View Post
Nords -- Greenspan's been getting some huge consulting contracts from investment houses to tell them what he thinks will happen -- I always wonder if the Fed kept him on the internal memo circulation as a courtesy? ;-) Maybe he gets to call up Ben and find out what he's thinking? If not, he's got access to the same information as the rest of us, albeit with more credibility and experience at figuring out what it all means...
For the last few years when David Letterman told jokes during his TV monologue, he'd occasionally pantomime a golf swing. After Johnny Carson died we learned that he'd been sending jokes to Letterman for years and Letterman's swing was paying secret homage to Carson.

I'm sure that Bernanke does something similar when Greenspan sends him a few paragraphs of poignant prose. (You have to keep the chairman emeritus on the Fed's distribution list or he'll write more tell-all books that'll really poison the system.) Maybe when Bernanke's testifying before Congress he gives secret credit by smoothing his beard or scratching his nose or fluttering his hands like a helicopter. Either that or it's a signal to the Plunge Protection Team to go long.

Or maybe the Japanese & Chinese, each without knowing about the other, are paying Greenspan $2M/year to help them figure out when to buy Treasuries.

If I was Greenspan I'd be worried that Congress was going to recall me to fix Social Security & Medicare. It's only been 25 years and they might need another tweak or two...
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 01-23-2008, 12:31 PM   #16
Recycles dryer sheets
 
Join Date: Mar 2006
Posts: 206
I agree - the cut was over reacting. We are building an economy that is hooked on credit and cheap money. We are ignoring the future for an instant fix.

My greatest retirement monetary fear is that at some point in the future the government will pay for all of this with run-away inflation.
__________________
I'm trying to find myself.* Have you seen me anywhere today?
Mysto is offline   Reply With Quote
Old 01-23-2008, 02:27 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Dec 2007
Posts: 4,764
Im not a backseat driver when it comes to dealing with monetary policy. I hope the people on the fed board have vast more knowledge than I do when it comes to these things. IF they thought .75 was need Im sure they did it with a reason and not some knee jerk reaction.
__________________
Notmuchlonger is offline   Reply With Quote
Old 01-23-2008, 02:37 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
clifp's Avatar
 
Join Date: Oct 2006
Posts: 7,450
Quote:
Originally Posted by Notmuchlonger View Post
Im not a backseat driver when it comes to dealing with monetary policy. I hope the people on the fed board have vast more knowledge than I do when it comes to these things. IF they thought .75 was need Im sure they did it with a reason and not some knee jerk reaction.
I am with you. Still I do like to play financial guru on internet discussion boards, the problem with Bernake is you can understand him. Greenspan had that wonderful ability to make every prouncement sound wise and indecipherable at the same time. It was much harder for us back seat driver to sound smarter than Greenspan...
__________________
clifp is offline   Reply With Quote
Old 01-23-2008, 05:51 PM   #19
Recycles dryer sheets
barbarus's Avatar
 
Join Date: Aug 2007
Posts: 433
Quote:
Originally Posted by Notmuchlonger View Post
Im not a backseat driver when it comes to dealing with monetary policy. I hope the people on the fed board have vast more knowledge than I do when it comes to these things. IF they thought .75 was need Im sure they did it with a reason and not some knee jerk reaction.
He certainly does have a reason and it's not to benefit you or me!
__________________
barbarus is offline   Reply With Quote
Old 01-23-2008, 06:19 PM   #20
Moderator Emeritus
 
Join Date: May 2007
Posts: 11,031
Quote:
Originally Posted by Notmuchlonger View Post
Im not a backseat driver when it comes to dealing with monetary policy.
You should try it! It's fun, it doesn't cost a thing, and the best part is this: if you're wrong nobody cares but if you're right then you earn the "I told you so" bragging rights for the next 10 years!
__________________

__________________
FIREd is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Explanation of Mortgage Rate & Interest Rate Enuff2Eat FIRE and Money 8 10-04-2007 03:25 PM
long interest rate Bart523 FIRECalc support 0 08-25-2006 05:07 PM
predicting interest rate changes Mysto FIRE and Money 4 05-05-2006 01:18 PM
Interest Rate Lock retire@40 FIRE and Money 13 08-04-2005 03:55 PM
EmigrantDirect Interest Rate Up MJ FIRE and Money 5 07-25-2005 10:57 AM

 

 
All times are GMT -6. The time now is 08:15 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.