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Home Front Economy
Bernanke hints of further rate cuts
2007-11-30
WASHINGTON - Federal Reserve Chairman Ben Bernanke on Thursday hinted that another interest rate cut may be needed to bolster the economy. The worsening credit crunch, a deepening housing slump and rising energy prices probably will create some "headwinds for the consumer in the months ahead," he said.

Bernanke said he expects consumer spending will continue to grow and suggested the country can withstand the current problems without falling into a recession. But he indicated that consumers could turn more cautious as they try to cope with all the stresses.

The odds have grown that the country could enter a recession. A sharp cutback in consumer spending could send the economy into a tailspin. Against this backdrop, Fed policymakers will need to be "exceptionally alert and flexible," Bernanke said.

That comment probably will be viewed as a sign the Fed may lower interest rates when it meets on Dec. 11, its last session of the year. Twice this year the central bank has trimmed rates to keep the housing collapse and credit crunch from throwing the economy into a recession. Those cuts came in September and late October.
Posted by:Steve White

#16  Which signifies low demand for bonds. So if bonds aren't in demand and everybody is afraid of committing capital to the market, then where is the money?

I suspect hoarded because of the current uncertainty. Cash holding combined with low interest rates is no credit crunch.
Posted by: Mike N.   2007-11-30 17:40  

#15  MN: I think when this is all said and done, we'll be looking back over this period as the credit crunch that wasn't. Interesst rates are still low, which doesn't seem to me like what we would expect from a lack of lenders, and long term bond rates are still unimpressive. Again, about the opposite of what I would expect from an economy in trouble.

Treasury rates are low. Corporate yields are high. Very high. Companies with mortgage exposure that used to roll over their debt via commercial paper issues can't float this stuff any more because buyers are leery. Treasury rates are low because of a flight to safety. Nobody knows what is safe any more, and in this environment, it makes no sense to reach for another point of yield when payment of principal is in doubt. This means everybody buys Treasuries. Which includes foreign investors who used to park their dollars in big hunks of agency issues (Fannie, Freddie). Now they're avoiding even agencies, preferring the safety of Treasuries.
Posted by: Zhang Fei   2007-11-30 14:30  

#14  Cutting the short rate won't do a damn thing about housing. we'd have to go back in time to do something about that. Berny is likely going to cut the short rate by 25 basis points. Not massive by any means, but it's enough to help the banks a little.

I think when this is all said and done, we'll be looking back over this period as the credit crunch that wasn't. Interesst rates are still low, which doesn't seem to me like what we would expect from a lack of lenders, and long term bond rates are still unimpressive. Again, about the opposite of what I would expect from an economy in trouble.
Posted by: Mike N.   2007-11-30 13:37  

#13  AH: Hmmm. Many large lenders are actually insolvent and energy prices will likely only rise even more if the Fed cuts interest rates again. Just who would benefit from a cut in rates?

Banks. If their portfolios were marked to market today, probably just about every bank in the country is insolvent right now (liabilities > assets). If they all fail, we get the Great Depression all over again. A rate cut will rescue the banks. Which will rescue the American economy. And by extension, the world economy. People trying to figure out whether to hold the dollar have to decide whether a collapsed economy with high interest rates is preferable (or politically sustainable) compared to a recovering economy with low interest rates.
Posted by: Zhang Fei   2007-11-30 11:18  

#12  Keeping the bubble around just increases our property taxes too.
Those of us who bought long ago are better off to see the bubble pop.
Posted by: 3dc   2007-11-30 10:38  

#11  I would leave rates where they are. People in trouble with their houses now can't be saved. Take the short term pain rather than stretching it out over years and raising the possibly of triggering more problems by lowering the rate of what actual borrowing costs are.
Posted by: DarthVader   2007-11-30 10:09  

#10  And here is a Michigan county treasurer who invested Alcona County's money in ... a Nigerian 419 scam.

http://www.boingboing.net/2007/01/23/county-treasurer-in-.html
Posted by: Seafarious   2007-11-30 09:48  

#9  Details on the Florida fund here

shrug A similar thing happened in Orange County California a while back - overly aggressive funds manager tanked $1.6 billion by investing in derivatives they didn't understand.
Posted by: lotp   2007-11-30 09:43  

#8  Thomas,

They were supposed to be AAA rated funds. They got sold a shit-sandwich by someone who should be going to jail.
Posted by: Bright Pebbles   2007-11-30 08:41  

#7  BP talking about the run on the SBA? You're correct - teachers in a few small counties will not be paid today without some sort of State intervention. Turns out the SBA (a parking spot for government funds) had 10% of it portfolio in SubPrime lenders.... criminal negligence.
Posted by: Thomas Woof   2007-11-30 07:50  

#6  BP is spot on. Unless interest rates reflect the actual cost of borrowing money, far worse things will occur than the popping of market bubbles in one (albeit large) sector of the economy. Artificially keeping interest rates below what the free market would dictate creates all sorts of problems.

We need only look to Japan over the last fifteen or so years for an example.
Posted by: no mo uro   2007-11-30 06:04  

#5  There's nbothing you can do about hosuing.

It was a bubble, and it's popped.

You CAN save the wider economy, but not by cutting interest rates.
Posted by: Bright Pebbles   2007-11-30 05:24  

#4  Prepare for the dollar to drop even further. This will also jack up oil prices and encourage the Saudis to decouple from the dollar.

But if he doesnt cut, the housing market collapse will continue and trigger a recession.

Damned if you do and damned if you don't.


Posted by: OldSpook   2007-11-30 03:46  

#3  thinks, not things
Posted by: Bright Pebbles   2007-11-30 03:36  

#2  "Helicopter" Benanke things inflation can solve problems in an economy.

He obviously doesn't understand inflation or economics at all.

I'd be very very scared. BTW Teachers in Florida might not get paid this month.
Posted by: Bright Pebbles   2007-11-30 03:35  

#1  Hmmm. Many large lenders are actually insolvent and energy prices will likely only rise even more if the Fed cuts interest rates again. Just who would benefit from a cut in rates?
Posted by: Anguper Hupomosing9418   2007-11-30 01:38  

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