[mattduke]

Story was replaced with piece about Paulson cancelling speech.

http://tinyurl.com/5u5v46

[jdmartin]

How interesting.

[Jotapay]

This is pretty bad news. They can't lower rates today or the dollar will tank.

LINKY

[Snowrunner]

This is pretty bad news. They can't lower rates today or the dollar will tank.

LINKY

I am still a bit puzzled what the lowering of the interest would accomplish anyway. It's not that nobody wants to borrow, it's that nobody is willing to lend.

Wouldn't the "smarter" move be to RAISE the interest rate?

[shortonoil]

Snowrunner said:

I am still a bit puzzled what the lowering of the interest would accomplish anyway. It's not that nobody wants to borrow, it's that nobody is willing to lend. Wouldn't the "smarter" move be to RAISE the interest rate?

Lowering the rates might get a 100 point, one day pop on the DOW. Other than that it wouldn’t do a thing. Certainly no one wants to lend, because no can afford to lend. The banks are in a terrible cash position, and they don’t trust anyone that they could lend to. The spread between the target FED funds rate and the effective rate shows that banks don’t even trust each other.

The consumer is tapped out, with higher prices for everything and declining home values; he can’t borrow. Business doesn’t see any place to invest with the economy declining, and with profit margins getting squeezed they don’t want to take the chance.

The credit markets are frozen, and they are getting worse by the day. Moving rates in any direction would probably be a disaster, and there is probably no way out of this except through a very big fall.

[heroineworshipper]

The people figured out lower rates cause inflation. So now we're using short term, indefinite frequency auctions to create money. Hopefully they won't figure that one out or else we'll have to go to reichsmarks.

[pedalling_faster]

This is pretty bad news. They can't lower rates today or the dollar will tank.

LINKY

i'm amazed at the patience the rest of the world shows towards the U.S. and the U.S. dollar.

$9 Trillion in debt that was then increased, by the covering of Fannie & Freddie. i hear news about that constituting $5 Trillion in additional debt, but i'm not sure that all of that will end up on the U.S. balance sheet. in any case the interest payments are substantial, and the U.S. is in a pickle - raise rates too much and the interest on the debt increases (i think), lower rates & the dollar becomes less attractive - who wants to buy THAT debt ?

one of the zillion stories about mortgage-backed securities was about a town in Norway. the mayor, a woman, was talking about dealing with losses from their investments in American financial products. think that lady is going to buy more US bonds ? multiply her by a lot of people (who have been scammed by American financial institutions).

[jbrovont]

In order for the Fannie/Freddie bail out not to cost $5.4T, the assets they hold have to be salable. The key to value in an asset, is that it can be traded for something else you want or need. The land and structures represented by the mortgages the Treasury bought (essentially) has inherent value. It provides shelter, a tax base to the state and locality, and in some cases of agricultural loans, they represent land that can grow food. That's intrinsic value. Nominal value is what that asset can be traded for in monetary terms.

If you go to McDonalds and get a double cheese burger, you've bought a "thing of value" and it's an asset until you eat it or it goes bad. It's intrinsic value, is about 500 calories give or take. You can live off it for about 12 hours and use that energy to do work (another thing of intrinsic value). The nominal value of your unconsumed burger is $1 USD. Theoretically if you had the fresh burger and decided you needed the money more, you could trade it to your buddy for $1.

What if your buddy doesn't have a dollar and has to borrow it to buy your burger? As long as the economy is working and credit lines are flowing, he can get that dollar and buy your burger. On the other hand if there's no credit available, your buddy goes hungry and you don't get your $1. You keep your burger.

If there's no currency to purchase the burger, it can't be sold. If it can't be sold, it has no nominal value. Could you still trade it? Sure, but the two of you would need to arrive at some kind of fair bartering arrangement. Money makes the value of assets easy to represent and compare, which makes trade easier than in the barter system. That's essentially why it was invented.

The credit markets _have_ to have liquidity open so people can purchase those assets from Fannie/Freddie. If people can't, monetarily, it's a complete loss. No money = no commerce. No commerce = no nominal value.

Could Fannie/Freddie barter out those assets to keep trade running and recoup that $5.4 trillion? Theoretically, sure. Unfortunately, our society is so used to functioning with money and so far removed from bartering, we don't have the knowledge, skills and tools to make this a realistic solution. The only solution we have ready to go, is pour money on the system and hope it flows around.

The idea was, make money easy for banks to get; banks will make money easy for people to get; people will get money from banks; people will buy goodies; money will go back to banks; wash and repeat.

What's really happening: Fed gives money to banks. Banks don't trust people b/c they lied last time. Banks don't trust eachother because they lied on behalf of their customers. Last time I gave you $20, you didn't give it back. There's no way I'm giving you another $20 today. I had to borrow this $20, and if you don't pay me back, I still have to pay interest on it to Mr. Ben. Instead I'm going to use it to pay my own bills. Take a hike.

It's important to get your mind around this relationship between the banks, the bad loans, the credit market and the economy. When the banks had the bad loans, they had an incentive to keep the credit lines flowing - they _had_ to in order to keep the economy running so that their assets could be monetized. With the Treasury on the hook holding the bad loans and the banks getting almost free money from the Fed, there's no reason for them to lend money to people. The money being given to banks in the bailout is essentially a hand out of tax dollars. They no longer need to make loans - all they have to do is sit there and collect a check from the Fed, which they then use to pay their bills and their salaries. When an individual does this, we call it welfare, or unemployment. When a bank does this, we call it a "bailout."

This is pretty bad news. They can't lower rates today or the dollar will tank. ... think that lady is going to buy more US bonds ? multiply her by a lot of people (who have been scammed by American financial institutions).