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Fed intervenes to bolster the economy

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http://www.thestar.com/Business/article/247509

 

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Fed steps in to bolster economy TheStar.com - Business - Fed steps in to bolster economy

U.S. central bank cuts key interbank lending rate to loosen liquidity as frenzied markets rebound

 

August 18, 2007

Madhavi Acharya-Tom Yew

Business Reporter

Investors took comfort from the U.S. Federal Reserve and jumped back into the markets yesterday, driving them up sharply after a week of gut-churning declines.

Still, it was a wild trading session in Toronto, with the S&P/TSX composite index spiking 300 points higher at the open. It turned south just minutes later, shedding 200 of those points.

The index closed for the week at 13,049.58 points, up 200.88 points.

In New York, the Dow Jones industrial average added 233.30 points to close at 13,079.08 points. It, too, soared from the opening bell, as investors welcomed word that the Fed cut its discount rate.

"The Fed has taken the first step to calm down the market and restore investors' confidence," said Tom Fitzpatrick, global head of currency strategy at Citigroup Global Markets Inc. in New York.

The Fed cut its discount rate by half a point to 5.75 per cent from 6.25 per cent, but left the key federal funds rate for overnight loans between banks unchanged at 5.25 per cent.

The discount rate is the interest the central bank charges when it is lending directly to other financial institutions, typically emergency borrowing by institutions in distress. It also said banks can borrow from it for as long as 30 days, using various forms of collateral.

"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth," the Federal Open Market Committee said. "The committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects."

It was the first reduction in borrowing costs between scheduled meetings of the Fed since 2001, and Ben Bernanke's first as its chair.

Meanwhile, the Bank of Canada said yesterday it was closely monitoring market developments though it declined to comment on the move by its U.S. counterpart.

Economists say the central bank may not be obliged to match the Fed's move, but it may feel pressure to leave interest rates untouched if conditions in the stock market don't improve.

"The conditions in the U.S. economy are probably much different than here in Canada, and therefore the need to actively move is probably a little bit less," said Bank of Nova Scotia deputy chief economist Aron Gampel.

The Bank of Canada could cut its target overnight rate, which is the rough equivalent of the Fed funds rate. It does not have the luxury of doing what the Fed did, cutting the rate at which it lends to banks, while leaving its main policy rate unchanged.

"They're waiting to see if the Fed's successful, and at this point in time, I don't think that the Bank of Canada will have to cut," said Mark Chandler at RBC Capital Markets.

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fed only acted to stop the puts and calls from coming into play before expiration - something which would ahve otherwise drug the market much further down....

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This is what happens in a society that politicizes money and economics overall. Wherever there are economic problems, a significant portion of society looks for policymakers to blame and is willing to flock to those who offer ostensibly "compassionate" relief.

 

So the powers that be fight like hell to make sure nothing too bad happens on their watch. We debase the currency like crazy, reward flawed business models and stupid risk-taking with bailouts, and spend spend spend.

 

The cure is far worse, in the long term, than the disease. But the majority of those in power won't be any longer when the shit hits the fan. It'll be off their watch.

 

By failing to let the market punish poor choices and liquidate the bad debt, we're not fixing the problem. We're just concealing it. I'm not as "gloom and doom" as Ankur when it comes to how low the market should be (I actually think it could be even higher under a regime with sane monetary and fiscal policies), but it is way overpriced. It's like paying $60 K for a run of the mill Honda Civic because it has a nice resale value. The perception of the market is nice, but perception doesn't equal true value.

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From one libertarian to another: I don't think vague, directionless rants help us shed our public image as a bunch of obstinate wackos. ;)

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From one libertarian to another: I don't think vague, directionless rants help us shed our public image as a bunch of obstinate wackos. ;)

 

I don't think that was very vague or directionless. As a libertarian, I think this is an important example of the wasteful and harmful excesses of government.

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From one libertarian to another: I don't think vague, directionless rants help us shed our public image as a bunch of obstinate wackos. ;)
I couldn't agree more. Far too often I see quality issues and candidates attract "obstinate wackos" who want to blather on about their pet issues. Next thing you know recruitment/persuasion is shot because all outsiders see are the conspiracy theorists, gun nuts, etc.

 

Libertarianism is the ultimate "Big Tent" ideology. Anyone who has a problem with how the government is meddling, in any realm, has a libertarian streak. Unfortunately, some of the more extreme individuals and groups that really "hate" government are all too visible, and (generally) incapable of recognizing that their strategies are a huge turn off.

 

That being said, I don't think anything I said was vague. And I certainly don't think it was "directionless." Perhaps you were referring to someone else's "rant." ;-)

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