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Central Banks Coordinate Rate Cut

There is no precedent for such a thing as this in our history.  The Federal Reserve, the Central European Bank and the central banks of Britain, China, Canada and Switzerland have all coordinated a collective rate drop of about a half percent on their prime rates.  This means that interest rates on loans from these central banks are lower by a half a percent, and since most business begins with banks borrowing from central banks, this means rate cuts across the board for most things which are not fixed-rate loans.

What effect will this have on markets?  Well, short term, it’s meant diddly shit.  The markets in Asia and the US plateaued breifly and continued their steep decline for a fifth day straight.  MSN Market Dispatches is reporting that the Dow has lost 1400 points in that time.  Yikes.

Long term, I don’t really see where this helps, either.  Sadly, this move has to be seen at least in part as a desperation move, not a decisive move in the right direction.  That’s because the problem with the credit market is not now nor has it ever been a question of interest rates.  It’s a question of liquid assets which no longer exist.  Lowering interest rates does nothing to stop that problem.  Until there is adequate liquidity in the markets, I’m afraid the problem will persist.

The Federal Reserve’s move to begin issuing commercial paper seems, to me, a far more sound decision.  That’s because commercial paper is what gets most businesses by their day-to-day operations, like paying employees.  The down side here is that they’ve requested 99 billion dollars to do this with, but that market is about 1.7 trillion dollars worth of trade.  That means someone’s going to lose out.

Still, if the Fed can maintain the workaday operations of our nation’s job engines, then what we’re seeing is really a massive investment opportunity in the making: after all, if the stock market continues to plumet, stocks bought cheaply in the next few days will be worth a barrel of monkeys come the upswing.  Let the stock markets dive.  We need to worry about monetary policy and banking liquidity at this point.

Update: Paul Krugman chimes in with far more salient points than I: basically, the rate for CP (commercial paper) is not tied to the Fed rate anyway, so it’s not going to do much good.  Why, then does he favour the move?  Lots of comments there asking the same question.

By Tommy Belknap

Owner, developer, editor of DragonFlyEye.Net, Tom Belknap is also a freelance journalist for The 585 lifestyle magazine. He lives in the Rochester area with his wife and son.