Rate cut or no?

[scooterbug44]

The Fed should cut rates! No, it shouldn't!
Here's why so many people think the Federal Reserve should cut interest rates on Tuesday.
Not everyone agrees that a rate cut is appropriate.

By Charley Blaine

The calls for the Federal Reserve to cut interest rates have morphed from polite talk to mob chanting since Sept. 7, when the Labor Department reported a surprising decline in payroll employment in August.
Now the Fed is widely expected to cut its key rate from 5.25% to 5% or even 4.75%. The fed funds rate -- what banks charge each other for overnight loans -- has been at 5.25% since June 2006. The fed funds rate is what banks and other lenders use to price everything from business loans to credit card rates.
Martin Feldstein, a former chairman of the president's Council of Economic Advisers, believes the Fed should work the rate down to 4% or lower over the next 12 months. But not everyone wants a rate cut. So the argument will rage until the central bank's Federal Open Market Committee, the group that actually sets rates, gathers in Washington, D.C., on Tuesday.

Here's how the debate breaks down.
The case for a rate cut
Supporters of a rate cut give four main reasons:

The global credit system still needs help. A rate cut, the argument goes, would help ensure the credit system has enough cash to keep functioning. The system nearly froze up in August when many lenders balked at buying short-term debt like commercial paper, because lenders didn't trust what was being offered as security on the debt. The credit crunch quickly spread around the world.

Problems in the housing and real-estate industries are spreading into the broader economy. Cutting rates would allow more people to buy homes at prices close to what sellers want. That would shore up lenders' finances and demand for new and existing homes. Housing starts are off about 30% from two years ago, while sales of existing homes are projected to be down about 8.6%. A slipping economy means fewer trips to Home Depot, Lowe's and other hardware stores, fewer furniture and appliance sales, and damage to state and local fees and tax revenues. The Wall Street Journal noted that the city of Sultan, Wash., had to lay off its janitor because building permit fees collapsed.

The broader economy is slowing down. The domestic automobile industry is reeling from the combination of Japanese competition and the automakers' over-reliance on gas-guzzling vehicles for profit. Consumers increasingly are strapped amid higher prices and only limited gains in wages.

Lenders need time to understand how bad their problems are. Wall Street investment houses made billions selling securities backed by pools of mortgages to investors around the world. The big unknown is whether the mortgages backing the pools are any good. Do Wall Street firms need to buy back the securities if the loans go bad?

Why the Fed shouldn't cut rates
Opponents of a cut also give a handful of reasons:

It would bail out the stupids. The credit crunch of 2007 began with increasing defaults of mortgages made to people with little or no credit histories. Critics say that was stupid lending and that those who are responsible should be held accountable.

It would boost inflation. A rate cut by the Fed will come as central banks around the world are raising rates or at least keeping them steady. That trend has cut the value of the U.S. dollar, which has set record lows against the euro. It has also caused sellers of key commodities to boost prices to maintain their purchasing power. It's no fluke that gold jumped over $700 this week and that crude oil traded over $80 a barrel for the first time ever.

The U.S. economy isn't that weak. Yes, housing and real estate are weak, but, critics say, speculation in state likes Florida, Arizona, Nevada and California was totally out of hand. Yes, the automobile business is a mess. But U.S. manufacturing overall is still very strong -- just ask Boeing. The service economy is still quite strong -- McDonald's said its same-store sales in August were up more than 8%.

If anything, the global economy may be too strong. The economies in China, India and elsewhere in Asia are booming, fueling superstrong demand for commodities and finished goods. Cutting rates would be like throwing lighter fuel on an open fire.

Some financial pain is necessary. Just as tech stocks became grotesquely overpriced in the late 1990s, so, too, did residential real estate in the first six years of the New Millennium, thanks to ridiculously cheap money and the growing belief in minimal risk. The excesses, as Bank of England Gov. Mervyn King said this week, need to be cleaned out, and he signaled he has no intention of standing in the way of that process.

[dude]

1/4 point - just because it is so anticipated.

[Capricious]

They probably will but I would just as soon they did not.

The real effects would not be felt for (6) months to a year,
and the physcological effect will wear off once the "runs" spread
from Northern Rock to other banks, anyway.

I am also against a lot of the proposed restrictions on "subprime'
lending.

You can't legislate-away "stupid."

And anyway, the loopholes will be found and exploited.

Let nature take it's course.

[Bob]

1/4 point is nothing. what group is bailed out here?

[SHELLY]

1/4 point is nothing. what group is bailed out here?

The banks. The decrease will not flow through to the consumers...the banks will use it to prop up their sagging profits.



.

[scooterbug44]

I don't want them to cut the rate because I think the consequences will be very bad internationally - further weakening the dollar and economy and will be mostly psychological.

Plus, I REALLY want the people who were stupid & greedy to be punished - just not at the expense of the economy at large.

[Bob]

The banks. The decrease will not flow through to the consumers...the banks will use it to prop up their sagging profits.



.

So if the Fed lowers 1/4 point, the banks will not lower the prime 1/4. interesting theory. I think Ben is capable of not lowering, but may go the 1/4, because he looks like a wimp.

