Originally Posted by 2B
What we are risking is a complete freeze of our banking system. This is far more important than the actual cost in dollars of my next trip to Europe. Inflation also won't be a problem if our banking system stops working. We can then worry about a far greater evil - deflation.
The Fed has screwed up big time. I don't disagree with your borrow and spend rant. However, we can't solve the problems with an economic breakdown. If it starts happening, the politicos will start to get involved in the "solution" which is almost certain to be worse then a quick drop by 1.5% followed by a series of increases as the system unfreezes.
Agreed that the banking system is on the verge of completely freezing. We all know its because the banks loaned billions and billions of dollars to people who couldn't afford it, and now can't pay it back. The write downs have already started, will continue, and now we have bond insurers on the verge of going under, which means a whole new round of bad debt to be added to banks balance sheets.
A lowered interest rate still doesn't mean the banks will start lending again. The 100 basis point cut to this point sure doesn't seem to have had much of an effect - either on lending or stabilizing the markets. I think the FEDs ability to solve this crisis may be greatly exaggerated. Yes, they can lower rates. And then lower them again. And again.
The Japanese central bank did just that in the 1990s. All the way to 0. It didn't pull them out of their economic morass - and their central bank effectively became irrelevant to affect any further changes.
And a true dollar crisis is a lot more than just a more costly trip to Europe. Remember all that oil we have to pump into our giant SUVs to sit in line for a Starbucks coffee? - we pay for that in dollars. If the FED cuts significantly, and sends the dollar tumbling, everything we import is going to cost a lot more. There is a real risk of a 1970s re-do. When the FED had to push interest rates to 21% to combat 12% inflation.
I'm not sure what the best course of action is, but I believe the FED will act cautiously in an attempt to balance the faltering economy and letting the inflation genie out of the bottle. They are walking the proverbial high-wire, with no easy answers.
Whichever way they go, I believe the equity markets have a great deal farther to fall, and its going to take a good deal of time for us to work through this.
Lets just hope its not as long as it was (is) in Japan...