« A Bank Run in England | Home | Market in Turmoil »
Interest Rate… Cut!!
By Jon Menaster | September 22, 2007
So the big news this week is the 50 basis points interest rate cut in the federal fund rate. The federal fund rate is essentially what banks charge each other to borrow money on overnight, short term loans. The lower the rate is, the cheaper it is to borrow money and the more liquidity is available in the markets. This was the first rate cutin some 4 years, and caused the stock markets to jump up all across the board. The general rule of thumb is when interest rates are lowered, stocks rise, and when interest rates push higher stocks go down.
My favorite discussion about the cut was on John Stewart’s excellent Daily Show on the Comedy Central network. Stewart had the notorious former federal reserve chairman Alan Greenspan on. Alan was hitting all the big talk shows in the hopes of pushing up the sales numbers of his new book, but Stewart makes a wonderful point a few minutes into the interview, which was:
When you lower the interest rate and therefore drive up the price of stock, you then lower the rate of return received by people who have savings account. You could look at this interest rate cut as favoring those who have invested stocks and not favoring those who have invested their money in banks.”
Greenspan agreed that it certainly looked that way, and I thought that really said something important. Honestly this was somewhat of a breath of fresh air into a market unsure of itself. Now current Fed chairman Bernanke did what he thought was the right thing.. but for who? For those corporations facing hardship because the housing crisis? The everyday American citizen? The hedge funds who own most of the stock market? Since most Americans have trouble saving anything at all (see American Savings Lowest Since Depression), what they do save is put into banks so it can be easily taken out in case of a crisis. To me this represented a bailout of the major wall street players who needed to take a deep breath after losing so much money in the first part of this year. Of course I am invested in the stock market (through no load index funds) and I managed to benefit a little myself, but what’s the problem with that? A guy makes a little money and everyone starts to point the finger at him. Sheesh.
Again, just my opinion, but I feel like the Fed chairman did what so many other branches of government routinely do: give more assistance to the rich, well to-do, corporations, and the people who represent the power brokers while ignoring the needs of the impoverished American citizens. Our current system of government favors those who have money, can make campaign contributions, and otherwise exert their influence through their wealth. That’s a whole different blog post though. Till next time, remember that only you can put out forest fires. And start saving money today!
Topics: Business, Finance, Investing, Money News |