[scooterbug44]

Isn't part of the idea that the 1/4 point would reduce the rate on ARMs and help folks slightly? I know it isn't a lot, but would be that much less.

My bet is that he lowers it, and the economy tanks anyway!

[Bob]

I am in shock...1/2 point

[scooterbug44]

Wow, does that mean the economy is REALLY worse off than we thought?

Will be interesting to see the effect on the local housing market - Dow already jumped more than 100 pts.

[Bob]

exactly my thoughts....

[SHELLY]

Wow, does that mean the economy is REALLY worse off than we thought?

Roger that.

Will be interesting to see the effect on the local housing market - Dow already jumped more than 100 pts

.

[elgordoboy]

Wow, does that mean the economy is REALLY worse off than we thought?

Will be interesting to see the effect on the local housing market - Dow already jumped more than 100 pts.

How should this affect the local housing? I doubt sales would radically improve as there still will remain no market for goofy loans. With no one to sell to originators are still downsizing and going out of business, value traps abound. Bank runs in England. Confidence is the issue now. I am mildly terrified, hopefully the bulk of folks remain unaware of how we are teetering maybe we can muddle through.

[Mango]

I am in shock...1/2 point

I thought he might lower .50 this morning when the producer price figures came out lower than expected. I am not surprised.

I wish I could have waged a bet though. I would have used the money to burn Greenspans' book on my front lawn.

[scooterbug44]

How should this affect the local housing? I doubt sales would radically improve as there still will remain no market for goofy loans. With no one to sell to originators are still downsizing and going out of business, value traps abound. Bank runs in England. Confidence is the issue now. I am mildly terrified, hopefully the bulk of folks remain unaware of how we are teetering maybe we can muddle through.

No idea how it should affect the local housing market, just will be interesting to see how/if it does.

[destinsm]

Oil at all time highs... Dollar quarter century lows... House passing a bill to increase FHA limits to $729,750, and eliminate the to expensive 3% required down payment... Fed cuts rates 0.5%...

All good signs for the economy ahead right??? We can just borrow ourselves out of any problem, cant we??? Okay sarcasm off... I'm getting a bit worried here about the state of our country, its citizens, and the joksters running it...

[scooterbug44]

Welcome to my world! I feel like I've got front row seats to the decline of the Roman Empire!

Keep seeing far too many repeat warning signs of a decline in a great empire/country - too much money spent on a military that is spread too thin all over the world, large trade deficits, building a wall to keep people out, dependence on other countries for our manufactured goods, corrupt and inept government.......

[goofer44]

Don't Fight The Fed !!!

[robertsondavies]

Goofer, are you punting JOE now? I punted half on the close, and used the proceeds to double my short on CROX, which I established when they announced they were getting into womens clothing a little while back...

anything else you like in here. more SUNCOR??

[Babyblue]

Four years without a rate reduction. It was needed and more will follow. It will take about 6 months to see the impact but it will be good. The RE industry has had the emergency brake but on it and it came to a stand still. Now a slow upward recovery will follow but there will still be foreclosures etc. So for those who wish others to be "punished" the whipping post is still intact.

[Babyblue]

I don't want them to cut the rate because I think the consequences will be very bad internationally - further weakening the dollar and economy and will be mostly psychological.

Plus, I REALLY want the people who were stupid & greedy to be punished - just not at the expense of the economy at large.

Like Chrysler and Amtrak? If we can spend 300 billion in Iraq why should we not help others at home?

[goofer44]

robertsondavies

I own 2500 joe at a cost of 33.80. the party has just started since the markets will expect and demand further rate reductions. the perception will be that the housing industry and the general economy will be saved from recession. i believe homebuilders and housing related stocks will all move up at least 25% between now and the end of the year. I intend to remain long JOE well into the 4th qtr.

[Bob]

Welcome to my world! I feel like I've got front row seats to the decline of the Roman Empire!

Keep seeing far too many repeat warning signs of a decline in a great empire/country - too much money spent on a military that is spread too thin all over the world, large trade deficits, building a wall to keep people out, dependence on other countries for our manufactured goods, corrupt and inept government.......

Microsoft Vista is the clincher!

[Babyblue]

robertsondavies

I own 2500 joe at a cost of 33.80. the party has just started since the markets will expect and demand further rate reductions. the perception will be that the housing industry and the general economy will be saved from recession. i believe homebuilders and housing related stocks will all move up at least 25% between now and the end of the year. I intend to remain long JOE well into the 4th qtr.

Smart play. To Joe's credit they saw this coming and have been quietly buying up properties and amenity's in the area. Bet me on this.

[Smiling JOe]

1/4 point is nothing. what group is bailed out here?

The banks. The decrease will not flow through to the consumers...the banks will use it to prop up their sagging profits.



.

So if the Fed lowers 1/4 point, the banks will not lower the prime 1/4. interesting theory. I think Ben is capable of not lowering, but may go the 1/4, because he looks like a wimp.

I think the point is that the rate cut of 1/2 a point means much more, in the terms of dollars, to those with a 5.25% rate (banks) than it will to the numerous people with rates greater than 7.5%.

