Re: "Is the Fed Bailing Out the Economy or the Banks?"

On Thu, 31 Jan 2008 08:51:42 -0500, "sinister"
<sinister@xxxxxxxxxxxxxx> wrote:

From

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=01&year=2008&base_name=is_the_fed_bailing_out_the_eco
(tiny: http://tinyurl.com/22chzo)

Is the Fed Bailing Out the Economy or the Banks?

That is the question that reporters covering the latest rate reduction
should be asking. When the Fed announced its 0.5 percentage point rate cut
this afternoon, something very interesting happened: long-term interest
rates rose. The 10-year treasury rate jumped by about 5 basis point when the
Fed announced its rate cut. The current rate of 3.72 percent is about 34
basis points higher than the low hit earlier this year.
There is a simple story that could be told to explain the movement in
long-term rates. The markets may increasing fear inflation and a falling
dollar when they see the Fed cut short-term rates. This raises a serious
problem from the standpoint of stimulating the economy. The long-term rate
matters much more for the economy than the short-term rate since it affects
the rate that people will pay on mortgages, car loans and most other
important sources of credit. If the Fed's rate cuts lead to higher long-term
rates, then it is possible that it is actually slowing growth by cutting
rates.

There is another story in which the answer is less ambiguous. Banks borrow
short-term and lend long-term. If they can borrow at a lower cost and lend
at the same or higher interest rates, then they are unambiguous winners. For
them, a rate cut that increases the spread between long-term rates and
short-term rates is clearly good news.

So, if this pattern continues, and the Fed moves forward with further rate
cuts, then it is reasonable to ask whether it is trying to help the economy
or the banks.

of course The Fed and the government are helping the wealthy bankers.
They do not give a *** about the average American. The wealthy will
only do what benefits the wealthy. If they can profit at the expense
of the middle class all the better.

Hal

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