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December 17, 2008 03:20 AM UTC

Fed Cuts Rate to Zero, Shifts Policy Focus to Socialism

  • by: Libertad

(He’s got a pretty good point…. – promoted by Laughing Boy)…

Now that we have all boarded the good ship to follow Japan we can be certain only to see decades of large government intervention, infrastructure projects, and the piling up of debt for our great grandchildren. We fail to face the reality that we are consumer whores who can’t help ourselves and we are hoping for someone else to bail us out.

Guess what, it won’t happen.

When the Fed takes this kind of action it becomes a printing machine designed on inflating our way to an unrealistic solution.

Spur Growth

Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. The abundant funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.

The senior central bank official said the Fed’s policy differs from Japan’s approach by focusing on purchases of short- term debt and other assets in constrained markets rather than on adding cash to the banking system.

The FOMC said that inflation pressures “have diminished appreciably.” The senior Fed official said deflation is not a major concern to the central bank.

Bernanke, acting with New York Fed President Timothy Geithner, has set up emergency loan programs aimed at averting a collapse of the nation’s credit markets. Geithner, President- elect Barack Obama’s pick for Treasury secretary, didn’t attend today’s meeting.

Scarce Credit

Credit remains scarce in many markets and major financial institutions worldwide continue to report losses and writedowns totaling $994 billion.

The Fed may increase its asset purchases and lend against lower-quality debt should Treasury provide funding, the senior central bank official said.

Macroeconomic Advisers LLC, a St. Louis-based consultant, says the economy is probably shrinking at a 6.5 percent annual pace this quarter, which would be the biggest drop since 1980.

The firm forecasts a 4.2 percent annual contraction rate in the first quarter, returning to no growth in the second quarter and a 2.3 percent expansion rate in the second half of 2009.

Early this month, as a panel of leading U.S. economists declared the recession began in December 2007, Bernanke signaled he was ready to dig deeper into the central bank’s toolkit. He said he may use less conventional policies, such as buying Treasury securities, because his room to lower the main U.S. rate was “obviously limited.”

The Dow will see the low 7,000’s again when the corporates come out with bad earnings in Jan/Feb.


12 thoughts on “Fed Cuts Rate to Zero, Shifts Policy Focus to Socialism

  1. With the DOW back in the 7000’s, at least we can hope that stocks will once again be rationally tied to P/E ratios and will cease being just so much speculation on the price of the stock itself.

    Okay, maybe it’s not much of an upside, but if you’re given lemons, lemonade should be on the menu…

  2. “Inflation pressures have diminished.”  But here comes deflation, a much more difficult problem to address.  Ask Japan about it during the 1990s.  Maybe the upside is more Americans will be saving–they just won’t have much to save.

            1. “Short-sheeted” the future of their own workers by getting such crazy wages for unskilled labor when he market for US cars was so high.

              Any more bed metaphors?

              1. someone’s wetting their bed!

                Might be the Fed, might be Obama’s economics team, might be the UAW, but someone is (not GM mgt-their salary is just right).

                BTW, I know that your world-view is anti-union, but isn’t this really a management issue, not a union issue? Wages for current workers are the same for U.S. and Japanese auto workers. It’s the pension funds that are killing GM et al. To me, it’s bad management to not set aside enough money to cover your pension obligations. You don’t have to be clairvoyant to know that workers grow older and eventually retire. Instead, they used that money to inflate their earnings and dividends, to drive the stock price and mgt bonuses ever higher.

                1. so why should managers practice it?

                  A company that consistently makes a good product and a profit and takes care of its workers will not see its stock price rise substantially. You can make much more money off a company that’s losing money but announces layoffs so it’ll lose less money than you can make off a company that makes a profit but never makes the news. So what’s the incentive?

                  1. Sooner or later a company that loses money and continually lays off people dwindles into nothing.   GM being the latest example.  The bad management in the name of stock prices is a great short term strategy, and a horrible long term one.

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