[Bobby J]

Like Chrysler and Amtrak? If we can spend 300 billion in Iraq why should we not help others at home?

[SHELLY]

Goofer, are you punting JOE now?
anything else you like in here. more SUNCOR??

You wouldn't be trying to "buy on Goofer's ideas," would you??

.

[scooterbug44]

Like Chrysler and Amtrak? If we can spend 300 billion in Iraq why should we not help others at home?

I can think of many ways to spend money improving people's lives (within our borders) and for some reason they DON'T involve rewarding/bailing out people for spending too much on McMansions and overextending themselves flipping real estate.

[Smiling JOe]

I REALLY want the people who were stupid & greedy to be punished

Isn't that thought of wanting the greedy to be punished along the same lines as greed? Don't you think all of the greedy people are learning their lesson without your strong desire to see their failure?

[scooterbug44]

I don't want them to be punished just to be punished, I just want them to have consequences for their actions in the hopes that they will learn something and not do it again.

[Capricious]

"...All good signs for the economy ahead right??? We can just borrow ourselves out of any problem, cant we??? Okay sarcasm off... I'm getting a bit worried here about the state of our country, its citizens, and the joksters running it..."



As my good budy Rush would say, "Ditto."

[Smiling JOe]

I don't want them to be punished just to be punished, I just want them to have consequences for their actions in the hopes that they will learn something and not do it again.

In my opinion, they are being punished right now, and a 1/2 point drop isn't going to make much difference in their suffering. Even a full point wouldn't change things much for the greedy. I think they really got "learned their lessen" when their interest only one year loans were converted into other loans were they had to come up with additional down payment and start paying principle. That is when the punishment began, and it hasn't improved from their perspective yet. Even if the 1/2 point reduction was passed to them, what are they going to do with what will still be a negative cash flow, which grows larger with each month that passes that they don't sell? Celebrate? I doubt it.

[goofer44]

I don't want them to be punished just to be punished, I just want them to have consequences for their actions in the hopes that they will learn something and not do it again.

People will always figure out ways to game the system, that is the nature of capitalism, HISTORY ALWAYS REPEATS ITSELF. Different players and different circumstances in the future but behavior ( greed and fear ) will be the same. The people that have been or will be flushed now, will be replaced with a new set of scammers and wiseguys in the future.

[Bob]

hedge fund rescue, no?

[goofer44]

hedge fund rescue, no?

I don't think so. More of a bail out of the big brokers and banks.

[scooterbug44]

People will always figure out ways to game the system, that is the nature of capitalism, HISTORY ALWAYS REPEATS ITSELF. Different players and different circumstances in the future but behavior ( greed and fear ) will be the same. The people that have been or will be flushed now, will be replaced with a new set of scammers and wiseguys in the future.

True, I am just too much of an optimist thinking that people would learn a lesson and pass those lessons on to their kids . If common sense trumped greed, I'd have a lot less to kvetch about overall.

[Capricious]

"...HISTORY ALWAYS REPEATS ITSELF..."


True.

Is not Vietnam currently repeating itself?
(possibly because W missed-out on the "Vietnam
experience?")

The oil price situation is repeating itself, except that
in 1973 the average U.S. citizen was driving a humungous
Pontiac or Buick, and in 2007 the average U.S. citizen is
driving a humungous Expediton/Suburban/ 3/4 ton pickup

Anyone remember the red, yellow, & green flags in front of
service stations? (anyone remember service stations?)

Green meant open and had gasoline, yellow meant open for
service (anyone remember "service") but no gasoline,
and red meant closed.

Anyone remember 1979 when you had to buy a minimum number
of gallans of gasoline depending upon how many cylinders
your vehicle had? I drove an SUV back then, when no one outside
of the hard-core 4-wheel-drive/off-road set knew what an SUV
was.

Manual transmission, manual-shift transer case, manual locking
hubs,manual steering (keep your thumbs out of the spokes
when the front axle is engaged).

No AC

Power windows and electric door locks? Are you kidding???

This was a MAN'S vehicle.

Suburban housewives need not apply.




See what happens when I have a beer.

[nmosley]

Capricious -
I remember all of that pretty well and must say that I think your trip down memory land is pretty accurate, except you forgot to add: long employment lines, kids going to school well into June because they had to stay home from school during winter months, people wondering how they would survive the "ice age" that was predicted to arrive within the decade, and many people wondering if there would be enough water for us to drink within 25 years. It is no wonder the drug use skyrocketed in this country as people sought some relief from the horrors of it all (including the war) as the 70's wound to a close. That whole government sponsored drug policy is food for a separate discussion. Who would have thought we would pay what we do for water purification systems and bottled water today? Had I known, I could have been wealthy beyond words right now. If you have another beer and check out Shelly's link on money supply, you may wnat another beer

Anyway, these next few years will be challenging and it is important that we remember that what we see in the media, regardless of where it comes from is propaganda of some sort or another... that said, I hope and pray that we don't find history repeating itself and I also pray that the history of the fall of the Byzantine Empire doesn't repeat itself anytime soon. Also, I hope that any of the lessons taught by Queen Isabella/Spain will be reviewed by those in power before any decisions about what next to do are carried out. Have a great evening!